A Conversation on Proof-of-Work versus Proof-of-Stake – Bitcoin Magazine
This is a recording of a recent Twitter Spaces conversation about Ethereum’s upcoming “Merge” from Proof-of-Work Consensus to Proof-of-Stake.
Watch this Twitter Spaces on YouTube or Rumble
Listen to the episode here:
Transcript
Dylan LeClair: Alex B, if you want to come and talk, you’ve covered a whole mess of miner extractable value (MEV) on Ethereum. Because there are so many types of smart contract protocols, decentralized exchanges, and all these automated market makers and oracles, there is actually value to be captured by producing the blocks. For anyone unfamiliar with Ethereum, it’s called MEV, minor extractable value. Now I assume that is the maximum recoverable value. Basically, these protocols can make a lot of money, especially those with the best bots and dev teams by ordering the blocks and potentially censoring them.
Checkmate: It’s a complex beast to say the least.
LeClair: And maybe not our most favorite thing, but it’s fascinating. Even Danny Ryan, who is one of the lead researchers for this proof-of-stake process for the Ethereum Foundation, said a couple of months ago. And he wrote it out. He said that liquid stake derivatives, such as Lido and similar protocols, are cartelization and induced significant risk to the Ethereum protocol and associated capital pools.
I mean, here we are, we’re a month away from the merge, and Lido has 31% of the total value of proof-of-stake eth. Coinbase, Kraken and Binance are behind with 11%, 8% and 6%. Right? It’s 50%, I mean, maybe not Binance, but if you want to include some of the other US entities, it’s over half; that’s maybe 60-65% of the total value of eth already captured.
Checkmate: I think what I definitely want to highlight and what really struck me is that these things can probably be solved with education, right? People, you really should go solo. Here are the guides… So help people understand that they shouldn’t have gone on Coinbase.
Many people have joined Coinbase because they always had to. They simply did not know. Education is tough. Many who contacted me said, “I’m not familiar enough with these things to understand these risks. I needed someone to explain it to me.”
For me as an engineer, I look at this thing and say, “OK, we have a potential mitigation, which is to allow a reshuffle of the mining pools in the reverse trade. Let that reshuffle happen outside of education. That’s what should happen. They should push the withdrawal code, let people shuffle, remove the risk completely and then merge.
Now what do you have to deal with some teasing from some bloody Bitcoiners, but come on. I mean, if all you’re worried about is some reputational damage, wait until you have to cut Coinbase, because something went wrong, because you left the door open. Just close the door, put on the lock and then do the merge. Put body pride aside and do the right thing from an engineering, risk management perspective.
That is my core view. Manage the risk before entering it. Don’t let them be an unknown window where something can happen. It just doesn’t make sense.
Dylan: For those who aren’t aware, check, you’re actually an ethicist, right? I mean, you have a significant portion of your net worth in eth right now?
Checkmate: Yes. 20%. I have held. This is the thing. I’ve held it since 2020, or actually I’ve held it since before that. But I grew it a lot using DeFi tools. I’m well and truly in the know, aren’t I? I’ve been there for horrible going up and down, braking, decision makers, steering, all this kind of stuff. I’ve been floating around since uniswap was a Gwei.
It’s not like I don’t know what I’m talking about. I spend enough time. I’ve been around long enough to know how these things work. There are many eth maxis who just call me a bad faith actor. Well, go at things yourself. You know, when I look at this thing from an engineering perspective: You have a risk, there’s a solution, fix it, and merge. Put your pride aside and stop gambling with consumer funds.
LeClair: I want to say hello to Alex. Thanks for coming, man. I think your tweet is back from summer 2021 or maybe before that, but you have covered this for a long time. Before I really understood what MEV meant. You lost some heat, so how’s it going, man?
Alex B: Cheers. Good to be here. Thanks for the intro. This thing blew up in the last couple of months in a way that I really didn’t see it gaining so much traction. It really felt like everything that has played out has really justified the pieces I put out last year. It’s almost a year ago.
We’ve seen Lido grow almost 100% since I started talking about it. Having, as you said one of the main architects of proof-of-stake, Danny Ryan, pretty much cemented all the concerns
LeClair: I mean, he pretty much stole your thread,
Alex B: I mean, to his credit and a lot of people did a lot of groundwork in putting my thread, which was certainly a bit bombastic and silly, into a more consumable format for others to consult and try to internalize.
I would say that the unfortunate thing for him is that his conclusion was that the only way out was pretty much for Lido to limit its growth, which we’ve seen is unlikely to happen anytime soon.
They actually voted on it in the last month and it was a landslide of Lido token voters. I think the outcome was that practically 99% of the Lido holders voted against that proposal. I don’t think something like this is going to be a reality anytime soon.
Although I also sympathize with Checkmate’s take on this and it seems like the most viable solution at least to allay the immediate concern, especially with what has been playing out with Tornado Cash. This attempt to use the staking pools and staking dynamics is really just kicking the can down the road.
The narrative switched to some sort of UASF/minority fork movement, but these attempts would not solve the fundamental incentive problems that have been engineered into Ethereum.
Unless they find a significant, substantive solution to the MEV problem, and that might be some kind of improvement over the privacy layer. I know they are talking about some sort of threshold encryption, which will make transactions effectively private until they are processed into a block. It couldn’t mitigate the MEV problem, but there are really two massive network effects at play: stake derivatives and the MEV extraction.
It’s hard for me to see any kind of future where, regardless of the fork, regardless of whether it’s a non-anti-US government fork that gets spun off, there will always be a tendency to centralize to potentially monopoly producers of blocks, which then the US government will just have to target this one next.
So that’s a bit of the conundrum they’re in right now.
Checkmate: Bitcoiners say Bitcoin will eventually absorb all these technologies. Well, they show you how they’re done, what works and what doesn’t. It is a good opportunity to learn. Privacy is really the ultimate solution to this. If you can’t see the transaction, you can’t censor it because you don’t know what it is.
You also can’t extract value from it because you don’t know what’s in it. So, real privacy is the only way you can solve this. However, that is the realistic scenario, which is that Bitcoin does not have Monero privacy anytime soon and neither does Ethereum. Once you do that privacy layer, even if you decided to do that, the amount of other trade-offs that the engineering approach will describe, you have to lose some sort of functionality elsewhere.
So this is the game; this is the trade-off. There is no perfect system.
