The PoW vs. PoS Debate | Lyn Alden & Justin Drake

Lyn Alden is the Founder of Lyn Alden Investment Strategy and an expert in macro markets who’s also a strong Bitcoin, proof-of-work proponent. Her friendly counterpart, Justin Drake is a researcher at the Ethereum Foundation and is pro proof-of-stake. Both are recurring guests on Bankless! The two experts debate which is better: proof-of-work or proof-of-stake for creating a global-crypto money system? Other topics include: economic security, deterrence and recoverability in the face of the dreaded 51% attack, minimization of governance power, economic fairness, commodity vs. equity money, and so much more! Which is your preference, proof-of-work or proof-of-stake? Warning: after this debate, your preference may change. ------ ✨ DEBRIEF ✨ | Ryan & David's Unfiltered Thoughts on the Episode https://shows.banklesshq.com/p/debrief-the-pow-vs-pos-debate-lyn ------ 📣 ZERION | Trade Across 7 Networks and 500+ protocols https://bankless.cc/Zerion ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: 👀 POLYGON | LAYER 2 DEFI https://bankless.cc/Polygon ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🦊 METAMASK | THE CRYPTO WALLET https://bankless.cc/metamask 💳 LEDGER | THE CRYPTO LIFE CARD https://bankless.cc/Ledger 🧙‍♂️ ALCHEMIX | SELF REPAYING LOANS https://bankless.cc/Alchemix 🦄 UNISWAP | DECENTRALIZED FUNDING https://bankless.cc/UniGrants ------ Topics Covered: 0:00 Intro 6:15 Backgrounds 8:12 The Better Monetary Premium 11:00 Equity, PoS, Commodity, PoW? 23:30 Hypothetical PoS Bitcoin 30:25 Lyn’s Rebuttal to Multiple Justin Claims 36:05 Justin’s Rebuttal to Multiple Lyn Claims 44:50 Inherently Fair or Unfair? 53:27 Different Kinds of Risk 57:30 Client Diversity 1:03:00 Lyn’s Macro Perspective 1:13:00 Justin’s Technical Perspective 1:17:42 Governance & Memes 1:29:55 The Rich Get Richer? 1:32:35 Closing Arguments ------ Resources: Lyn’s Proof of Stake Article https://www.lynalden.com/proof-of-stake/ Economic Security & Efficiency https://docs.google.com/spreadsheets/d/1KdzhgbTqhRd0LndK4R8c50OK-s6W568Ydd1aytokwbs/edit#gid=0 Lyn’s Twitter https://twitter.com/LynAldenContact Justin’s Twitter https://twitter.com/drakefjustin ----- 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.

• 0:00Speaker 00

  It's almost black and white. The proof of stake is clearly superior than proof of work.

• 0:05Ryan Sean Adams?

  So there's a bunch of points that I respond to, so I'll try to go linearly, I guess.

• 0:12Ryan 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. This is Ryan Sean Adams. I'm here with David Hoffman and we're here to help you become more bankless. Guys, you are in for a treat today. We've got two experts on proof of stake and proof of work, and they are debating the subject over which is better for creating a global money system, a crypto money system, proof of work or proof of stake. Lynn Alden and Justin Drake on the episode today. We're going to talk about a few things. Number one, which provides the most economic security? Proof of work or proof of stake? Number two, which provides the best deterrence and recoverability in the face of the dreaded 51% attack?

• 0:57Ryan Sean Adams?

  Number three, which minimizes governance power for the elites? Which is more power to the people? Number four, which is economically the fairest system to participate in? And number five, this is personally my favorite. This conversation around proof of work being more commodity money and proof of stake being more equity money. Is that correct? That's what one of our debaters believes and we dive into that as well. David, why don't you tell us a little bit about the format of this episode? Because it was a fantastic, I think, format in that the participants, like, I felt like for times during this episode, you and I could just sit back and watch the participants go over their points and articulate them well, back and forth.

• 1:41Ryan Sean Adams?

  It was like watching a tennis match of like a serve and then a volley and then like back and forth, back and forth.

• 1:48David Hoffman?

  Yeah, the first, the first half of the episode, I'd say, just wrote itself. Seriously debated going back and like making a bag of popcorn because the first half, the first half of the show, as, as hosts, we didn't have to do a damn thing. Yeah, Lynn and Justin just took it in of themselves and took this conversation in their own direction. And then we started, you and I as hosts, again, started in the second half of the show really to. Actually direct the conversation and summarize things that were said and digest things that were said. And so this is kind of how this this episode is bisected down the middle. But then I would also say I really enjoyed the closing statements as well, just allowing both Justin and Lynn to really just summarize holistically their entire scope for

• 2:31David Hoffman?

  why Lynn believes that proof of work is a better money system and why Justin believes proof of sake is a money system. So there is so much knowledge baked into this episode. This is going to be one of the ones that we're going to have to re-listen to to really fully extract all of just the fantastic knowledge that that is here. And overall, I'm just very happy that in this very tribal world of crypto, that we have people like Lynn Alden and Justin Drake, who can come to a podcast and just talk about things without the yelling that you would find on Twitter Spaces and without the jabs that you would find, just a very respectful respectful conversation, which I know is important for the listeners, because it's just very it's a pleasant debate to listen to. So I'm so happy that we were able to produce this podcast here, Ryan.

• 3:16Ryan Sean Adams?

  Imagine having an adult conversation about crypto. It's impossible to do on crypto, Twitter and other locations. But that's what was had today. It's fantastic points by both sides of this argument, well articulated. One thing David and I are going to do is have a conversation about the conversation that was just had. We have that on an episode we call the Bankless debrief. You get that if you are subscribed as a Bankless Premium member. David and I are going to talk about the merits of both sides. Maybe maybe your mind was changed, David, in this in this debate. Maybe there are some points that Justin brought up, maybe some Lynn points that we'll have to talk about. So I'm looking forward to that conversation. If you're a Bankless Premium member, you can look forward to that

• 3:58Ryan Sean Adams?

  conversation to should be available to you now. Just upgrade to Premium Membership. We're going to get right into the conversation with Lynn Alden and Justin Drake. But before we do, we want to hear about the fantastic sponsors that made this episode possible.

• 4:13David Hoffman?

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• 4:58David Hoffman?

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• 5:43David Hoffman?

  If you want to bridge your assets quickly and securely, go to across.to to bridge your assets between ETH, Optimism, Arbitrum, or Bova Networks. Bankless is proud to be sponsored by Uniswap. Uniswap is a new paradigm in asset exchange infrastructure. Instead of a cumbersome order book system, where trades are matched with other humans, Uniswap is an autonomous piece of software on Ethereum that lets you trade any token at the current market price. No human counterparties or centralized intermediaries, just autonomous code on Ethereum. Input the token you want to sell and receive the token you want to buy. The Uniswap Grants program is accepting applications for grants. Do you have something of value that you think you want to contribute to the Uniswap ecosystem? No matter how big or small your idea is,

• 6:27David Hoffman?

  you can apply for a unique grant at uniswapgrant.org and help steer Uniswap in the direction that you think it should go. Thank you Uniswap for sponsoring Bankless.

