58 - EIP-1559 | Hasu

Hasu is a pioneer and thought leader in the world of cryptoeconomic research. He is a rare voice in crypto, unafraid to speak his mind and break ranks with both Ethereans and Bitcoiners. His takes were often varied and elusive… until the EIP-1559 proposal. Dive in to learn what changed his mind. ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ 🗞️ GET THIS EPISODE'S DEBRIEF: https://shows.banklesshq.com/p/exclusive-debrief-eip-1559-with-hasu ------ GO BANKLESS WITH THESE SPONSOR TOOLS: ⭐️ AAVE - BORROW OR LEND YOUR ASSETS https://bankless.cc/aave 🚀 GEMINI - MOST TRUSTED EXCHANGE AND ONRAMP https://bankless.cc/go-gemini 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 📱 DHARMA - MOBILE ONRAMP DIRECTLY INTO DEFI https://bankless.cc/dharma ------ 🎙️Bankless Podcast Episode #58: EIP-1559 March 29th, 2021 Guest: Hasu Hasu is a renowned pseudonymous researcher in the cryptoeconomic space, and we have been long impressed by his clear, sober ideas. In his second appearance on the pod, we dive deeply into EIP-1559, covering its technicals but also the social & cultural implications of the proposal. When it comes to the field of cryptoeconomics, Hasu is most compelled by research on establishing and maintening economic security. EIP-1559 embodies these concepts through its transaction fee dynamics, regulation of gas prices, and novel mechanisms for users to buy transactions on the network. Properly incentivizing validators to come to consensus is necessary for a cryptoeconomically secure platform. EIP-1559 aims to accomplish this by regulating the consumption of resources on the network, fixing the price of gas on a block while allowing its quantity to float. The changes under EIP-1559 allow Ethereum to incentivize its deflationary mechanism, mitigate Miner Extracted Value (MEV), and improve the user experience for individuals transacting on the Ethereum network. Tune in as Hasu's refreshing and credible perspective conceptualizes this multi-faceted cryptoeconomic system. ------ RESOURCES: Uncommon Core Blog/Podcast: https://uncommoncore.co/ Derbit Insights: https://insights.deribit.com/market-research/ Hasu on Twitter: https://twitter.com/hasufl?s=20 Some of Hasu’s Writings: -Analysis of EIP-1559 https://insights.deribit.com/market-research/analysis-of-eip-1559/ -Guide to EIP-1559 https://uncommoncore.co/eip-1559/ -The future of money https://insights.deribit.com/market-research/the-future-of-money-could-be-discretionary/ EIP-1559 on the Horizon https://newsletter.banklesshq.com/p/eip-1559-on-the-horizon-market-monday-37f The Bull Case for Cryptography https://shows.banklesshq.com/p/-moon-math-the-bull-case-for-cryptography ------ THIS WEEK ON BANKLESS: 🦄 Alpha Leak | Uniswap V3 (3/23) https://youtu.be/TRJYs7v7gYo 🎙️ Ultra Sound Money | Justin Drake (3/22) https://shows.banklesshq.com/p/-ultra-sound-money-justin-drake ❓ AMA with Chris Spadafora of Badger DAO (3/24) https://shows.banklesshq.com/p/-ama-with-chris-spadafora-of-badger 🏴 State of the Nation | David Grider (3/23) https://newsletter.banklesshq.com/p/-sotn-39-is-wall-street-going-bankless ⚫ Token Thursday | The Best Yields on USD (3/25) https://newsletter.banklesshq.com/p/the-best-yields-on-usd ✏️ Why ETH is the Best Money the World Has Ever Seen (4/24) https://newsletter.banklesshq.com/p/ultra-sound-money- ⚒️ Tactic Tuesday | How to Automate Your Staking Rewards (3/23) https://newsletter.banklesshq.com/p/how-to-automate-your-staking-rewards ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:13Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. I'm Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, what an episode. This is a perfect follow-up to our last episode with Justin Drake. Who did we have on, and what is this one about?

• 0:40David Hoffman?

  We had on Hasu, who is a pseudo-anonymous crypto-economic researcher, who is renowned for being a very clear, sober thinker in this space, which is hard to come by. And he has particularly found resonance with EIP1559 as a mechanism, which he thinks is generally positive in most, if not all, respects. And so he has really led the charge. And Hasu has previously been kind of labeled a very strong Bitcoiner, if not Bitcoin maximalist. And then EIP1559 came around, and he has really found resonance with EIP1559, and has really been a champion in the Ethereum community, championing EIP1559

• 1:24David Hoffman?

  for all of its merits, to make sure that it gets included into the Ethereum protocol. And so we brought on Hasu to help us walk through and understand EIP1559 from the person that, in my opinion, understands it the most, except for maybe after people like Tim Bako and some of the deepest researchers in this space. But what Hasu is uniquely positioned to talk about is not only the specific technical details of EIP1559, but how EIP1559 extends into the social realm and the cultural realm, which is where this conversation leads to towards the end of this podcast, which I thought was the best part of the podcast.

• 2:02Ryan Sean Adams?

  Yeah, the reason this is a great follow-up episode is because you've heard from us why ETH is money. Previously, we've talked about the triple-point asset thesis. We've talked about ETH as economic bandwidth. We've talked about actually using ETH as collateral for this reserve asset for this decentralized finance system. Last episode, you heard Justin Drake, who is actually designing the engine of the future, basically economic engine of ETH2, talk about ETH as sound money. Now you are hearing people like crypto economic researchers who are kind of neutral. I feel like Hasu is the type of researcher who just goes wherever the data takes him. Now he is coming to the realization, and he is here saying in this episode, that Ether is

• 2:47Ryan Sean Adams?

  a sound money experiment. Like, things are starting to fall into place, David, for this narrative to pick up steam and for this reality to pick up steam in the broader market. Now with people like Hasu saying the same thing. And I really think that's what we talked about in the first part of the episode. We sort of described EIP1559. And we got into some technical specifics of why block space is scarce and how this is an improvement on the economic mechanism, the economic engine of allocating scarce block space. But then the second half of the episode is really where we camped on this idea of Ether as a sound asset. And I think that's what Hasu sees in EIP1559.

• 3:29Ryan Sean Adams?

  He sees it as a second economic experiment, Ether's soundness. We've called it Ether's scarcity mechanism, but it's almost like Ether's sound money mechanism as well.

• 3:39David Hoffman?

  Hasu is a true pioneer of crypto economic knowledge. And whenever Hasu is paying close attention to something, I also pay close attention to that thing. So let's just go ahead and get right into the episode with Hasu. But first, we're going to talk about some of these fantastic sponsors that make this show possible.

• 3:58Ryan Sean Adams?

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• 5:06David Hoffman?

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• 5:49David Hoffman?

  if I wanted to lock that interest rate in permanently. One of Aave's V2 features is the ability to swap collateral without having to withdraw your assets, trade them on Uniswap, and then deposit them back into Aave. Aave does all of this for you, all in one seamless transaction, so you don't have to repay loans in order to change the collateral you have backing them. Check out the power of Aave at ave.com. That's A-A-V-E dot com.

• 6:16Ryan Sean Adams?

  Bankless Nation, we want to welcome back Hasu, who is a renowned crypto economic researcher. I really think he's one of the brightest analysts that span multiple crypto communities, including Bitcoin and Ethereum. He also has a fantastic podcast that should be on your rotation called Uncommon Core. And we're talking today about EIP 1559. That's been of particular interest to Hasu. He's written extensively about it. He is a proponent of EIP 1559, maybe not just for Ethereum, but perhaps other crypto economic systems in the future? Bitcoin, maybe? I don't know. We will dig into that. Hasu, welcome to Bankless. Once again, it's great to have you.

• 6:57Speaker 02

  Yeah, thanks, guys, for having me. I love your show. Frequent listener.

• 7:00Ryan Sean Adams?

  That's awesome. Well, look, the fandom is mutual because Uncommon Core has some fantastic episodes and you guys really extensively dig into some issues on your podcast. So thanks for contributing to this conversation. It's just a fantastic podcast you guys have over there.

• 7:15Speaker 02

  Yeah, thanks. I mean, I guess you guys really were the first to do a DeFi Focus podcast, right? I mean, there was really nothing before you that dug deep into the dynamics of DeFi and so on. So I feel that you inspired us quite a bit, so.

• 7:31Ryan Sean Adams?

  Well, that is awesome. All right. Well, so let's dig into the subject today because, and you know, why don't we start with this question? What about EIP 1559 gets you so excited?

• 7:44Speaker 02

  Well, that's not difficult to answer. So I've always been focused on the security of blockchain and the economics. That was what I spent most of my time researching in the past. I wrote a paper in 2019 on basically the security model of Bitcoin and whether it's what actually contributes to the security and whether that security can be maintained after the block subsidy is gone. And I spent several months working on that. So this topic has always been the most interesting to me in the entire space. And EIP 1559 really combines this kind of research into the security of blockchain and the economics with all the transaction fee dynamics and the

• 8:25Speaker 02

  Different mechanisms that exist for users to buy transactions on a public blockchain. And when I saw EIP 1559, it was something that I could immediately analyze. Although it is quite a bit different, right, from how Ethereum works today and from how Bitcoin works today. So it took some time to really understand all the dynamics. But when I did understand them, I became a really strong supporter of it because of the different benefits that I think we'll get into in this call.

• 8:55Ryan Sean Adams?

  Yeah, we're going to spend this entire episode camping on EIP 1559. And of course, this is of particular relevance. We've been talking about it a lot on Bankless for many reasons. It touches security, it touches issuance, and maybe most importantly, it is now timely. It looks like it has been scheduled for a future Ethereum hard fork that may happen as soon as this summer. So guys, this is a really important topic to fully understand. But before we get there, Hossi, I want to ask you this question. You brought up that you've always been fascinated with the economic security aspect of crypto and of blockchains. Why is economic security so important?

• 9:37Speaker 02

  Well, there are really two reasons. I'd say one is personal. I thought this is the biggest unsolved problem in Bitcoin. It's the only one that I think could really become a problem for Bitcoin in the future. So I really believe in kind of the values of Bitcoin and the mission. So I thought this, like if I dedicate my time to something, then it should be this. I thought that's how I can make the most positive change, hopefully, in the crypto space. But the second is, I think the economic incentives is what really sets crypto, Bitcoin, Ethereum, and so on, what sets them apart from the traditional systems, right? I mean, none of the cryptography that's used in a cryptocurrency is really new.

• 10:16Speaker 02

  What is new is how we can incentivize a permissionless set of validators to come to consensus via these economic incentives. That's the main thing that didn't exist before.

• 10:27David Hoffman?

  So Hozu, I believe you may agree with me when I say that the legacy that EIP1559 could leave on the world of crypto economics is an elegant mechanism that fixes many things and increasingly fixes long-term sustainability with economic security for crypto economic systems. And so I want to make sure that the listeners can get up to that point in understanding of EIP1559. But to get there, we need to walk through EIP1559 and how it's designed and what it is. I recently wrote a piece in the Bankless Newsletter that described EIP1559 as the blind man feeling the elephant metaphor. Depending on the way

• 11:06David Hoffman?

  that you look at EIP1559, it does different things. One is a deflationary mechanism based off of the overspending of transaction fees based off what is needed for security. One is a MEV mitigator. One is simply a UX improvement with how to use a blockchain. Let's start at the very beginning. When you first start to like define or describe EIP1559, where do you start?

• 11:34Speaker 02

  This goes back to what you said, because how I described EIP1559 has changed several times. This is pretty much true for everything in this space, right? The more we learn, the better we get at explaining things and the simpler the terms that we can put them in. And today, I would say that well, EIP1559 is a mechanism for how transactions are sold on Ethereum, and it differs from the status quo in two major ways. So something that most people don't know or that don't think about right now is that today in Ethereum, we, the protocol itself fixes the quantity of gas that can be used per block. That's

• 12:15Speaker 02

  gas in Ethereum is kind of like block space in Bitcoin. And it lets the price of the gas that is consumed float, which means it can be found in the marketplace in a type of auction. And if EIP1559 is implemented, then Ethereum will fix the price of gas and it will let the quantity per block float. So it's really a change from how the protocol regulates the consumption of scarce resources.

• 12:45Speaker 02

  So why do we need to kind of regulate the consumption of resources at all, right? I mean, aren't we all about free markets? Like, shouldn't the price of everything be found in a market? That's actually a discussion that was very prominent back in 2015 to 17 in Bitcoin. Because like a lot of proponents of bigger blogs, for example, they described the hard-coded block size limit in Bitcoin as a sort of production quota and Bitcoin developers messing with the free market of mining. But I mean, this is totally misguided in my view, because like, that's one thing that markets can't do, and that's sort of pricing of negative externalities.

• 13:29Speaker 02

  And in every blockchain, like every transaction that someone makes that has a private benefit to that person, like I have a benefit when I can send a transaction of ether to you, but that transaction has a social cost on every other participant in the network who has to validate that transaction, who has to download it, who then has to relay it, who has to store it forever. And that cost really, that's not compensated in blockchains. So if we let kind of the social cost explode, then what really happens is that you end up with a completely centralized blockchain, where a lot of people can participate as transactors, but no one can participate as validator. And by validator, I don't mean a miner, but validator is someone who is a node in the network, right?

• 14:13Speaker 02

  I mean, if you're not really a node in the network, then you're kind of a second-class user if you are, because you don't validate what happens. So this kind of summarizes why we really need to put the limits on kind of the resource consumption that we have in a blockchain. We need to both make it relatively cheap to transact, but also relatively cheap to validate like what's going on and follow the consensus. And if we go too far in one direction, then the blockchain itself really stops being useful, right? At least for the reasons that we kind of want.

• 14:44Ryan Sean Adams?

  So Hsu, what you're saying here is that the purpose of EIP 1559 is to really regulate the consumption of resources on the chain. And the resource of the chain, a chain like Bitcoin or Ethereum, is really block space. We might also say that's a network resource. There's also other resources on Ethereum and Bitcoin, namely the asset Bitcoin or ETH. And it's interesting to me because I remember back in 2017, around the time of CryptoKitties, there was this move to say, you know, chains like EOS, we're talking about, you know, transactions should be free. There should be no such thing as gas. Transaction space shouldn't have to be paid for. And I think these are some of the negative externalities that you were mentioning.

• 15:29Ryan Sean Adams?

  Because if this block space is free, essentially, we have a tragedy of the commons. We have a public goods problem on our hands. And what happens is what we've actually seen bear out in some of these chains, which is they become centralized, they have all of this state bloat, they can't be run in a decentralized manner. That's kind of what you're talking about. That's what negative externalities lead to unless they're throttled, unless they're governed by some sort of scarcity engine. Is that what you're saying?

• 15:58Speaker 02

  Yeah, that's, that's pretty much exactly right. I mean, EOS is a good example. Like whenever someone says they can offer transactions cheaper than someone else. I mean, that's almost never really the case, right? I mean, the transactions in Bitcoin and Ethereum are more expensive than transactions on EOS because those protocols, they privatize some of the social costs that transactions have on other participants in the network. Whereas EOS doesn't privatize this cost. It's just that all of the real costs of transactions are socialized on the other participants. And that's why it's impossible to run a node on EOS, right? That's the kind of trade-off that we go for. I would address one other thing that you said.

• 16:40Speaker 02

  So I would say EIP 1559 is not about regulating resource consumption, not any more than today, right? It's we regulate resource consumption in a very similar way. Instead of regulating the amount of gas that can be consumed per block, we regulate the price that people have to pay. But for example, if you assume, if you look today, I don't know what the gas fee is right now. Okay, it's about 180 gray per unit of gas, right? And when the blocks are full at this price, this means that at a price of 180 gray per gas, there's about 12.5 million gas of demand, right? And if you keep this number in your head, it doesn't matter if we fix the block size

• 17:21Speaker 02

  at 12.5 million gas, or if we fix the price at 100 gray, that it will be the same, right? I mean, if we, does that make sense? If we fix the price at 180, then there would still be 12.5 million gas consumed. Because if there wasn't, then current price would be higher.

• 17:40David Hoffman?

  And so the goal of this is that we have regulated what we need to regulate, which is the externalities of putting data into the blockchain, which makes the blockchain bigger in terms of size. But what we're saying is that we can either regulate block space, which is a way to regulate how large that blockchain grows, or we can regulate price, which regulates people's desire to put data into the blockchain, and the net result is the same. But why is EIP 1559 better? If at the end of the day, we're still regulating how fast the state of a blockchain is, how fast that data growth size is, why is EIP 1559 an improvement off if it's going to end up regulating the same thing?

• 18:25Speaker 02

  Yeah, I mean, the all the benefits basically are downstream of the original change. They are kind of derivatives of it being better to, in a blockchain, regulate basically the price instead of the quantity. And already in your interview, you touched on one major benefit. For example, EIP 1559 does in theory have a block size cap. But that block size cap, that's twice the target of 12.5 million gas. So blocks can in theory be up to 25 million gas. But that limit only exists for, for basically denial of service protection of nodes.

• 19:02Speaker 02

  So if it turns out that maybe nodes are resistant to like 50 million gas to like 100 blocks in a row that are 50 million gas and we could get rid of this limit and it would not materially affect the mechanism, right? So really, the how much block space or how much gas is consumed is regulated via the base fee mechanism. And that's the price that the protocol quotes you for transacting. But what this really gives you is that we have no more fixed block size is that there's always more block space available than is kind of the protocol projects in terms of what the current demand is. So this has really one benefit and it's that the protocol quotes your price and you know if you pay that price, then you're getting into the next block. And

• 19:46Speaker 02

  that is what most people would describe as this major UX benefit of EIP 1559. And you couldn't guarantee this in any other system that doesn't have an unlimited block space, right? Because then what if too many people are willing to pay that transaction fee, then you would basically have the same system that we have today where it's kind of an auction and you have to speculate what everyone else is going to want to bid. But this almost never happens in EIP 1559 because there's always about 100% extra space. And that 100% extra space could be in theory also expanded, could be way bigger than it is today. And still, the average resource consumption in the blockchain would be the same.

• 20:28David Hoffman?

  So yeah, let's go into the details behind where we are with Ethereum block management today and how EIP 1559 changes that. And so where we are today is that miners have a target block size. And interestingly, they can vote that up and down, but that's actually irrelevant to EIP 1559. The Ethereum blockchain has a target block size that it holds at a constant and transactions can go up to that limit and no more. And that's where we are today. EIP 1559, it takes that target, that block size, and then it doubles it as a capacity. But and so up to double of the target of the average gas size can be fit into a single block. And when people are transacting in their MetaMask or however, they see this gas size transaction.

• 21:12David Hoffman?

  And for a simple Ether transfer, it's 21,000 gas. For an ERC 20 token transfer, it's like 35,000 gas. And the block size limit that EIP 1559 targets is 25 million. And that's the size of a block. That's how much data you can fit into a single block. But it targets Being 50% full at 12.5 million gas per block, but is allowed to fluctuate up and down because there's volatility in how many people want to get their transactions included into one single block. And so what we were talking about is the regulation of Ethereum block space is targeted

• 21:51David Hoffman?

  to 12.5 million gas in EIP 1559, but that extra capacity allows for volatility in transaction inclusion. And what the elegant part about EIP 1559 does is that it allows short-term volatility in gas in block saturation of data. But when that trend of how full blocks are trends upwards or downwards, what the EIP does is it readjusts the price to always compensate to always be targeting 12.5 million gas. Did I explain that okay?

• 22:24Speaker 02

  Yeah, that's, that was exactly correct.

• 22:26David Hoffman?

  Okay, so why is this slack so nice? Let's just dive into the UX improvement. What does this slack in the system, this extra capacity of blocks that are always generally only 50% full, how does that improve things?

• 22:39Speaker 02

  Well, I would still say that the main benefit of having this extra room is that like anyone who's willing to pay the fee that the protocol quotes them can always know with a very high certainty that they will get included in the next block. What the consequence of this is, as you said, that when blocks above 12.5 million gas are mined, then the base fee will regulate upwards in the next block, right? So the way that it does that is for every new block that's being mined, it looks at the size, at the distance of the size of the last block to the target. So if it was 25 million gas, then that's kind of the maximum distance that it can go. And then it's adjusted upwards by the highest possible amount per block, which is 12.5%.