• 6:36Ryan Sean Adams?

  Bankless Nation, we are super excited to introduce you to our next guest and host this conversation about proof of stake versus proof of work, or flip that around, proof of work versus proof of state, depending on what side of the conversation you're on. I wanted to introduce you to Repeat Bankless podcast guest, founder of Lynn Alden Investment Strategy, Lynn Alden. She's a leading expert in macro markets. Lynn Alden has been a leading expert commentator on macro. She's been a proponent of Bitcoin for a long time. She generally believes that proof of work is more suited to producing a new global money system than proof of stake. She also wrote an article on this topic that was widely read,

• 7:18Ryan Sean Adams?

  very well circulated, and well argued. So we've got Lynn on the one side, who is pro proof of work and critical of proof of stake. Lynn, welcome to Bankless. How are you doing?

• 7:27Speaker 03

  Happy to be here.

• 7:28Ryan Sean Adams?

  Fantastic. On the other side of things, we have Justin Drake. Justin Drake is also a Repeat Bankless guest. He is a researcher at the Ethereum Foundation. He's the pioneer of ETH as ultrasound money. You may have heard that meme a few times before. He's also been hard at work at helping Ethereum transition to proof of stake. So of course, he's a believer in it. And he believes that proof of stake produces an asset with the properties that the 2020s will need with the monetary properties, that is. So he's on the side of pro proof of stake and he's more critical of proof of work. Justin, how are you doing? Welcome to Bankless.

• 8:03Speaker 00

  Doing great. Thanks again for having me.

• 8:05Ryan Sean Adams?

  Guys, okay, we're super excited to host this debate, this conversation, if you will. I know you both have some fantastic points to go through. I want to start with kind of the big question I think we're settling and see if we have some agreement on that big question, which is, I think we're trying to answer the meta question of whether proof of work or proof of stake is most amenable to the accrual of monetary premium. Basically, which of those two consensus protocols are most amenable to making a cryptocurrency, a money, have monetary premium? Do you guys agree, before we get into kind of the subtopics

• 8:47Ryan Sean Adams?

  here, that this is the correct framing of the whole conversation? We're trying to answer which consensus protocol has a better monetary premium potential? Justin, why don't we start with you?

• 9:00Speaker 00

  Yeah, I think that is the big question. And it kind of boils down to what the consensus mechanism is all about. It's about security. And so we can kind of look at a consensus mechanism and through the lens of economic security, for example, we could look at it through the lens of governance security. To what extent does the community have control over the consensus participants, which are meant to just be doing that job of maintaining the blockchain? We can look at physical security, which one is more liable to attack from violence in the context of nation states, for example?

• 9:42Speaker 00

  We can look at quantum security and we can even maybe look at meme security. You know, monetary premium to a large extent is about having the best memes. And I believe that proof of stake has the potential to have much better memes than proof of work when it comes to looking at cash flows. But that's, I guess, something we'll discuss later.

• 10:01Ryan Sean Adams?

  Lynn, I want to get your way in on this. So do you think that this is the question we're trying to answer is which sort of consensus mechanism is most amenable to the accrual of monetary premium, proof of work or proof of stake? Or would you reframe this in a different way?

• 10:16Speaker 03

  I think that's a good way to phrase it. And, you know, in the current system, we have, you know, not on the blockchain, but we have proof of work and proof of stake assets essentially, right? So equities, because you, you know, you own a stake in that company, you have a proof of stake, right? And so your stake allows you to exercise some degree of control over that company. Whereas, of course, we have normal commodities that are proof of work assets, more or less. And what we've seen over history is that either asset can acquire some degree of a monetary premium, right? So for example, in this era of bad money, stocks have acquired in some cases a monetary premium. So you can have assets of either case that have monetary premium. And so the question becomes what is most suited to our monetary premium and what is

• 10:57Speaker 03

  able to acquire and then hold for the very long run and accrue a structural monetary premium?

• 11:04Speaker 00

  I really want to kind of interject almost at the very beginning here and kind of try and And and kind of argue why this this analogy with with equity and proof of stake is may is maybe a bad analogy. And the reason is that in the context of of of equity, you have the right to vote on anything. You can completely change the rules of of the company.

• 11:29Speaker 00

  But in the context of proof of stake, actually, there is a bit of ambiguity. You could have proof of stake governance, and you can have proof of stake consensus. So some chains like Tezos, like Polkadot, like Definity, they empower their token holders to make arbitrary changes to the rules of consensus. And that can happen even without a fork. If there's a sufficient quorum, the rules kind of automatically change on chain. But in in the context of proof of stake as a consensus mechanism for security,

• 12:07Speaker 00

  the consensus participants can't just arbitrarily change the rules. So for example, and I think this is something we can both agree on, the consensus participants can't say, we're just going to give ourselves, you know, a thousand if each, because that would be kind of an invalid transaction and invalid block. And so ultimately, the consensus participants are beholden to the community, and that is a huge difference relative to to equity. And if we really want to go down this equity metaphor, then we kind of need to think of us, think of how proof of work would be equity like. And it is equity like in the sense that the consensus participants, those who have hash rates,

• 12:50Speaker 00

  have this very constrained voting power only in the context of governance. So and on the context of consensus, not in the wider context of governance.

• 13:00David Hoffman?

  Guys, I think everyone here is really eager to get into the details. And we jumped ahead a little bit with that, Justin. So I'm going to zoom out and kind of give a roadmap for the listeners before I give it right back to Lynn to Lynn. There in order to answer the question, which produces the best monetary premium, there's a bunch of sub questions. One of those is like the commodity versus equity debate with which we just kind of hopped into. And so we'll start with that first, but the other things that we're going to talk to, talk about on this show are things like 51% attacks, which one, which system can recover, deter and recover from 51% attacks, economic security, which provides the most economic security, fairness and decentralization, which one is economically fairest for participants? And kind of what we were just talking about commodity money versus equity money.

• 13:44David Hoffman?

  Lynn generally thinks that proof of work produces commodity money or money with commodity properties and proof of stake produces money with equity properties, as we just alluded to, and that is, I guess, where we're going to start this debate as we've hopped into it already. So Lynn, do you want to just keep on going with that conversation about proof of work as commodity and proof of stake as equity?