• 23:24Speaker 02

  For any smaller distance, it would be adjusted less than that. So it really, what the protocol does is really tries to guess how much people would be willing to pay for 12.5 million gas.

• 23:35David Hoffman?

  And this is actually a really similar mechanism to Bitcoin's difficulty adjustment. Could you draw that comparison for us, Hasu?

• 23:42Speaker 02

  Yeah, I mean, both are kind of, yeah, I mean, I agree they are similar for sure. It's, they both use control theory, if you will, to achieve, to basically target, yeah, a specific thing in the, in the protocol, but I wouldn't say that they are. Otherwise related, yeah.

• 24:01David Hoffman?

  Yeah, one, the Bitcoin proof of work adjustment, like how hard it is to find a block, like regulates itself up and down to target 10 minutes. And the benefit of EIP 1559 is that it formally introduces a number in the protocol. And so the protocol, rather than like wallets and, you know, users, people guessing how much gas that they need to pay, the protocol just formally creates a number, like you said, using control theory. And that instantiation of that number is an advantageous piece of data to have because that's where we talk about this UX improvement of make ensuring that your transaction will get included if you pay this particular number, which is informed to you by the Ethereum

• 24:46David Hoffman?

  protocol under EIP 1559.

• 24:48Speaker 02

  Yeah, this is, I mean, what you said is that we have a number in the protocol. That's, I mean, many Depp developers would probably tell you that this is a pretty nice feature of it because it's basically an oracle for what the, you know, what gas price of protocol needs to pay, for example, to liquidate users collateral, or it's also relevant in the context of systems like rollups that have fraud proofs and challenge periods. Because the protocol can, for example, really say if the protocol is congested, then maybe the, the challenge period should be extended until the protocol is no longer congested. So it basically takes a timeout, right? So that's one benefit.

• 25:26David Hoffman?

  So we're going to talk about this from a system benefit perspective, but I also want to just camp here for a minute and make sure that the average DeFi or Ethereum user knows what's going on here and what kind of the before and after is. So right now, the current state, if I am trying to get a transaction through the Ethereum network, I have, say, my MetaMask wallet and I want to send David some ETH. So fairly simple, low gas transaction, I want to send you some ETH. Well, the price of that transaction in Gwei is going to fluctuate based on demand. So there have been times, I remember the distant past where you could do that for like five Gwei, like nothing, right?

• 26:09Ryan Sean Adams?

  You know, now it's closer to eighty to a hundred. It's gone as high as nine hundred like for transactions of this size. But what's actually happening is as a user trying to get ETH to another user, if I'm trying to pay David in some ETH, I have to kind of guess what the fee might be. And so the way I might guess is MetaMask proposes a slow transaction price. It proposes an average one and like a fast one, right? And so if I'm in a hurry, I might click the fast one and pay the most in gas to try to send my ether to David. And what's happening today, Hossu, if I'm correct, is it's some kind of an auction mechanism, essentially.

• 26:52Ryan Sean Adams?

  But everybody who is trying to get a transaction through is guessing, essentially. They don't know totally what miners will accept or what they won't accept.

• 27:02David Hoffman?

  Or what other people will bid.

• 27:04Ryan Sean Adams?

  Exactly, or what other people will bid. And this creates a lot of inefficiency. Am I understanding this correctly so far?

• 27:10Speaker 02

  Yeah, that's, that's right. Yeah, I mean, from a standpoint of mechanism design, we would say that that's called a first price auction, what you described. And it doesn't really maximize user welfare because it doesn't really capture very well kind of what they are willing to pay and kind of charging all of them the least. That's kind of how we would design the optimal bidding mechanism, right? There's another form of auction, which is called a second price auction. And there you have a lot of bidding, but then everyone kind of pays. I mean, either there are some variations of that, but either everyone pays kind of the price that the person bid that's behind them, or everyone really pays just the lowest price that anyone bid that is still included in the protocol.

• 27:56Speaker 02

  And this form of auction is really the most efficient that you can have. But it's not possible in blockchains. It's not going to be possible in blockchains. And that's because it sort of requires trust in the auctioneer. So the person running kind of the marketplace and deciding which, which bids are included. And that's something that you can't do in a blockchain. Like if miners are not happy with the lowest fee transaction in the block, then they can just include their own transactions and thereby move sort of the gas price in the block to whatever limit they want. So that's really not possible. So we were looking for something that captures a lot of those benefits, but without being exploitable in this way. And that's also where in ERP 1559, the burning of the base fee comes into play.

• 28:42Ryan Sean Adams?

  We'll get back to that, definitely. So that's kind of the before. I've got an inefficient transaction. It's probably costing me more. I have bad UX in terms of, you know, the protocol doesn't tell me what to pay. I have to kind of guess. So I have no idea when David's going to get it, if I paid enough, if I paid too much. It's inefficient from that perspective. After EIP 1559, with my transaction data, I'm not just sending the price that I want to pay in Guei, essentially. I'm sending a few things. I'm sending this thing called the base fee. And what you're saying is in EIP 1559, the Ethereum protocol determines what the base fee is, essentially. So it outputs that, almost like a price oracle. I don't have to guess.

• 29:23Ryan Sean Adams?

  I know what the base fee is, so I can set that as my transaction cost with some certainty. But then there's also this element on top of the base fee that I add, which is a tip element as well. So I have the base fee that a wallet might generate based on the, like, the Ethereum protocol provides me that base fee. And then as a user, do I set the tip amount I want to pay? And does that determine the priority of my transactions? I'm just trying to wrap my head around what this looks like from a user's perspective.

• 29:52Speaker 02

  Yeah. So you're right, there are two fees in ERP 1559. There's the base fee, which is being burned. So the miner has to burn a specific amount of ETH. The miner can include any transaction they want, but for every gas that they basically use, they have to burn a specific amount of ETH, and that is set by the base fee, right? So the user doesn't necessarily have to pay the ETH, but the miner has to. So that's important. And the second is a tip. And the tip is sort of like, that's a bribe to the miners to include your transaction. Because if you imagine that didn't exist, what benefit does the miner really have to include your transaction when the fee no longer goes to them? So, including it, like you could argue, of course, well, the miner is better off if,

• 30:36Speaker 02

  like, the Ethereum users are happy and get their transactions mined, because that's good for the price of Eve, and that determines the value of the block subsidy. I think that's a good argument. But every transaction they include has a cost for the miner, because if they mine larger blocks, then they take longer to process and to propagate to other miners in the network. And so you really need to compensate the miners for these delays, because the delays kind of cause what's known as uncle risk. That's basically the risk of another miner finding a block before you, and then you don't get the block reward. Maybe you become an uncle, or you become an entirely stale block. So, that's really a pretty small cost.

• 31:16Speaker 02

  So, we kind of expect that sort of the minimum, like, one to two gray per gas, will be enough for miners to compensate them. You can calculate what the uncle risk is, what is really the cost that the miners take. So, this is not something that we have to guess. We can, like, all the wallets can just agree, okay, per gas, we pay a two gray tip, and that's pretty much set in stone.

• 31:37David Hoffman?

  So, that tip is, to me, that's the same exact system as the system that we have today. The tip is a first-price auction that is layered on top of the base fee. It's layered on top of the protocol changes for how Ethereum manages gas.

• 31:51Speaker 02

  Yeah.

• 31:51David Hoffman?

  And, to me, the priority is first burn base fee, then pay tip. And it's really this prioritization of first the base fee, then the price auction, that allows this new kind of equilibrium to arise. But the tip is just the same recreation of the first-price auction that we know today. It's just deprioritized. It's after the new order of operations, where EIP 1559 comes first. And so the tip is, again, just the incentive to pay the miners to get the transaction included into the block. But the tip also facilitates a different role under a high congestion environment. Can you talk about that?

• 32:24Speaker 02

  Yeah, that's right. So, basically, in the Current system, there's always more demand to transact than there is supply available. And that's why people bid up the gas price, right? Because kind of congestion has a cost to them. Like other people being processed before you has a cost to you. And that's why you increase your transaction fee. And that's why we see the transaction fees being as high as they are. Because there's more demand to transact at the current price than there is supply. And this would, under most circumstances, not be the case in ERP one five five nine. And that's because of what we already established, which is that there's always extra room in the block, right? So whenever at the current price, there's more supply than demand, then the tip will be zero in this kind of auction. Or like the kind of very low value that we talked about.

• 33:10Speaker 02

  But it is possible, as I said, that there's a kind of market event, right? Like, and a lot of things could trigger this, right? It could be like a five percent, ten percent price drop of Bitcoin, of Ethereum on on the major exchanges. And then suddenly empirically, we know that kind of the transaction demand spikes on Ethereum.

• 33:32David Hoffman?

  Immediately, very quickly.

• 33:33Speaker 02

  Right. And why is this? I mean, it's because people get liquidated, suddenly a lot of arbitrage trades become profitable. People want to exit their positions, rush into something else, rush into stable coins. There's a lot of stuff going on, a lot of it happening automatically, which is not really human driven, right? But bots doing arbitrage liquidations and so on. But we don't see this increase of demand in the block size. And that is because the block size is, of course, kept right now. We do see this in the increase of the gas price that people are paying for that gas. Like, we can't really know today if the gas price before sort of the price move was at a hundred gray and now it's five hundred. We don't know how much gas the market would consume if the price was fixed to a hundred

• 34:17Speaker 02

  or fixed to a hundred fifty or fixed to two hundred, right? It's it's impossible to know because we don't know that the the demand curve of the transactors is invisible to us. But in ERP one five five nine, we can see a block being mined that's twice as large, right? That has twenty five million gas. We could also see several blocks in a row mined that large. That's entirely possible. I think that's even quite likely. But what will happen is that the base fee will start rising exponentially. And I had a tweet the other day just to give people a feeling for what exponential growth really means. So if you imagine that at block one, the base fee is a hundred gray. And then we have a series of twenty five million gas blocks mined in a row. After five blocks, the base fee would be a hundred sixty already.

• 35:01Speaker 02

  After ten blocks would be about three hundred. After fifteen blocks, which is only about three minutes, the gas price would be five hundred gray. After twenty blocks would be over nine hundred. So that's the highest that we've ever seen. And then it just keeps rising exponentially from there. So basically, the protocol can react very fast. It can very quickly quote a price that will then lead to, again, fifty percent utilization of the block. It doesn't take long at all. It takes definitely less than five minutes, unless, unless really we see transactional demand that we've never seen before. That would lead to a demand in the thousands of gray in the current system. And yeah, that's not very likely.

• 35:44David Hoffman?

  And then where does the tip fit in this time of extremely high, unexpected demand?

• 35:49Speaker 02

  When, at the current price, the demand exceeds twenty five million gas, that's when basically the system would fall back to the current state that we have today, the state of a first price auction. But it would already be like with far fewer participants, right? Because we already filter a lot of participants via the base fee. So this is basically what we have today. But the example that I gave about the exponential growth, that really serves to show that such states of the first price auction don't last very long.

• 36:20David Hoffman?

  Right, so because in this very short time, this acute time of volatility and extremely high demand for making a transaction into the block space, base fee is maxed out, we're maxing out all the slack, we're consuming all of that extra space, all that extra space in the variable block size. And therefore, base fee ticks up and it ticks up exponentially. But until we meet that threshold, we have gone back to the current first price mechanism that we find. Ethereum in today. And so during that times that economic actors are consuming all of the possible block space that Ethereum is giving it, which is again capped at 25 million gas. We are using that tip to now prioritize transactions.

• 37:00David Hoffman?

  And this should just be like you are saying momentary because the base fee can increase exponentially. And anything that can increase exponentially is destined to stop increasing exponentially at some point in time. When we finally discover the right price according to the market.

• 37:16Speaker 02

  Yeah.

• 37:16Ryan Sean Adams?

  I just have a question, Hozu, about so what is the net effect of this? Because is the net effect to like actually smooth out these periods of high demand? So I remember it was just a year ago, actually. David and I were recording a podcast at the time. The day later became known as Black Thursday. And I remember at the start of that podcast, gas prices were something like 80 Guay. And then the market dropped, right? And then at the end of the podcast, we were talking about price a little bit in the podcast. At the end of the podcast, prices for Ethereum transactions were like 900 Guay. And anybody who has used the Ethereum network during this period of panic,

• 37:56Ryan Sean Adams?

  during this period of frenzied activity, whether it's in the bull direction or in the bear direction, the panic direction, has felt this where you'll see MetaMask or ETH gas station quote some price. And you're like, oh, my God, like a few minutes ago, this price was 100 Guay less. And so what am I going to do? I'm going to pay instead of 300 Guay, I'm going to pay 400 Guay for this transaction. Because if I don't get it through, all of my collateral in my maker loan that I just took out is about to be liquidated. And so, yeah, I'm willing to pay an extra $50 for a transaction that if it doesn't go through, could cost me like thousands of dollars, right? And so this is what happens. But this is kind of the inefficiency that you were talking about.

• 38:40Ryan Sean Adams?

  And what this seems to lead to is like this rapid increase during these frenzied activities in transaction fee price. We see it go from 80 Guay to 900 Guay in a relatively short period of time. With EIP 1559, does this get smoothed out? During these periods of frenzied activity.

• 38:59Speaker 02

  Um, yeah, you talked about a very important problem with first price auctions, which is that it really has many equilibria, many of which are pretty bad for the transactors, like because if you think that I'm going to bid 500 away and I think you're going to bid 500 gray, then like we both end up paying 500, even though paying 300 would also get us both included in theory, right? And and you can really.

• 39:23Ryan Sean Adams?

  Exactly, and I might just want to pay 501, you know, just to get ahead of you.

• 39:27Speaker 02

  Yeah, exactly. So, yeah, the gas price can really be better, be like way higher than it needs to be. So I would say, yes. Um, transaction fees will be smoothed out, um, definitely. The other, I mean, this is sort of the same as kind of reducing really the overbidding and lowering sort of the mental transaction cost. Right now, you look at your transaction and you really like, okay, how much should I bid, right? Whereas then it's really just a take it or leave it, right? You can still offer a base fee that's lower than what is required today and just say, okay, this transaction is not urgent. So if demand drops, like you know that, for example, every time when sort of US business hours are over, then gas prices on Ethereum drop substantially, like during the night in the US.

• 40:11Speaker 02

  So you say, okay, I'm gonna have this processed at night. So I know the base will probably be way lower than, so you can still do that. You don't lose that benefit. Um, but other than that, it's, yeah, it's probably a lot smoother and it's hard to say, right, if it will lower gas prices because yes, on the one hand, I would say it will lower them a bit, but I mean, if the UX is better, then this could also increase the demand to transact. So you really can't know it when when the new equilibrium will be found. What I would say, though, one of the biggest misunderstandings about EP1559 is that it will substantially decrease transaction fees. And um, that is something that no transaction fee mechanism can do.

• 40:55Speaker 02

  That is fundamentally a problem of scalability, only adding more transaction supply. So gas slash block space can do that.

• 41:04David Hoffman?

  I want to dig into that a little bit more because when Eric Connor first introduced this EIP into the sphere of Ethereum, he actually cited that, you know, people are overpaying for gas because of this crappy auction mechanism. And you said a line just now where the mental load or the mental bearing of having to like guesstimate the right gas, you know, cause it and humans are emotional characters. Like maybe we get into our heads and say like, well, if he's going to pay this much, then I'm going to pay this much. And then if he, well, if I pay this much, then he's going to pay that much. And all of a sudden, like our imaginations start to increase the price of gas that we pay, which is crazy. And so the instantiation of base fee in the protocol really eliminates that internal game that people play in their heads in their, their perceived game. And

• 41:47David Hoffman?

  how do I know that you're a poker player? So I know that you know what these type of mental games that you play. But why doesn't that decrease transaction fees? If it eliminates that mental game of trying to outbid people in our imaginations and it just formalizes into the protocol and says what you need to pay and that reduces overpayment, why doesn't that decrease gas fees?

• 42:07Speaker 02

  Yeah, no, I agree with you. I mean, definitely. That those are like two distinct scenarios, right? And the one, the protocol quotes us both a price of 150 gray and we both accept it and then we both get mined at 150 gray. But in the other scenario, we both have to guess what we are going to bid and what everyone else is going to bid. And we could end up at 200, at 250, at 300 gray. And like we both, everyone, all transactors involved lose from that. The only parties who win would be the miners, right? So you could say this lets the transactors coordinate better on how much they're really willing to pay and thereby prevent them all overpaying, all losing. But this is not something that can reduce

• 42:48Speaker 02

  gas prices by like 50% or whatever. I mean, that's only like adding more supply can afford you that. And yeah, I would reiterate what I said before, which is that I mean, if the gas prices get lower, then this might just lead people to make more transactions, right? And then maybe the gas price will go up again, right? So it's always difficult to say, oh, a change like this will will affect the gas price. I would say it can't substantially lower it. I would, I would, yeah, that's something that I would sign.

• 43:18Ryan Sean Adams?

  I think a lot of people don't remember this basic fact that gas price is always going to be a product of both supply, but also demand, right? And so what EIP 1559 is not doing is it's not doing anything to increase supply of block space, really. It's creating a more efficient coordination mechanism so that we're not overpaying for transactions. Less of that goes to miners. We're not overpaying, but it's not increasing supply. And it may very well increase demand because it becomes better, easier to do a transaction on the Ethereum network. That's what you're saying.

• 43:57Speaker 02

  Yeah, exactly.

• 43:59David Hoffman?

  So Hozu, as we progress through EIP 1559, again, blind men feeling the elephant. We're all trying to figure out what this thing actually is. I think we should talk about why we burn base fee. Why do we burn base fee?

• 44:12Speaker 02

  Yeah. Yeah, there are a couple of reasons. So the original one, I would say this, the original one, because it was basically the first one mentioned in the original proposal, which is that the mechanism would otherwise not be what Tim Ruffgarden called OCA resistant, OCA standing for off-chain agreement. And what does this mean? It means if you, for example, didn't burn the base fee and paid it all to the miner of that block, then what happens is that the price that the protocol charges transactors is no longer binding. Because if you're a transactor and the base fee is 100 gray, but you're really only willing to pay 50, then the miner could now, like, nothing really forces you to pay 100 now, right?

• 44:55Speaker 02

  The miner could just take your 100, right? But pay you 50 back from, like, after he received your payment, right? So the protocol could still dictate that you pay it in protocol, but it wouldn't be a cost to the miner. The miner could just give it back to you. And that's really the way that miners and transactors could work together to really completely circumvent this sort of price setting. This goes back to like what governments all around the world do, right? Price controls never work unless you make it.

• 45:25Speaker 02

  Like the way that you kind of get around this is by just burning the price. So it cannot be paid back, pretty much.

• 45:32David Hoffman?

  And this is the term economic abstraction, where a transactor and a miner could strike a backdoor deal or say like, hey, instead of me paying you like $50 of ETH, I will wash your car and you will include my transaction. And this, the, the formalization of ETH as the only currency that you can pay to make a transaction included into Ethereum is formalized by the burning of it because you can't burn anything else other than Ether. Ryan and I were talking while we were preparing for this interview, Hasu, where we actually never thought that economic abstraction was ever a threat to Ethereum, simply because the Ethereum protocol just makes it so easily to use Ether as a currency to pay because it's not formally baked in, but it's kind of baked in enough.

• 46:16David Hoffman?

  It just makes Ether the easiest asset to use to compensate miners for including your transaction. Is there a threat that we, we aren't seeing? Because I kind of thought that the shelling point aspect of Ether, the currency that you use to pay for transactions, would be strong enough.

• 46:32Speaker 02

  I would say it's a threat and an opportunity. I think you're underestimating the threat and missing the opportunity.

• 46:38David Hoffman?

  Okay.

• 46:39Speaker 02

  Let's actually start with the opportunity because it is actually, I mean, most, maybe you don't agree, but most people would say it's actually a big pain to always have Ether in your accounts when you transact. And if you're privacy conscious and you don't want to reuse accounts either, so you want to make a new account, but then you have to move some ETH there to transact and then, but it doesn't consume all your ETH, then you're left with dust in a hundred accounts. And what if you really just want to receive USDC? Like you receive USDC on some account, but now you can't move it, right? You first have to move ETH there and so on. This is a pain that more people experience than you think, maybe?

• 47:18David Hoffman?

  Well, I actually think like I experienced this pain too. And I think ETH bulls even experienced this pain where they don't actually want to sell their ETH. That's what's required to create a transaction. You're selling your ETH for a transaction. So you, you know, you have to continuously top up your ETH.