• 14:05Speaker 03

  So I agree that there are different types of proof of stake systems, right? So there are ones that give you more control than others. And I, you know, if I were to focus on, say, defining proof of work as, as, you know, commodity money, I would also even go, you know, so far as to say that if you have a proof of work system that has difficulty bombs or that has, say, very large blocks or, you know, very, you know, hard to run your own node, that starts to have equity like systems as well. And so, for example, you can have some of the hard forks away from Bitcoin start to look more equity like because it kind of consolidates the number of people that can make decisions for that protocol rather than being a fairly immutable protocol as you would generally see in a commodity, right? So producers have no influence over the properties of copper,

• 14:49Speaker 03

  for example. That's, that's an example of a commodity money or a commodity in general. And so going back to the, you know, proof of stake to equity analogy, we can point out that, for example, shareholders in a corporation can make changes, but of course, they can't make changes that violate the law of the country that they're, that they have a jurisdiction in or that, you know, places they operate in, right? So they're still bound by things that are outside of just their stake in that company. And that's, that would be true for this as well. And so in this context, the proof of stake would refer to the fact that people that hold the capital are the ones that get to decide which transactions are processed, more or less. That's kind of what that's what their, their stake is rather limited to.

• 15:28Speaker 00

  Right, so if we want to take kind of a a technical perspective, I guess the consensus participants can try and do two things. One is they can try and do a hard fork, which is basically to make transactions which are are are not valid and somehow make them valid. And as you say, this is the context of the law. There's this law which is set by by by users, which cannot be violated by the consensus participants. And then there's this other thing that they can try and do is basically, as you said, restrict the set of transactions that can be processed. And so this is what's called a soft fork, which is basically a form of censorship, where transactions that used to be valid are no longer being processed.

• 16:12Speaker 00

  And so they're effectively invalid. And so I I do agree that consensus participants have this ability to do censorship. And then the question becomes, if we want to compare proof of work to proof of stake, which one is least liable to these censorship attacks? And and here what we need to do is we kind of need to zoom out all the way to the social layer, because this is where the social layer needs to intervene. And it turns out that one of the massive advantages, in my opinion, of proof of stake is that the social layer has the tools to go intervene whenever there is censorship by the consensus participants, whereas proof of work does not have that.

• 16:58Speaker 00

  Now, in terms of, you know, things that you mentioned, like like the the difficulty bomb, small blocks versus big blocks, these are things that I believe are somewhat orthogonal to the discussion today. And I think one way to really focus the discussion on the topic of specifically proof of work versus proof of stake, which is a a tiny part of consensus, is kind of interesting how this this proof of proof of work versus proof of stake is actually all about. Restricting the set of consensus participants that can come in. It's an anti-sibyl gadget. And you know, there's other things in a, in a, in, in, as part of consensus. There's the folk choice rule, there's mutualization, there's DEVM versus UTXOs, there's big blocks versus small blocks. There's all sorts of other things.

• 17:43Speaker 00

  But I think in, in, in order to have like the simplest discussion possible, maybe we could compare a hypothetical Bitcoin proof of stake and a versus a Bitcoin proof of work. Or we could just look at Ethereum proof of stake versus Ethereum proof of work. But if we start, um, you know, talking about things out, outside of, kind of, this apples to apples comparison, then the discussion becomes quite, quite convoluted.

• 18:09Ryan Sean Adams?

  I'd like to go back into the kind of commodity money versus equity money type of discussion. So Lynn, I, I, I want, I want to understand kind of your take here. Is it, is it the case that you believe that any kind of proof of stake produced monetary premium or money is more like equity and less like a commodity? Or is there some like granularity there in, in, in kind of your belief? I, I, I think you just expressed in what you were saying previously that some proof of work systems can actually become a bit more equity like and less commodity like.

• 18:52Ryan Sean Adams?

  Is the same true of proof of stake systems? Can they become a bit more commodity like and less equity like in your mind?

• 19:01Speaker 03

  So I think there is some to your spectrum, but I think for the most part, it's a rather one directional street in the sense that it's, there's, there are multiple ways to become an equity, but very few ways to become a commodity in that sense. And so commodities by their nature are somewhat rare, they're immutable. And there are so many things that require governance in our, in our world. And so, you know, especially when we're talking about the topic of decentralization and immutability, there are multiple ways to essentially become an equity. And there are multiple ways to define what an equity is in that context. And so I would say it's for the most part. You know, the ways to create a true kind of commodity in the digital realm is extremely limited. And that's why I bring up the block size.

• 19:43Speaker 03

  I agree that we should focus almost entirely on the proof of work versus proof of stake concept. But my point of bringing that up is that even in proof of work, there are multiple traps to fall into to create a system that ends up being more equity-like in the sense that those with capital and those with outsized influence can control the network compared to having one that's truly decentralized and as close to immutable as you're going to get in the digital realm.

• 20:08Ryan Sean Adams?

  Do you think part of the difference here, Lynn, is that like a difference of ossification? Right? So some networks, like maybe say a Bitcoin, for instance, has far fewer governance decisions to actually make since it's kind of done. It's like fully baked. But something like Ethereum, whether it's proof of stake or whether it's proof of work, it's not a complete project. Maybe it's 50% complete. I think Vitalik said somewhere between 50 and 60% recently complete. So there are still future governance decisions to make. And whether that is like hash power, you know, kind of influencing some of those governance decisions, or whether that's staked tokens influencing those governance decisions, is

• 20:53Ryan Sean Adams?

  the difference that Ethereum and many of the other proof of stake chains are not ossified. They still have work to do versus something like Bitcoin and proof of work. Do you think that's a useful distinction in your mind?

• 21:06Speaker 03

  I think that is a useful distinction, but I would say even in an ossified proof of stake system, it still wouldn't be basically a monitored premium in the same way that a proof of work system is. One way, I think one analogy you can use is that a proof of work system is like non-volatile memory, right? Whereas proof of stake system is like volatile memory. Basically, you have to be continually online to be as trustless as possible with that system. And so that gives you different levels of hardness as it relates to attack services. In addition, when you go down to the complexity of the code, proof of stake is far more complex, far more bloated compared to proof of work. And again, I'm not saying that proof of stake Has no use cases. So saying that something is a digital equity is not saying that it's worthless.

• 21:50Speaker 03

  It's just saying it's not a digital commodity. And so that's how I kind of would make that that kind of differentiation that even if you had a hypothetical ossified, totally done proof of stake system, or at least closest to being done as possible, or maybe you're changing with gradual soft forks and things like that, that you still inherently require more governance because the failure modes in case that there is a major system event is requires more intervention than if you have a proof of work system. And if you had, for example, something crazy like the internet goes down for a month, right? So proof of something like a proof of work system or Bitcoin can just restart again. Whereas a proof of stake system requires kind of more of a kind of a manual restart because,

• 22:33Speaker 03

  you know, it's not a system that's designed to make sense when it's not continually online. And so I think that there are there are multiple angles you can approach it from a hardness perspective. And it's more than just ossification, although ossification is a factor.

• 22:45Ryan Sean Adams?

  Justin, I'm kind of interested in you responding to that. But I'm also interested in your concept of ether as an asset. Do you view ether as more commodity like or more equity like? Do you think that's a helpful distinction?

• 22:57Speaker 00

  I like to think in technical terms. And so like these these traditional labels, I'm somewhat uncomfortable with. And I think the case could be made that both Bitcoin and BTC and ETH have, you know, commodity properties and both have equity properties.

• 23:17Speaker 00

  But, you know, I want to, you know, ask Lynn a kind of a simple question, which is, you know, you mentioned that the capital holders have this this outsized power in the context of a proof of stake. So if, let's say Bitcoin was a proof of stake system, fully the same kind of ossification, the same kind of culture and everything like that, what exactly would be that outsized power? Because I'm I'm not really seeing it.

• 23:45Speaker 03

  Well, essentially it would go down to the idea that those that hold larger stakes in the system have an influence, a structural influence on who can transact in that system, who can be censored and who cannot be. And so, for example, in the current banking system, as we've seen in some countries lately, you know, there's a rather small number of entities that can then determine what people can use that system to transact and which people cannot. And so, both types of systems have a risk where they can become, you know, centralized to the point where they have temporary or permanent blockades on certain types of transactions. And so, in a proof of stake system, you have a situation where if you hold a quorum of the capital,

• 24:27Speaker 03

  if you hold a majority of the capital, you can then lock down the network to entities that are considered, for whatever reason, unworthy of transacting in that system. And I think one thing to keep in mind is when we talk about, say, attacks on a network, we often think of, like, you know, some rogue actor coming in to attack the network, whereas I think a more realistic thing to approach is from a, like, you know, from a regulatory standpoint. So, for example, if a country declares that all of the proof of work miners have to, you know, avoid processing certain types of transactions, right? So, that's an example of regulatory

• 25:08Speaker 03

  capture that becomes a problem if you have a lot of, say, publicly traded Bitcoin miners, for example, located in one country, and that they have, you know, a majority of the processing power. Now, that could eventually be rectified by bringing more hash to the network in other places, whereas when you look at the proof of stake system, then the question becomes looking at custodians and looking at whales and seeing how, to what extent, they can be regulated to essentially capture the network. And so, that's how I'd phrase that.

• 25:38Speaker 00

  Right, so you somehow acknowledge and kind of highlight the outsized power that the stakers might have, but I think it's the miners, those who own hash rate have the exact same outsized power, right? It's just, and at the end of the day, both proof of work and proof of stake are proof of capital. And so one of the questions we should be asking ourselves is, how much capital is required to go overwhelm the system? That's one of the key questions around economic security. And it turns out empirically that proof of stake is vastly superior by roughly an order of magnitude 20x better

• 26:21Speaker 00

  from an economic efficiency standpoint to go raise that barrier to entry to actually perform a 51% attack. Now, one thing that you said, which is that there could be these external attackers, but that could also be kind of endogenous attackers. And this is the exact same situation, in my opinion, for proof of work and proof of stake. Like you could take, for example, a company like Genesis Mining. They're effectively a custodian of hash rate. They have customers who will basically just send funds. That's all they do. They hold the miners and they can be regulated in the exact same way that a custodian can be regulated.

• 27:03Speaker 00

  Now, the key critical difference is it goes back to the counterattacks that the community can do. You mentioned that in proof of work, you could have more hash rate come in. Well, I don't think that's the expected outcome. And the reason is that if a 51% attacker comes in, they get to collect every single piece of reward, every single piece of issuance, every transaction fee goes to them. And the reason is that they can mine a chain where they're all the only miner. They win every single block and no one else wins blocks. And so the honest miners, what are they gonna do? They're gonna turn off their miners because it doesn't make sense

• 27:46Speaker 00

  to be spending electricity and not get income. And then what's the next step? Well, they're gonna want to liquidate their assets. They're gonna wanna sell their hardware. And then what can the attacker do? Well, now the attacker can... Buy this this hardware for pennies on the on the dollar and basically reinforce themselves as as the attacker. And it's kind of this this really terrible situation. And even if for some reason or another, the community, despite, you know, a totally compromised blockchain, despite the price of Bitcoin maybe having crashed quite significantly, manages to to make a counter a counter attack, which is not against their rational interests,

• 28:30Speaker 00

  because they would likely be losing money in in in in that process. The counter attack would take months, if not years, to organize. On the other hand, in the context of proof of stake, you have a very straightforward mitigation, which is just take the attacker and remove them from the validator set. This is what what we call kind of a forced exit. Now, it turns out that in Ethereum, if you want to join as a validator, there is an activation queue. So it takes time to go from non-staked ether to staked ether. And if you want to double the amount of staked if, it takes roughly 200 days.

• 29:13Speaker 00

  So at a minimum, what you can do is you can kick out the the attacker, and that buys you 200 days. But of course, the the community has more powers than that. One of the things they could do, for example, is totally destroy all the rewards that have been accrued so far. In addition to doing the forced ejection, or they could do like something even much more nuclear, is that they could just destroy the whole stake of the attacker. And if they do that, we're actually in a position where we can bound the number of times that an attack could happen in the first place. Let's imagine, for example, that there's 10 million if that's honest and that's staking. If you want to do an attack, you're going to need another 10 million if. And every time you make an attack, you lose a 10 million if.

• 29:58Speaker 00

  Now, if there's only 120 million if in circulation, the attack can only be done, you know, 11 times. So really, in the in the case of

• 30:10Speaker 00

  Healing these attacks, it's almost black and white. The proof of stake is clearly superior than proof of work.

• 30:17Speaker 03

  So there's a bunch of points that I respond to, so I'll try to go linearly, I guess. The first point is that the difference between mining as basically the source of control versus staking as source of control is that staking requires little or no, you know, there's no, almost no entropy there, right? So, once you hold the power, you accrue more power. Whereas in any mining business, including physical commodities, and then now extending into digital commodities with, you know, mining of, say, Bitcoin or other blockchains, it's a very capital intensive business. You have to constantly put in fresh capital in order to maintain those rewards. And so it actually doesn't really accrue a lot of value for the miners, other than on the margins, right?

• 30:59Speaker 03

  So basically scraping by and, you know, it's historically been a very rough business to operate in. And so that's one difference between, say, the, that you, either way, you need capital in order to, you know, be a processor in the network. But one is kind of inherently more structural, inherently kind of, you know, power against power. And the other one is it actually kind of rewards new entrants. People that come in and say, okay, there's almost no economy of scale here. There's some degree of economy of scale, but for the most part with proof of work, the most efficient energy sources are these small stranded energy sources around the world, right? So, you know, you can have these, you know, large entities that have, say, a big, you know, kind of economy of scale in terms of their ability to buy machines and things like that.