• 47:34Ryan Sean Adams?

  And buy more. So I even I think ETH bulls will resonate with the point that you're making where they might not necessarily want to spend their ETH. They want to hold their ETH or they want to stake their ETH or validate with it. And they'd happily spend their fiat rather than ETH for a transaction.

• 47:50Speaker 02

  Yeah, that's exactly right. I mean, I think it's just a big pain point that prevents Ethereum from getting broader adoption, having better user experience, that every transaction requires ETH. It would be better if you could use any token to pay and, for example, like this could go even further, right? You don't even need a token necessarily to pay a transaction fee in the future. I mean, you could also just pay with your order flow, for example. So imagine, I would imagine that in a few years, or maybe in a year or less, it's possible on Uniswap not pay a transaction fee if you play on Uniswap, because you submit it to the miner and the miner will include it because they can front run you or they can send with you, right? So that you pay, you pay with some other form of compensation.

• 48:33Speaker 02

  And that's okay. I mean, EIP 1559 on the one hand enables this and on the other protects against the risks that we will talk about in a minute, because the miners still need to burn ETH, but you don't need to give that ETH to the miner. The miner can also just have sort of a reserve of ETH that they then drain and occasionally they top it up, right?

• 48:53Ryan Sean Adams?

  Right. Yeah, absolutely. So what EIP 1559 does is actually enshrines Ether as the asset that the protocol requires these transaction fees to be paid with.

• 49:06Speaker 02

  At least on layer one. Yeah.

• 49:08Ryan Sean Adams?

  At least on layer one. Interesting. Are there any problems, though, that come with economic abstraction that we should be aware of?

• 49:16Speaker 02

  Yeah, I mean, I would say economic abstraction, it's rarely seen as something good, but I think I just made the case that it's actually essential. It's absolutely required for Ethereum to get broader adoption, that basically we improve the user experience in that regard. But it's also a risk because it creates this sort of tragedy of the commons, where yes, for every individual user, it is better to not have to use ETH to pay transaction fees, but that sort of chips away at this monetary premium that ETH has, that ETH is sort of the central asset in the Ethereum protocol.

• 49:52Speaker 02

  It's sort of a slippery slope to sort of ETH becoming demonetized over time, losing some of its monetary premium. Ethereum pays for its security by minting ETH, right? Really, and so it sort of relies on that market demand for ETH and ETH having a high price, because the more valuable ETH is, the less ETH the protocol then has to mint in order to pay for the same dollar amount of security. So I would say if a protocol has to pay for security in a currency that it can't mint, then this protocol will always pay more for their security than a protocol like Ethereum or Bitcoin that can mint its own currency.

• 50:29David Hoffman?

  Hey guys, I hope you're enjoying the podcast with Hasu so far. It's always a fun time to talk to Hasu. In the second half of this podcast, we talk about how Hasu characterizes the monetary policy of Ether after we integrate EIP 1559 and proof of stake, and really what that brings holistically. And we also talk about the culture of Ethereum as well, as it relates to some of these protocol changes in the protocol that we all surround ourselves in, Ethereum, right? How does that impact the culture? Really excited to dig into those parts of the conversations. But first, before we get there, we got to take a moment and talk about some of these fantastic sponsors that make this show possible. If you want to live a bankless life,

• 51:12David Hoffman?

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• 52:42David Hoffman?

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• 53:24David Hoffman?

  So that actually brings us into the next part of this EIP1559 conversation, where we're going through, we're feeling all the different parts of the elephant, trying to figure out what's what. And Hozu, in a recent article that you wrote that we will have in the show notes, the design goals of EIP1559, you started off talking about a better UX, which is just the formalization of the number that you need to pay to get your transaction included. It's clear, it's specific, there's no guesswork, better UX. We also talked about the slack mechanism, the variability in block size, which increases the probability of you as a user getting your transaction immediately in the next block. That's a fantastic feature as well, also aids in a better UX. And then next up is the section that you just kind of hinted at,

• 54:08David Hoffman?

  which we're going to dive into now, which is better security. But interestingly- Hossu, when I was reading through your article, I noticed that in the better security mechanism, you only discussed the issuance of Ether, the asset. How do you square these two things? Why is security and Ether issuance the same thing?

• 54:25Speaker 02

  So I think fundamentally, it's better for a blockchain to pay for its security with permanent issuance, because that affords you one thing, namely that you will always have a certain amount of miner incentive, right? So even if you compare that to Bitcoin, for example, because it's probably the most known. In Bitcoin, after the block subsidy has ended, then the miners will only pay it with transaction fees. So in that system, the security of the system is entirely linked to the congestion of the network, right? The transaction demand relative to supply. And that has a few big problems, right? So you can get into a sort of death spiral there. If the transaction demand is low, then as a result, the security will be low. And what does that do? It will only further lower the demand to transact. I think that's really problematic.

• 55:09Ryan Sean Adams?

  So Hossu, on a recent episode we just had with Justin Drake, he kind of compared the different ways to fund economic security as kind of different types of fuel. So he talked about grade A fuel versus grade B fuel. And he said, grade A fuel is issuance. It's a better quality of fuel because it's predictable, because the protocol can manage it. And transaction fees are more like grade B fuel. It can still fuel economic security essentially, but it has some major problems. It's not reliable necessarily. It's not protocol managed.

• 55:42David Hoffman?

  Sometimes it's too much, sometimes it's too little.

• 55:44Ryan Sean Adams?

  Exactly, very volatile. So it's also very combustible. I think that's what you're talking about here when we talk about sort of issuance, of issuance being a very good fuel for economic security. But in order for issuance to be a very good fuel, it also has to have some sort of a monetary premium, right? Like, that makes it the best type of grade A fuel. If you're not just issuing some capital asset, you're actually issuing a thing that the rest of the world views as money. And arguably, that's what Bitcoin has today, right? And arguably also, that's what Ether is starting to have, this monetary. Premium. Can you talk about this some more? Is this sort of why economic security is important?

• 56:27Ryan Sean Adams?

  And why like enshrining Ether as part of the only payment mechanism by which you can pay for transactions? Is this why all of this stuff is important?

• 56:36Speaker 02

  Yeah, I definitely think so. This goes back to what we already talked about, right? Which is that if Ether is worth a lot in USD terms, then the protocol has to pay less in order to generate a high amount of like US-denominated security. And this is one aspect that I would say secures the protocol, right? Having just a high US-denominated barrier to overcome for a attacker. But we typically also want the security budget to scale with either the network capitalization, sort of the market cap of the network, or the transaction volume, right? So some of those activity measures, if you will, right? Because a protocol that transacts a lot of value would be arguably at a bigger risk of attack. And the tax would be easier to monetize than a network with like a far lower transactional activity, for example.

• 57:20Speaker 02

  So those are really several things the block subsidy affords you that transaction fees don't. I really liked that meme that Justin made. I mean, he's really getting into the memes lately, right? With the, with the, what did he call it?

• 57:33Ryan Sean Adams?

  Ultrasound money.

• 57:34Speaker 02

  Ultrasound money, right. And now the, the great A fuel and great B fuel. Yeah, that's really good. I mean, I definitely agree with everything you said there, that subsidy paying for security is fundamentally better than fees. There's even one aspect of transaction fees. I mean, we earlier touched on why do we want to burn the transaction fees? And we can go back to that right now because I think it's very fitting now. So one benefit is that there was this paper back in, I think it was 2016, called "On the Instability of Bitcoin Without the Block Reward", that's one of the most well-known papers on basically the economic security and fees in crypto. And the thesis of that paper was that transaction fees can also destabilize consensus in a cryptocurrency

• 58:17Speaker 02

  because they can create incentives basically for miners to reorganize each other's blocks instead of building on them, right? So there are some mitigations for that, but I would say that's fundamentally a problem. So the fees come in like really unregularly. Blocks come in unregularly and then you have some blocks that are very high fee. Just recently on Ethereum, we had a block that had over one hundred twenty ETH in transaction fees, right? But I mean, this would totally make sense for some miners to try to reorganize their transactions and include those high fees for themselves. But luckily, we are not yet seeing that. Hopefully, we will never see that. But if we can lower the fees of the blockchain, we can lower that kind of instability risk. So that's definitely one factor.

• 58:58Speaker 02

  Yeah, the other one, you already touched on that as well, which is that really the security spend of a blockchain shouldn't be linked to the congestion of the blockchain. The congestion might be high, but it doesn't necessarily mean that the network should pay much more for security. I mean, congestion is low, then it doesn't mean I have to pay nothing or very little for security. I think that's exactly the wrong approach, right? When demand is low and you lower security even further, then you can get into very dicey territory there. So that's why I think it's fundamentally better to have a block subsidy, which is you have basically holders pay for security via dilution. But when this ties back to ERP one five five nine is that it's way more acceptable by the market and by holders to pay to subsidize security in this way.

• 59:44Speaker 02

  When they know that when that subsidy is not necessary. For example, because congestion is very high and there's a lot of transaction fees generated. That then they don't need to be the one also paying for security, right? So they're only subsidized when it's really necessary. But when there's a lot of transaction activity in the network, a lot of fees generated, then what happens is sort of in ERP one five five nine. That the holders still pay the subsidy, but then they are refunded via the burning of the transaction fees, which is sort of a reverse block subsidy, if you will. So then you could have a scenario where when demand is really high and there's no need for subsidy. Then the holders won't pay a subsidy. And I think that makes it way more acceptable for them to pay a permanent subsidy at all.

• 1:00:28David Hoffman?

  So going back to this fuel metaphor, which I think ties it nicely here. We have the grade A fuel, which is issuance, because it's dependable. It's exactly what is needed to secure the blockchain. And then there's grade B fuel, which is transaction. transaction fees, which are volatile. But Justin Drake in our recent podcast and Hozu, I think you're going to appreciate this metaphor, said that there's actually two different types of grade B fuel. There is the stable amount of generalized transaction fees that we find on a persistent level. And right now with Ethereum, that's roughly two to three ETH of transaction fees per block. In addition to the two ETH issuance per block, there's also roughly on a very dependable, stable level. There's two to three ETH of transaction fees that we can find on almost every single block.

• 1:01:11David Hoffman?