• 31:45Speaker 03

  But when it comes to the cost of energy, smaller entities actually sometimes have the advantage because they can, they can go to places that are just too small for these bigger ones to deal with. The second one, I think, relates to overall, when it comes to security, it's not just about 51% attacks, it's also about bugs, right? So, for example, when it comes to the largest blockchains, I'm far less concerned that they're going to be 51% attacked than, say, the smaller ones that are sharing a hashing algorithm with a larger chain, right? Because they're much easier to, you know, like, say, 1% of Bitcoin miners could attack Bitcoin Cash. 51% attack and then go back to mining Bitcoin, right? So I'm more concerned about the smaller chains getting 51% attacked than I am the largest one or the largest five, let's say.

• 32:29Speaker 03

  And so in that context, I'd be far more concerned about bugs. And so one of the things that's easy to grant is that in a world of just like where everything works perfectly, proof of stake has a higher cost to attack. That's something I mentioned in my article a couple of times where, especially if a system's smaller, right? So especially if you're in a world with multiple chains and you're trying to create a project, proof of stake makes sense because it gives you a higher initial threshold to attack it. Whereas the downside of that system is that because proof of stake is inherently far more complex and there are greater attack services, there are greater bug services, it's more bloated code, there are more challenges to that system. And then this goes somewhat out of the bounds of proof of work versus proof of stake, but

• 33:14Speaker 03

  then you layer in additional features, right? So if we're talking about what makes a good money, it's something that is inherently simple and inherently small node decentralized proof of work. Basically, the leanest code you can get and distributed as among as many machines as you can get and as immutable as you can get. Whereas as we layer things on top of it, like proof of stake adds a lot of code complexity. It also makes it, using my prior example, more like volatile memory than non-volatile memory. It needs to be continuously live in order to function as intended. And so when you layer those things on top of it, I would say that takes away a monetary premium and then you can argue that it adds equity value, right? So for example, when we look at Apple stock, right?

• 33:56Speaker 03

  So we look at Apple stock over the long term, you know, like this kind of meme of ultrasound money for Ethereum, you have this thing where it's mostly focused on whether it's inflating or deflating and what percentage, right? So for example, Apple stock is actually one of the most deflationary assets around. It's got a 4.5% average annual deflation rate over the past 10 years. They decreased their share count from 26 million to 16 million. And that's of course, one of the factors for why they did well on a per share basis. But at the end of the day, what it comes down to, because they're an equity, it's the attractiveness of their ecosystem for customers, right? So it's not about how many shares they have because you have other ones like IBM that are also rapidly reducing their share count, but because their ecosystem's unhealthy,

• 34:41Speaker 03

  they're not really accruing that value to shares overall. And so I think when it comes down to Kind of what is trying to be money? The thing that does almost nothing other than just be money is the best money. And something that tries to do multiple things, including proof of stake as one of the components, inherently gives it less monetary premium. And then just to finish up with the very last point, when it comes to recovering from 51% attacks. So I think the main point there, while granting that, say, in a non-bug world where things have to be approached honestly, proof of stake does theoretically have a higher cost to attack. But when it comes to unwinding that attack, the only way to do it is to soft fork and

• 35:26Speaker 03

  then take people's capital. Which, you know, if you phrase it as you're taking the attacker's capital, that sounds fine. But if you realize that the attacker could be a regulated custodian and that you're taking people's capital that had nothing to do with the attack, right? So their coins were captured and then used against the network, you're basically then splitting participants, right? So either way, responding to a 51% attack, a sustained 51% attack is a messy proposition.

• 35:54Speaker 00

  Well, I'm happy to go through the response point by point, I guess. So one of the things that you've highlighted, Lynn, quite a bit is complexity and bugs. Now, I don't think, you know, complexity is necessarily like an evil. Complexity is one of the things that humanity thrives on, right? That we could be doing calculations on an abacus, we could be doing calculations in a calculator, or we could be doing calculations on a computer. And, you know, humanity is very, very good at abstracting away complexity. Now, in terms of the complexity of proof of stake, it is more complex and proof of work,

• 36:38Speaker 00

  granted, you know, at least 10x, you know, maybe 100x. But it's complexity that, at this point in time, we have tamed. And, you know, one of the... Biggest maybe example, you know, show examples of this is that we have five different clients that have implemented the, the, the, the, the, the protocol.

• 36:59Speaker 00

  And these are the small teams, you know, we're talking on the order of, of five to 10 people per team and they've each managed to implement the, the consensus. Now, one of the strategies that you can take to mitigate against complexity and bugs is to have client diversity. And this is the whole, one of the big reasons why we have five clients is that we can enable the community to basically buy insurance against these, these bad bugs. And another point that you've, that you've brought up is the idea of being continuously online, which is basically the technical word for that is, is, is weak, weak subjectivity.

• 37:37Speaker 00

  And the idea of weak subjectivity is that if you've been offline, the way that you sync up is that step number one, you get some sort of semi-trusted checkpoint. And then you sync from that checkpoint onwards. Now, it turns out that Bitcoin has these checkpoints all over the place. Now, here's one example, like literally in the Bitcoin Core software, um, you know, in the C++ code, there's like 12 checkpoints. And so if the, if hypothetically, there was an attacker that would, you know, build from Genesis, build an alternative chain that completely rewrites history. Then guess what? This chain would not be valid.

• 38:18Speaker 00

  Why? Because the developers have literally put, you know, subjective checkpoints in the codebase. Where's another place where there are subjective checkpoints? Well, if you've been offline, you need to go, you know, download the, the, the software, the Bitcoin Core software, that's like step zero, right? Before syncing. And guess what? When you're downloading the software, you're trusting the code. You're trusting the whole supply chain. You might be trusting, you know, GitHub is giving you the right code. You might be trusting even your, your operating system. There's all sorts of places where you're effectively trusting, um, you know, the, the, the, the initial checkpoint.

• 39:00Speaker 00

  That also baked into the, the software is this idea of bootnotes, right? The first time you sync. After being offline, you need to connect to the peer-to-peer network, right? And so what what happens in practice is that literally in the code are some hardcoded IP addresses. And these, and you go talk to these IP addresses. Now, guess what? If all these IP addresses are compromised, you're gonna be disconnected from the the real peer-to-peer network. You're gonna be in this isolated kind of fantasy island. And you're gonna be downloading and syncing the the the the wrong chain. And furthermore, I think that the Bitcoiners thinking that, hey, we'll always, you know, sync from Genesis,

• 39:42Speaker 00

  even if there were not all these issues that I mentioned, is kind of fantasy. Like, just imagine hypothetically that there was a reorg of a hundred days, right? The last hundred days was just completely wiped out. Do you really think that the Bitcoin community would just say, okay, yeah, we're just gonna accept that? That's totally normal. We're just gonna pick the longest chain, even though it's wiped out a hundred days of history? No, of course not. What will happen is that there will be social, you know, governance would would create, effectively create a new subjective checkpoint. And then basically pin the the the chain that that was attacked and say, this is the canonical one, despite not being the the the longest.

• 40:27Speaker 00

  One of the other points that you brought up was around the the the last mover, right? Where if you if you're the the last person to come in as a miner, you have an advantage. And I would argue this is actually a huge disadvantage for Bitcoin. So in proof of stake, you have perfect fairness. You put in one unit of capital and you get the exact same amount of rewards, no matter how big, no matter how small. In proof of work, you have various places where the last mover or the big fish have these, you know, unfair advantages. So you mentioned economies of scale.

• 41:06Speaker 00

  If you're a retail miner buying one Bitcoin, Bitmain mining rig, you're gonna get absolutely screwed on on the price. You're gonna be overpaying by by by two X, three X, four X, five X, your your your hardware relative to the professional miners that are buying in bulk, you know, a hundred million dollars at a time. Another thing that you mentioned is that, you know, because of, because of Moore's law, you have a last mover advantage. And so, guess what? That means that attackers who want to attack, they have an advantage over the rest of the, of the, of the network. And not only do they have an advantage because they can pick the, the, the latest and most bleeding edge hardware,

• 41:49Speaker 00

  but they actually, for them to perform an attack, the, the price of electricity is to a large extent irrelevant. And the reason is that in, in order to perform a 51% attack, it suffices to run it for, let's say, one day or one week, and then discourage all the honest miners to just turn everything off. So the 99% of the cost of making an attack is in the rigs and in the transformers and all the electrical infrastructure to run the rigs. It's not in the actual operation of the miners and the electricity costs

• 42:28Speaker 00

  associated. And so, wha- wha- what that means is that

• 42:35Speaker 00

  as, as, as, as a miner, you can actually go buy,

• 42:39Speaker 00

  acquire hardware which is in, in, in literally in the dump. So you have, you know, professional miners who they need the, the, the price of, of electricity to be, let's say, under 10 cents.

• 42:52Speaker 00

  Now, if the price of electricity for them is over, well, you know, it's over, it's over 10 cents, then they, they would, let's say, get, get, get rid of that hardware. It's no longer valuable for them, but it is valuable for, for, for an attacker. And so, you know, we can, basically the fact that proof of work is inherently unfair, is inherently unequal, actually creates advantages for, for, for an attacker. And then the, you know, one of the things that you, you, you mentioned as well is around slashing custodians, right? One of the tools that the community have in the context of proof of stake is that they can slash. And slashing your custodian is kind of problematic because you're not really penalizing

• 43:37Speaker 00

  the custodian, you're penalizing the clients behind the custodians. And this is why I wanted to emphasize the fact that there's softer tools than slashing. One of the tools that you can do is this forced eject- ejection. You're not, there's no penalty there. You're just removing them from being consensus participants and that will buy you some amount of time. In Ethereum, it's 200 days, but that's a parameter. You could make that 1,000 days. Or what you could do as well is you could actually freeze the funds. You force eject and then you freeze the funds for five years. You know, that will teach them. Or you could do partial slashing. You could say, you know, we'll, we'll, we'll give you a slap on the wrist this time, we'll slash only 10%, but if you try and attack again,

• 44:21Speaker 00

  we'll, we'll slash 100%. And so there's this wide range of tools that the community has to address these more delicate situations. But again, this is a toolset that is completely unavailable in the context of proof of work.

• 44:36Speaker 03

  So I, one thing I, so I rephrased the one part of the middle where you describe proof of work as being inherently unfair. I would describe that as inherently renewative. Basically that, that every dollar that goes into the space has a set of decisions with it, right? You're determining what hardware you're going to buy, what scale you're going to buy it, what stranded energy source or what, what cheap energy source you're going to use. And a series of decisions goes into determining, you know, your, your success as a miner. And then rather than, you know, say, early participants, they're then having a permanent advantage, right? So for example, in, in say, a pre-mind system, proof of stake system, those who bought in at the early stage, you can say, okay, they made one good decision, but then they have this permanent structural advantage for the rest of time, as long as

• 45:21Speaker 03

  they continue to hold their stake. Whereas proof of work requires an ongoing series of good decisions in order to maintain your ability to be our participant in the, in the network. And I think actually when we look out longer term, the kind of the direction that we're going, I think in, in proof of work, assuming these systems continue to be around for, for quite a while, is that you'll see, you'll See increasing integration between miners and the energy producers themselves. We already see, for example, early signs of co-location where you have, you know, an energy producer, could be solar, could be hydro, could be whatever, and they have Bitcoin miners on site. You know, they often will contract with a miner to co-locate them,

• 46:04Speaker 03

  but they could easily do it in a vertically integrated model where the way that the grid works, and this is something that a lot of kind of environmental criticisms of proof of work don't understand, is that the electrical grid naturally has to over-produce electricity, right? Otherwise, if we didn't have extra productive capacity, then turning on the marginal laptop would cause a brownout, right? So we have to have this spare production always going into the network, and then we have to have a way to drain out excess power that's being produced but not consumed. And it's actually this really kind of tricky balancing act. And so proof of work systems are actually a really good load balancer, where if you, if you're, you know, the type of energy source that is,

• 46:46Speaker 03

  doesn't have full control over your production, maybe you're a wind farm, maybe you're a hydro dam, maybe you're solar, or maybe you have just kind of your nuclear plant that just kind of has like continuous power, but maybe the demand is fluctuating throughout the day, right? So it's more demand at evening, less, you know, less demand other times. And so I think over time, we're going to see that the cheapest source of electricity is that virtually zero-cost stranded energy, and the best ones to harness that are the producers or people that contract directly with the producers and go on-site. And so I think over time, that's what basically makes it as kind of diversified as possible. And right now, I think, you know, last I checked, the biggest Bitcoin mining facility in the world is like 1% of total hash rate.

• 47:31Speaker 03

  It's already kind of a structurally decentralized system, and I think it only gets more so as you increasingly incorporate that into production. And so, you know, I agree that, say,

• 47:44Speaker 03

  Slash, you know, basically proof of stake systems have multiple ways to deter attackers. They require governance and in worst case scenario, they require confiscation. Whereas in say a proof of work system, you also have a couple of ways to require or recover. The simplest way is to do no changes and more, more network, more capacity, I should say, more hash capacity can come online. And if there's an existing attacker, then those new entrants have an advantage over that existing attacker. And, you know, people can fund that in multiple ways, right? So for example, if you're a large Bitcoin holder and Bitcoin is currently being 51% attacked, you now have an incentive to, you know, bring hash online. It might not be profitable at first.