  And then there's kind of this other type of transaction fees, which is extremely spiked amount of ETH fees per block. And like you said, there was a recent block that was mined that had 120 ETH per block. And since we are burning all transaction fees, what that allows us to do is pocket all of those transaction fees and turn them and refine them into grade A fuel and turn that into future issuance. And this is really, really important. And where I want to lead this conversation next is how this burning leads and protects Ethereum from minor extractable value. Hozu, could you talk about all of these different transaction fees? And how MEV is relevant with the IP 1559?

• 1:01:53Speaker 02

  Yeah, I would actually challenge what you just said. So first of all, I think it's a great meme. I think maybe we should call it a great C fuel, because it is really different from the great B fuel in the sense that it won't be affected by IP 1559. And it maybe helps a bit to dissect where actually those fees are coming from. Just using the example of that one block that had 120 ETH of transaction fees. So it wasn't the case that there's 100 transactions in the block that each paid like 1.2 ETH of fees, right? To get into that block, that was not at all the case. The lowest fee paying transactional block paid maybe 200 gray or 300 gray, right? But then you had some transactions, some really large transactions that paid 50,000 gray.

• 1:02:38Speaker 02

  For the same amount of gas and why is that the case? That's because there were some really profitable arbitrage opportunities in DeFi. There was a big price drop and there were a lot of liquidations on Compound and a couple of other lending protocols. And so someone paid these very high amounts of gray per gas in order to get a very, very early prioritized position in that block, right? So the first 20, 30 positions in that block were all basically just bots and like large trading firms bidding against each other to get into these very special early blocks, right? Where only the first person to a particular opportunity can fill that trade. Yeah, that's why you have this large divergence, right? Between sort of the last person in the block and the first person in the block.

• 1:03:23Speaker 02

  And it's absolutely true that this is sort of the most, uh, the most aggressive fees that also causes the most incentive problems and consensus instability. And I mean, we would like to get rid of them if we could, but that's not really possible, not even in ERP 1559. Because if you think about it, it's not enough for those, they don't really care, like the people who want to make these MEV transactions, it's not enough for them to get into the block, right? They don't care about that. They want to get into a specific place in the block, like the first place, the second, the third, the fourth, and they want to get there and they want other people not to get there. So they bid against these others and they will always be engaged in the first price option, even if the block is otherwise completely empty, right?

• 1:04:08Speaker 02

  So for them, it's totally irrelevant how much extra space there will be afforded by ERP 1559. So what they currently do via the regular transaction fee will then move entirely to the tip. So you will have these same kinds of, we call them priority gas auctions. Those will all happen in the tip and not in the base fee. Those transactions will also pay the same base fee that everyone else pays, but they will also pay a very high tip. That's probably 10, 20, 30, maybe 1000 times what the base fee is and that revenue will not be burned. There was this debate, to maybe go on a small tangent here, where miners argued that ERP 1559 would slash their Their revenue by more than fifty percent.

• 1:04:51Speaker 02

  And that could really hurt the security of the network and lead to a large drop in hash rate and so on. What Georges and I did is we leveraged some MEV data from Flashbots. Um, just sort of an initiative to democratize the extraction of MEV and illuminate the dark forest. I think is what they called it. So we leveraged some of this data to figure out how much of the fees that are today being paid stems from these priority gas auctions versus from regular transactions. And compared that to the block reward. And what we found is that about, like, we can only give a like high level guess because it's not always easy to identify MEV transactions. So we only give like a lower bound, right?

• 1:05:35Speaker 02

  But we figured that about fifty percent of the fees that are today being paid are from MEV and fifty percent are from regular transactions. So I think it would be probably a fair assumption that about half of the fees that are being paid will be burnt after ERP one five five nine. And the other half will continue to get paid in tips.

• 1:05:54David Hoffman?

  And so extending that out, that implies that the base fee to tip ratio of Ether value is roughly going to be about the same.

• 1:06:03Speaker 02

  From the perspective of miners, yeah, absolutely. Like from the perspective of an individual user, you will almost never pay a tip, right? You will almost always pay a base fee, but then you have some people who pay obscene amounts of basis fees because they are engaged in these auctions and they like the base fee that they pay will look completely tiny in comparison.

• 1:06:21David Hoffman?

  Right, so inside of a block, perhaps ninety five percent of transactions are paying just a tiny little tip. But there's a five percent of transactions which are in trying to engage in some sort of arbitrage transaction, some MEV transaction that are paying exorbitant amounts of tips which go to miners in current Ethereum, proof of work Ethereum, but then also go to stakers in Ethereum proof of state, correct?

• 1:06:44Speaker 02

  Yeah, that's right. The MEV will go to the stakeholders in POS now. That's why you can think of like POS internalizing, like EFP one five five nine internalizes some of the revenue that currently flows out to miners, basically.

• 1:06:58Speaker 02

  leaks from the system and then EIP 1559 internalizes some of that revenue and POS will then internalize even more.

• 1:07:06David Hoffman?

  So Hauzu, since we've brought up the subject of miners, do you foresee any systemic issues with regards to EIP 1559 and miners and the future of Ethereum? Because we do need miners currently in Ethereum while we have the beacon chain and is not securing the actual GDP of Ethereum. Do you foresee any bumps in the road with transitioning into EIP 1559 as it comes to getting miners on board?

• 1:07:31Speaker 02

  I mean, I really don't think so. I mean, you do see, especially the smaller miners, the hobbyists, you do see them make a lot of noise right now. And I mean, it's sort of understandable, right? I mean, they think that revenue is being cut. But in my view, really the best, and we wrote a long analysis about this, but in my view, really by far the best they can do is just go along with the update. Because it's just an unsustainable scenario right now, right? Miners make like many times, like a magnitude more than they made a year ago or something. And I mean, it's clear that all of this money is not actually necessary to secure the Ethereum blockchain. And really, the holders are kind of the losers in the current scenario, right? Because there's a lot of demand for transactions,

• 1:08:13Speaker 02

  there's very high transaction fees. The transaction fees are even a little bit higher than current block subsidy, like, no, they're actually several times higher than the current block subsidy, about two or three times. But still, you have kind of the holders who are paying the block subsidy, right? But why are they subsidizing it? It's a subsidy that's completely unnecessary because the transaction fees alone can clearly sustain the security of Ethereum. So I think this is a much needed upgrade that then would kind of alleviate this, this burden from the holders when it's not necessary and would still pay it when it's necessary. So I think that like the miners who complain about this are really short sighted because they don't see, well, for one, they don't properly recognize their own status in this economy, right? That they are service providers to Ethereum,

• 1:08:58Speaker 02

  they are not, like Ethereum doesn't exist to make them profitable or keep them profitable, right? That's not how this works.

• 1:09:04David Hoffman?

  The other weird thing about all this, Hauzu, is like, are they not aware?

• 1:09:07Ryan Sean Adams?

  That their positions are about to be eliminated, like that they are a redundancy. I mean, Ethereum has made no secret that it plans to transition to proof of stake. And with the launch of ETH2, it's now implemented a decent portion of that vision. The reality is, if they're service providers to the Ethereum network, they're temporary service providers. So this is another reason I've not understood the reaction from miners. I mean, if all goes well, in 12 months, 18 months, 24 months, they'll no longer be needed at all and will receive no revenue

• 1:09:48Ryan Sean Adams?

  from the Ethereum network unless they transition to becoming validators and staking providers and holding ETH. That's, I've never understood that. You have any ideas here?

• 1:09:59Speaker 02

  Yeah, I mean, I think it makes a lot of sense, right? The behavior, it's exactly what we kind of would expect, right? So I think that when you think about it, when miners actually, when do they have the most control over Ethereum? It's on the last day of proof of work mining, because then they have only one day of future revenue left that they can lose, but they have all the power over the entire consensus of Ethereum. So, I mean, this is something that the people behind the scenes, I assume, are thinking very hard about, right? So how can we actually make a safe transition to proof of stake? Because it's, I mean, maybe you know this, I don't know who said this, was it Naval or something? But play long-term games with long-term people, right? This sort of goes into this, really the dynamics of repeated interactions with people are a lot different,

• 1:10:44Speaker 02

  a lot more fair than sort of these one-off interactions. And if someone can control the entire block ordering and mining of Ethereum, but have nothing at stake really that they can lose if Ethereum goes away, if they blow up the system, or if we decide to move to proof of stake sooner, then like what is really their incentive not to misbehave, right? That's, I think it makes sense that maybe miners accepted previous block reward reductions, which were, by the way, much larger, right? We had one from five ETH to three ETH, so a 60% reduction a couple of years ago. And then we had another one from three ETH to two ETH, that was a 33% reduction. So and those were both, our estimates, much larger than the current expected reduction. And almost no minor complaint back then. Why is that, maybe?

• 1:11:27Speaker 02

  Because they thought that if the price of ETH increases as a result of this, then they would have a longer time to benefit from that, right? So there's. Really, the way I think about mining hardware is sort of as basically future coins that still have to vest, right? And if they mine, then they can unlock these coins, if you will. So I think that it makes sense that miners become more and more hostile, the shorter the duration to proof of stake. But that's what we also said, it's way too soon for them to be stupid, right? And make any aggressive moves, because there is still 12 to 18 months of proof of work mining left. And if you just look closely enough, then the market loves ERP 1559, right?

• 1:12:11Speaker 02

  I mean, there was an article about it on Bloomberg that was the most read on the entire site. I talked to the author on Twitter, it was clicked 330,000 times on the first day that it was posted. It was the most read article on the site.

• 1:12:25David Hoffman?

  And it called Ether crypto coin.

• 1:12:27Speaker 02

  You know, I'm actually fine with that, right? Because it's whatever gets people to click on the article, right? I mean, the headline is just to catch them in a sea of other articles, right? So people would maybe click, the Bloomberg audience would maybe not click on an article as much that mentioned Ethereum. So to me, it's really clear that this is the most important update that Ethereum has ever made outside of the transition then to proof of stake. Proof of stake is the only thing that really comes anywhere close in terms of the importance. And a lot of people are looking at it. And I mean, if ERP 1559 doesn't go through for whatever reason, I think that's terrible for Ether and the price of Ether, and ultimately, everyone loses.