• 48:26Speaker 03

  You're basically making an investment to unlock your Bitcoin transactions. Number two is that there's also potential soft work to, to, you know, kind of the nuclear option in, say, a proof of work system would be to do a soft fork to kill the miners. And you could, you could phase that in over time. There's a way to do it gradually. And so there are those nuclear options if they end up being needed. But the, kind of the beauty of the system that it's self regenerative.

• 48:52Speaker 00

  So one of the things that I'll, I'll, I'll say on, on the fairness is that in order to be a profitable miner, you need to operate at scale. Like you can't just be a retail miner with, with, with one rig. That doesn't work. You need to have, and there's like these centralization forces. Like you have miners, for example, building their own custom firmware. They have their own specialized know-how. They know how to take the mining rigs that they receive and just assemble them as quickly as possible so that they can be immediately connected.

• 49:23Speaker 00

  And then there's all sorts of centralization vectors around the supply chain. What if the fab, what if TSMC or Global Foundries was to create, you know, create their own, own rigs? Well, we actually, we've seen that, right? Intel, right? One of the big fabs, they're building their own, own chips. What if you just cut the middleman? And, you know, they, that is a huge centralization vector.

• 49:49Speaker 00

  And you know, in in in in practice, I don't I don't know anyone. And you know, I'm I've been in this space for for for, you know, almost a decade. I don't know any friend or any anyone, any individual who who who who mines Bitcoin at this point in time. It's all industrial. Uh, on the other hand, with with proof of stake, I think ev- everyone on this call, you know, maybe except you, Lynn Alden, I'll I'll li- literally mine a staking as individuals. Um, we're all contributing, like the the diversity on proof of stake is much, much, much larger. The barrier to entry is much, much, much lower. You know, you basically just need to have a computer running twenty four seven and that that that that that's about it.

• 50:34Speaker 00

  And the the fairness is just out of the box. What happens with with with Bitcoin mining is that you you have two classes of people. You have the the retail who are gonna get absolutely wrecked uh on in terms of of of returns. And what's gonna happen is that they they might not even realize that they're getting wrecked. And the reason is that, you know, the price of Bitcoin went so high uh that, you know, in dollar terms, they're actually profitable. But in Bitcoin terms, you know, they put in ten Bitcoins initial investment and they they got three Bitcoins back. Whereas on the other hand, if you're super sophisticated industrial miner, you know, you can go, you know, sell hash rate futures. You can go buy, you know, energy futures. You're like really well connected to the fabs.

• 51:18Speaker 00

  You might even make your own chip, you know, making a chip is like at least ten million dollars. You know, if we're talking three nanometer chip, you know, you might be minimum investment is thirty million dollars. The the the the barrier to entry is much, much, much higher to be competitive and and like empirically, like uh that's what can be observed today.

• 51:40Speaker 00

  And then you talked about, you know, the the two remediations that the community can do. One is kind of the the the do nothing approach. Um, and as as I mentioned, I don't think the do nothing approach really really works out. Because, you know, the the the price of Bitcoin will crash. It will be difficult for honest miners to be to be to be to be profitable, um, you know, because.

• 52:11Speaker 00

  You know, now they have to make a hu- a huge like guess, not only do they need to, not only is the current hardware need to be turned off and they make no income, but you know, now we're talking about amplifying the risk. They need to go double the amount of hardware that they have. And now they're basically doubling the risk. It just seems completely crazy when you have no income to just grow your, your, your, your capital by, by so much. And in terms of the, the nuclear option, well, that, that's not satisfactory either because you, you're just effectively starting from scratch. Your, your old, um, you know, SHA256, that's completely compromised. And now you're starting with some new algorithm, but that, that here you have,

• 52:56Speaker 00

  you could have an attacker, uh, just buy out in terms of capital, you know, five, five billion dollars or whatever it is, $10 billion of that other thing, and completely overwhelm that, that, that new form of, of proof of work.

• 53:11Speaker 03

  So I'll try to keep my response short just so we don't keep going super back and forth on these without kind of a, you know, guidance. But one thing I'll point out, so it is true that there are supply chain risks with proof of work. And that's something that, that, you know, participants have been familiar with quite a while. Uh, and it's also you have jurisdictional risk, right? So for example, you know, when China banned their mining, uh, you know, a lot of kind of, a lot of people were like, oh, like, uh, that's bad for Bitcoin, whereas actually a lot of Bitcoiners were like, oh, thank God. Like now we won't have like 60% of the hash rate in China, whatever the number is. We actually want to see that geographically dispersed as much as possible. Uh, and you know, a lot of them welcome, uh, the entrance of new, uh, you know, uh, participants in terms of making the hardware.

• 53:55Speaker 03

  Cause you don't want that to be super concentrated either, because you can either consolidate power, you can put in secret backdoors. There, there are risks associated with the supply chain, kind of like how there are risks with hardware wallets associated with the supply chain. So there are those real risks with proof of work. Uh, and so it's not the argument that any system is, is perfect in every one, in every single metric. It's, it's how it responds overall, you know, what, what are the trade offs that it's making? And, you know, The, the, I think the last part I would just jump on is, right now, for example, there are, there are a large number of very, very small, private Bitcoin mining companies. They're very small firms. Now, they're still larger than the individual, right? But they're, but they're, you know, small compared to those publicly traded companies. Because you kind of have two different classes, right?

• 54:40Speaker 03

  So you have some companies that are going after, you know, just economy of scale. They're just building a massive facility and then they're buying a lot of energy. And then they're operating that way. Uh, and they're actually still tiny in terms of, say, global companies, right? So they're not these, these mega companies because mining's inherently not that lucrative. But they're these, they're going for the economy of scale approach. Then you have the other type that is basically buying older machines. And then they're going off-grid for the cheaper source of, of energy, right? So they're, they're, they're going, for example, when you find a, an oil well and it has a little bit of natural gas with it, but it's not enough to build a pipeline for, they just burn the natural gas. There's nothing else they can do with it. So these companies go in and say, hey, instead of just burning that natural gas,

• 55:25Speaker 03

  how about we just put this little box of Bitcoin miners? And you, and you can, you know, uh, use it to generate electricity and mine it there. And only small companies can really do that. It's, it's only, it's something that small teams have to go out and make, make deals with these companies and kind of, you know, arbitrage. And so there's, there's not just one model of how a Bitcoin miner works. So I would phrase it like that. But overall, I think the key thing to focus on is one versus like normal attacks versus bugs and other things like that. And you touched on that with the client diversification, where there's different clients. But, you know, one thing worth pointing out is like, at least, I don't have the numbers in front of me, but last I checked, the, the biggest client is like, what, like 84% of Ethereum clients?