• 1:13:10Speaker 02

  I mean, I have no doubt in my mind that miners would make less money if they somehow manage to block ERP 1559 or even to fight for some important concession like block reward increase or something. I think that will ultimately not even benefit them. I think we already see them realizing it will take maybe a while longer. But I mean, there was this protest planned on April 1st where some smaller miners called for the gathering 50% of the hash rate in one mining pool and then maintaining it for 51 hours, right, to send the Ethereum, quote unquote, the Ethereum developers a signal, right, that they are not to be messed with. And what was the response?

• 1:13:52Speaker 02

  I mean, the response was a research post that discussed their accelerated deployment of proof of stake, right, the sort of the fast merge. And now miners are like, you could tell that the miners sort of freaked out by this, but because they, I don't know, they didn't really think about the consequences of their actions, right, which is unfortunate.

• 1:14:13David Hoffman?

  Yeah, it does talk about the game theory about the whole entire ecosystem and really having the proof of stake beacon chain live and operational is really just a fantastic ace up the sleeve, at least from the perspective of the Ethereum community, because you can't argue with that. The beacon chain is ready to be accepted if such a need ever arises. Hozu, we've done a fantastic job running through the specifics of EIP 1559, but I want to start to stitch everything together and try and create a comprehensive picture of at one point, EIP 1559 will just, in my opinion, be called Ethereum or at least a part of Ethereum. And so I want to project ourselves into that future where at some point in time, we will

• 1:14:56David Hoffman?

  be under a proof of stake system, the heavy issuance under a proof of work system will be eliminated. At this point in time, it's highly likely that EIP 1559 will have gotten integrated. So not only do we have reduced issuance, meaningfully reduced issuance, because that is the benefit of going from proof of work to proof of stake. But now we also have a fee burning mechanism, a deflationary force on the price of Ether. When we get to this point, how would you characterize the monetary policy of Ether?

• 1:15:24Speaker 02

  Uh, hmm. I mean, I would say that you have holders paying for security when the subsidy is necessary, but then getting refunded when it's not necessary, even get rewarded for kind of the subsidy that they pay, right? Because in theory, there doesn't need to be inflation at all, right? You can have holder funded subsidy, but the holders don't even feel any inflation because the deflationary pressure from the burn could be larger than the inflationary pressure from the minting for the block subsidy. So. I think that ERP 1559 really captures the best of both worlds. It really combines having a very secure, very stable monetary policy from a security standpoint,

• 1:16:05Speaker 02

  right, where you can ensure that the protocol always pays X amount relative to market cap for the security, which is just a fantastic feature of any blockchain. But it combines this with having a solid monetary policy where there's no guarantee that holders actually have to pay the subsidy, right, that the protocol gets, which, I mean, in my view, this, it's really the perfect combination. And I think, I don't want to say Ethereum can rival Bitcoin's monetary policy, but I mean, I think it will just happen automatically, right? I mean, if really it turns out that we burn more transaction fees than we issue in new coins and Ether turns deflationary, I mean, that's just going to be a very powerful narrative.

• 1:16:48Speaker 02

  And I think a lot of people, a lot of institutions, a lot of people that like Bitcoin, right, for very good reason, will also then pay far more attention to Ethereum. I think that there are still, like, the issuance is not everything, right? I mean, there are also other aspects, right? If you're just purely interested in the store of value asset, then you might still value Bitcoin's larger network, you might value like the integrations that it has, the brand value, the trust, like the protocol itself is easier to trust because it's less complex, right, it's smaller tech surface and so on. So Bitcoin doesn't lose these advantages, but I think that Ethereum will definitely, against everything else, right, against every other asset in the world, will become a far better store of value type asset.

• 1:17:33Speaker 02

  And I mean, you've made this point many times on your show and in your articles, I think you call it like triple point asset, right? But I mean, this combination of an asset that's

• 1:17:46Speaker 02

  Yeah, really, it's a productive asset, but also a deflationary store hold of wealth asset. That's just incredibly powerful, I think. And that really goes to show the kind of types of money and value that the private market can design if it's left free rein. And I mean, I wouldn't be surprised if Ethereum is going to become really, really successful on the back of proof of stake and EIP 1559 in combination.

• 1:18:11Ryan Sean Adams?

  Neither would we, of course. I mean, this is a very kind of Austrian sort of ideal. It's almost like Hayek with, you know, we'll try all of these different private monetary experiments and see which wins. It seems clear, you know, from what you're saying, that now not only do we have just one sound money experiment, which is fixed cap Bitcoin, we have this second sound money experiment, which is sort of this EIP-enabled proof of stake Ethereum ultrasound money, as Justin Drake has called it. But I want to ask you about one thing, and this is something that Bitcoin does have in addition to all the things that you mentioned from a monetary premium perspective that Ethereum doesn't.

• 1:18:54Ryan Sean Adams?

  And that is, it's never changed its monetary policy from day one. And I think that's fair, right? So Bitcoiners will say that Ethereum, even the fact that is making these changes, and Ethereumers would say these are improvements, these are in line with the social contract of minimum necessary issuance, but the fact that these changes are even being made goes against the principle of having an algorithmically defined monetary policy. Like Bitcoin was made and there was 21 million and there shall never be more than 21 million. No one can change that social contract of Bitcoin. What would you say to that, to the sound money evangelists who say, well, the fact

• 1:19:36Ryan Sean Adams?

  that Ethereum's monetary policy has changed in any way, even if it's gotten better, is a bad thing and, you know, makes Ether less of a sound money?

• 1:19:46Speaker 02

  I would say that soundness means different things to different people. And I can totally relate to those who say that. I mean, blockchains are really ungovernance mechanisms, right? They get their value from being very hard to change. And I also think it's definitely in the tech surface of Ethereum that it's more easy to change, right? And I participated in a governance process for the last few months because I really want to push for ERP 1559. I want to see this get implemented, right? And so I participated pretty closely. And I think it's definitely far easier to get changes, even major changes into Ethereum than into Bitcoin, right? And I mean, at the same time, if the change itself is good, then it's really no saying like it does pose like a long-term risk.

• 1:20:31Speaker 02

  As I said, I can understand if people just want the protocol to be completely resistant to change because they don't trust humans, right? I mean, so far, we have driven every monetary system into the ground, right? We have found ways to hack every one of them. And basically for a small group of insiders to control it and extract rent at the expense of everyone else, right? And who's to say that this doesn't happen to Ethereum in 10 years, right? I mean, nobody can, right? It's just a risk that we, I think we are happy to accept, like us who sort of like the way that Ethereum works right now. And I think Ethereum as well has to as possible probably at some point if it doesn't want to fall victim to that.

• 1:21:11Speaker 02

  So, yeah, that was a bit like long-winded, but I would say I can definitely understand those who prefer strong resistance to change. But I would also see this other side of it, that the inflation or deflation aspect of it is the most important one, right? I mean, how many people today invest in Bitcoin because they know that it has a fixed supply? They don't even care what any of the benefits that it has or the weaknesses, right? They don't think beyond, okay, what is the inflation rate of that asset? And we can't expect most people in the world, most investors to dive as deep as we have into the technical side of cryptocurrency and so on. So ultimately, this will be a big driver of what they invest in and what they don't.

• 1:21:52Speaker 02

  And if Ethereum has a lower inflation rate than Bitcoin, then that will automatically put it on more people's radars and make it a far more attractive investment. And I do think this makes it sound money for sure. It just depends what you define as soundness.

• 1:22:08Ryan Sean Adams?

  So, Hsu, in our intro, you said security was one of the last unsolved problems in crypto. And you made mention of Bitcoin. I wonder what you think of this. Do you think that? Bitcoiners and the Bitcoin network will have to wrestle with its issuance in time in order to pay for this economic security. So like, how does, I know you've written extensively about this, but the question in my mind is, how does the unsolved problem of security in the Bitcoin network get solved? Because of transaction fees are that grade B fuel, not a great fuel.

• 1:22:48Ryan Sean Adams?

  Do you think that the market is kind of overweighting Bitcoin's immutability and fixedness? I've always thought it seems to be the case that at some point Bitcoin is going to need to, in order to maintain its economic guarantees, is going to need to change something about its issuance policy or the way it does security. What are your thoughts on that? Do you think the market maybe underweights that or doesn't understand that?

• 1:23:15Speaker 02

  Yeah, I mean, I guess there are several ways to think about this. The one is really that you should think about this today because change in Bitcoin takes a long time. So that's kind of the approach that I take, right? I try to engage people in discussions about this topic, even get them to think about it and explore even what solutions they might see as viable if it turns out that there's a problem. But then sort of the other side or the other half of people would be like, for them, there's really no value to admitting that there's a problem right now. For one, because it doesn't make Bitcoin look good, right? Which is important, right? It's sort of like a self fulfilling prophecy, right? If we deny today that there can be a problem in the future, then it actually decreases massively the chance that there will be a problem, right?

• 1:23:57Speaker 02

  Because if Bitcoin gets adopted, like the higher its adoption is, the higher the fees will be. And maybe we'll never see actually a scenario where the system isn't fully congested all the time. So this makes me actually pretty reluctant myself, right? Because I think that's actually such a valid argument. It's not just, okay, these are like mindless maximalists who don't want to admit to the faults of the system. But it's one of the scenarios where if you do admit it, you can create a self fulfilling prophecy. And if you don't, then you can create the reverse, sort of like a virtuous cycle, if you will.

• 1:24:29David Hoffman?

  That's so crazy.

• 1:24:30Ryan Sean Adams?

  That's such a nuanced take.

• 1:24:31David Hoffman?

  That's so crazy.

• 1:24:32Ryan Sean Adams?

  Yeah, you're saying there's, but this should be no stranger to anyone who's listened to what we've talked about on Bankless, right? There is value in the shared delusion that we call money. That's what you're talking about here.

• 1:24:43David Hoffman?

  And Hozza, that brings me to my next question, and I think the question that we can wrap up to a close with is, I want to talk about sound money culture and if you see sound money culture in Ethereum, because we definitely see sound money culture in Bitcoin. And perhaps, perhaps sound money culture in Bitcoin is an absolute necessity, because if there isn't sound money culture in Bitcoin, then the meme of Bitcoin is less strong. And as we just said, Bitcoin needs to make sure that everyone sees that it's wearing clothes, rather than not wearing clothes. And if the world sees that the emperor has no clothes, then perhaps Bitcoin doesn't work. But that same, we can extend that same sort of reasoning or rationale to Ethereum and Ether the asset,

• 1:25:24David Hoffman?

  where Ether the asset has this shield, this protective shield of the culture around Ether the asset. And if the Ethereum community and Ethereum culture predictably protects the soundness of Ether the asset, that then that makes the ETH, the asset meme even stronger. How do you see sound money culture in Ethereum playing out? And, and, and overall, can you just comment on the connection between a social contract of a cryptoeconomic system and its security?

• 1:25:58Speaker 02

  Yeah, one of the longest standing thesis that I've heard about crypto is that blockchains are most useful for money. And the money that the market most wants is sound money, right? I mean, you have all these people who are worried, like we need 2% inflation per year, or like deflation, the economy can't work and so on. But ultimately, these are all systemic arguments. These are arguments that monetary economists would make, or like someone who plans an economy, who writes regulation and policies and so on. But those are not the ones who make the decision to adopt Bitcoin or Ethereum, but the individual does. And for the individual, it's always better to use the currency that has the least cost of carry for them, right? That has the lowest possible inflation rate or even deflation rate.

• 1:26:38Speaker 02

  If possible. So I think that every blockchain that's useful will converge to the sound money ideal over time. It's just inevitable, right? If it doesn't, then we'll just disappear. But the best ones that have the strongest community, then I think over time, then you see sort of those supporters rise to the top that do support that ideal that has the highest fitness in the marketplace. In Bitcoin, we saw, I mean, it wasn't really about the block size, right? In Bitcoin in twenty fourteen seventeen, it was about the vision of what Bitcoin is supposed to be. And the vision for Bitcoin is sound money as a store of value. That's the kind of vision that won out. And it wasn't really about the block size, right? That was just one battlefield of it.

• 1:27:20Speaker 02

  And in Ethereum, we've seen, I think, the same battlefield. I mean, when Ethereum was conceived, like the idea of Ether being money or the idea of DeFi being as big as it is today, that was just, that wasn't really an option at all, right? But then people, this is the thing with blockchain, and there's something Vitalik said, which I really like. It's not like, blockchains aren't as much developed as they are discovered, right? We have this kind of technology and we can only guess at what it might be useful for in the future. But one thing that it's clearly useful for is sort of the form of digital value, right? That people want to save, want to transact and want to just keep away from sort of the nation state and banks and so on.

• 1:28:04Speaker 02

  And so it just turns out that people adopt the blockchain to be useful as sound money and to transact sound money. And in the case of Ethereum, also do more additional stuff with it, like lending and exchanging and leverage and all this great stuff that's really necessary for a parallel financial system to work. And so I think that the social contract of Ethereum and really of any blockchain will migrate always, whatever very strong like magnetic pull towards these sound money ideals.

• 1:28:33Ryan Sean Adams?

  And Hasso, have you seen that? From the time you entered into crypto to now, that the Ethereum community and Ethereum culture has moved farther in that sound money direction?

• 1:28:43Speaker 02

  Oh, yeah. I mean, it's impossible to overlook. I mean, when I came, then nobody really, I mean, nobody really thought that Ether should be money. But at that time, you already could see that Ether was being used as money because of the ICO boom, right? I mean, all these projects raised their ICOs with ETH and then held it in their treasuries. And you could tell it was already being used as a reserve asset, even though it wasn't really acknowledged in the community itself. I would say that Ethereum developed like a sound money focused social contract, or the social contract gravitated toward becoming more sound money in spite of who was in charge and in spite of what maybe the preacher said, right? Because I mean, if you look at Vitalik himself, I mean, it's sort of an open secret that he doesn't

• 1:29:26Speaker 02

  really believe in Ether to be money. And the same goes for other people who just were very important figures at the time, right? There were several Ethereum figureheads who did not really strongly believe in the Ethereum as money narrative, right? But that doesn't matter, right? Because the market took Ether and made it money, right? And then people who said this all along, they grew in importance, right? And are seen as someone who predicted this and saw it happening much earlier, right?

• 1:29:55Ryan Sean Adams?

  The most I've heard Vitalik say about this is if the Ethereum community wants ETH to be money, then it will be money. He's kept almost this neutral poise the entire time.

• 1:30:05David Hoffman?

  That was his answer to my question about whether he thinks ETH is money, which I asked him in Tel Aviv. I was like, Vitalik, do you consider ETH to be money? And his answer was, well, if the Ethereum community wants ETH to be money, it will be money. And Hozu, I kind of want to finish off with this question. Would you say that the growing sound money culture in Ethereum is one of the reasons as to why I've noticed you become part of the Ethereum community spearheading this effort into EIP 1559? If you hadn't noticed Ethereum moving towards the sound money culture, do you think that you would have been as interested in this community and as interested in this EIP?

• 1:30:44Speaker 02

  No, I would say that's definitely a big part of it, right? I mean, I have my thesis about the space, what's valuable and what isn't. And when I see that a coin gravitates towards these ideals that I think are being rewarded by the marketplace, then that's something for me to put my time behind and my capital and so on. Because I too would like to front run this opportunity, right? Because if I think that sound money is what the world most wants out of crypto, and nobody really looks at Ethereum as sound money right now, but I see that Ethereum is on the way to becoming sound money, then that's just a great opportunity, right? Then you can see the future before others can. I mean, Ethereum has a lot of other interesting stuff as well, right? I mean, DeFi and the sound money narrative, those are the two big ones. I think DeFi is totally revolutionary.

• 1:31:29Speaker 02

  I think that lots of people are still missing the opportunity there. But it wasn't really clear in 2017, like what a blockchain could really be useful for other than money. And I think it turns out that just financial services that do transact the permissionless value and also some permissioned assets, I think that this is really a fantastic use case for like sort of a general purpose blockchain.

• 1:31:50Ryan Sean Adams?

  Hasu, last one for you. I think we all agree that the inclusion of EIP 1559, the merger with Proof of Stake, makes Ether a sound money asset. We probably also agree that maybe folks on the blacklist journey, maybe folks like yourself are sort of front running that opportunity. But the world has not yet woken up to this fact. The world is just now discovering Bitcoin as a sound money 21 million fixed cap meme. What do you think it's going to take for the world to discover that, about this Ethereum sound money experiment too? And how close are we to that?

• 1:32:28Speaker 02

  I think it'll take time. That's, I think, the biggest one. Some things just can't be rushed. I think EIP 1559 is catching the attention of a lot of people, including the mainstream financial media and so on. As we've seen with the article, for example, that I talked about, it's I think that's one that will get a lot of people talking, but it's not the first time that you hear about something that you invest in them, especially not if you're an institution or a large money manager, right? It takes time, right? And it takes several instances, right? Lots of people, like the people who invest in Bitcoin today, they haven't heard about it now. They heard about it for the first time in 2017. It just takes time to grow, I think. And then it takes time to develop momentum where it turns

• 1:33:09Speaker 02

  from being like a very controversial trade that can sort of lose your job if you miss to do something where you lose your job if you don't, right? So it turns into a consensus trade. And Ethereum is not there yet, but every big thing that it achieves, every milestone is getting closer to that. I think EIP1559 is very important. And it's also super important in the sense that the sound money narrative, it de-risks Ethereum from the biggest risk that it has, which is execution risk, right? I mean, nobody really mentions Bitcoin and execution risk in the same sentence even because it doesn't exist. Bitcoin doesn't need to execute, right? I mean, not on a protocol layer, doesn't need to do anything to be sound money, right? And I think that-

• 1:33:50Ryan Sean Adams?

  Bitcoin executes every 10 minutes. That's it.

• 1:33:53Speaker 02

  Yeah. But there's no real, I mean, we talk about here the economic failures that Bitcoin could have in the future with the declining subsidy, but that's something that like the market doesn't talk about, right? But with Ethereum, everyone is treating it like a venture bet, right? It's like a super risky tech startup or whatever, right? That has a pretty large chance of blowing up. But if Ether is sound money, then you know, a lot of this is getting de-risked, right? Because then, okay, so maybe part of that sharding roadmap or whatever is not going to materialize, but it's okay. I mean, because Ether is sound money, right, guys?

• 1:34:28Ryan Sean Adams?

  That's right, Hsu. We agree with you. This transition from Ether becoming a venture bet, which is, you know, words even Michael Saylor has used recently to becoming a sound money bet. I think that narrative and that switch over is starting to happen. And thank you so much for guiding us through EIP1559, not only guiding us through on the podcast, for the work you're actually doing in the community, pulling up your sleeves and digging into this EIP, writing about it, fighting for it in governance. As a sound money advocate, I think David and I definitely appreciate everything you're doing for the Ethereum community. So thank you for coming on the podcast and thank you for your contributions, Hsu.

• 1:35:12Speaker 02

  Thanks, guys.

• 1:35:13Ryan Sean Adams?

  All right, Bankless Nation, we hope you got a flavor of EIP 1559. So, once again, hopefully, this is coming out this summary. If you want more on this, we'll include some reading material in the show notes. Make sure you check out Hsu's analysis of EIP 1559. There's an article about it. We also made reference to an article on our Bankless newsletter that David wrote about this. And then you might have also heard mention our Justin Drake episode on crypto economics that also touches on EIP 1559. So, those are some resources for you. Lastly, make sure you check out the Uncommon Core podcast. That is a fantastic podcast that explores some of these topics as well and also explores DeFi. It's on both

• 1:35:57Ryan Sean Adams?

  David and I's rotation.

• 1:35:59David Hoffman?

  And Hsu is the host of the Uncommon Core podcast.

• 1:36:02Ryan Sean Adams?

  I should have mentioned that.

• 1:36:03David Hoffman?

  It's an important component.

• 1:36:04Ryan Sean Adams?

  Hsu is the host with his co-host, Sio.

• 1:36:06Speaker 02

  Yeah, you can actually find it at uncommoncore.co/podcast. And on that site, we also have a resource for EIP 1559 that collects and summarizes and answers all of the biggest questions that people have had in the past about this EIP.

• 1:36:21Ryan Sean Adams?

  Check those resources out. They're definitely big-brained resources for you guys. Risks and disclaimers, of course. Despite being sound money, ETH is risky, crypto is risky, so is DeFi. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but thanks for joining us on another episode of Bankless.