• 56:10Speaker 03

  So you, you do have some degree of client diversification, but it's also partial illusion. And these things over time tend towards, uh, you know,

• 56:20Speaker 03

  Basically becoming protocols where once one becomes dominant, it's pretty hard to then have true diversification in there. But I agree that in theory, client diversification is a good thing and helps protect against bugs. But in practice, I think one of the key things that protects against bugs is having the simplest possible code base. So complexity can allow us to do a lot of things. And in a system where you want it to do a lot of things, if you're not trying to be the best possible money, if you're trying to be an operating system that lets you do multiple different things, then complexity is a useful thing. And that's why I don't, for example, say that proof of state systems shouldn't exist, or that smart contract blockchain shouldn't exist. It's whether or not they're capable, or if they're suited, to acquiring a monetary premium

• 57:04Speaker 03

  over the long term. And that's, I think, the key thing to focus on.

• 57:08Speaker 00

  On the topic of client diversity, we actually have two types of clients, and they're very, very different. We have the execution clients, that's basically GAF, which is effectively to, at first approximation, is effectively a monopoly. Let's say 100% use GAF. And then we have the consensus layer, where we have five different clients. Now, we can ask ourselves, what is the value of client diversity? Like, one of the value is to be an insurance against bugs. But guess what? GAF has been battle-tested for years and years and years, with hundreds of billions of dollars that it's securing. And guess what? There's not that many bugs left in GAF.

• 57:50Speaker 00

  On the other hand, when you take, you look at the consensus layer, which is much, much fresher, the value of client diversity in these early days is much, much higher. And right now, we do have a client diversity problem, with Prism having roughly 65%. But some of the biggest stakers have signaled that they understand the value of

• 58:16Speaker 00

  Diversity and I'm very optimistic that this is going to improve in the months to come, leading to the merge. Another thing that I want to highlight is that if we want to be the internet of money, we need to have a time scale on the order of the internet itself, right? The internet is here to live on for decades, if not centuries. And it just so happens that complexity is something that has a half-life of, I don't know, maybe like, let's say, one year, right? Like, it can be tamed, it's something that can be hardened. We have this idea of the Lindy effect, right?

• 58:55Speaker 00

  Where over time, as lots of, lots of values being secured by these systems, they can be trusted. And maybe different people have, you know, different risk tolerance. But if you look over the long term, if you look at fundamentals, this is, this is noise, right? The complexity of a system is absolute noise. The bugs will be fixed, the system will, will harden. And, and really what we should be looking at is like these long-term fundamentals. And when we project ourselves to long-term fundamentals, we bring up topics like, like, like quantum, right? It turns out that the, the, the nature of computing is going to change in the next 20, 30, 30 years.

• 59:37Speaker 00

  And it, it so happens that proof of work is going to be completely disrupted by quantum. And so, yes, there are these, you know, these short-term things, which in the grand scheme of things are just noise. But if you zoom out and you really focus on the fundamentals, then actually you can see that there's fundamental reasons to be bearish on, on, on, on proof of work.

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• 1:01:26David Hoffman?

  which I use to collect PoApps, NFTs, and do all my DeFi things while I'm away from home. If you haven't downloaded MetaMask, you gotta try it out. Web3 wouldn't be the same without it. Download MetaMask for desktop and mobile at metamask.io and load up your Trezor, Ledger, Lattice, or Keystone hardware wallets so that they too can get into the world of Web3.

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• 1:02:44David Hoffman?

  Lynda, creo que has tomado el lider en el mundo como un macro comentador enfocado en los mercados macro y los mercados de las commodities. Y algo que he notado en el campamento de Bitcoiners es que tienden a estar enfocados en las commodities y las propiedades de las commodities de Bitcoin y cómo se relaciona con el dinero. Y has descrito Bitcoin como algo alemán de la moneda como relacionado con cómo se consume la energía, viendo la energía como una moneda, y cómo esa energía es una de las cosas que produce bitcoins a través de la prueba de trabajo. Y en mi opinión, esto creo que es parte, tal vez se describe como un argumento moral, en lo que creo que los Bitcoiners piensan que la moneda de la moneda es simplemente una

• 1:03:26David Hoffman?

  moneda más adecuada para el mundo basada en su equitabilidad y justicia. ¿Estás de acuerdo con esa descripción de la creencia general de los Bitcoiners y por qué crees, si estás de acuerdo, por qué crees que la moneda de la moneda es simplemente una propiedad mejor de la moneda para tener?

• 1:03:42Speaker 03

  Creo que, quiero decir, habría diferentes argumentos entre ellos. Y si miramos atrás en la historia, ¿verdad? Así que yo me acerco principalmente desde un punto de vista macro, ¿verdad? Así que, por ejemplo, si estás hablando de, digamos, diferentes tipos de prueba de la propiedad competiendo entre sí, cuál va a ganar, sabes, yo dejaría que los doctorados de computación trabajaran eso. Cuando se trata de un tipo de macroanalista que mira diferentes blockchain y determina cuál tiene un premio monetario o debería tener un premio monetario o es seguro lo suficiente como para invertir grandes cantidades de capital, yo lo acerco desde ese punto de vista macro, con cierto grado de detalles obviamente técnicos a lo largo del camino como es necesario para informar ese punto de vista macro. Y si miras atrás en la historia, básicamente lo que estás giving, si vas de moneda de

• 1:04:24Speaker 03

  la moneda a la propiedad de la propiedad es que básicamente se dirige hacia la gobernanza, ¿verdad? Así que, por ejemplo, en, digamos, el período previo a los primeros años 1900, tenías la moneda de la moneda por lo mayor, y tenías capas de propiedad sobre ella, pero la base subyacente era la moneda de la moneda, prueba de trabajo en la forma de oro. Y luego, a medida que se mudó hacia una moneda puramente fiat, básicamente se mudó más hacia la prueba de propiedad. Y, sabes, como un ejemplo de cómo funciona la Reserva Federal, ¿verdad? Así que... You know, the cost of producing money has no, there's no constraint on how much money you can produce. So you have to, you have to add artificial constraints to how that's going to function and how transactions can be processed. Who can make new, you know, for lack of a better word, tokens, new units of the system? And who gets to participate in the network?

• 1:05:09Speaker 03

  And so, for example, most central banks are not really decentralized at all. The Federal Reserve is, you know, the most decentralized and it's basically, you know, it's basically like a proof of stake system, but not on a blockchain. Right? So you have the system where you have 12 regional reserve banks. Each one has, you know, they're owned by commercial banks, right? So they, they have this kind of special share structure. So they, they have their representation in that system and it's based on their capital, their initial capital, their stake in the system. Then you have, uh, you know, the Federal Reserve Board, which is appointed by the president and confirmed by the Senate. So that theoretically is, you know, goes downstream to the people because you vote for the politicians and then they appoint and confirm those participants.

• 1:05:51Speaker 03

  And so you, when you look at the, say, the, the Federal Open Market Committee, you're that, you're in that system where you have the seven, uh, Reserve Board Governors, the ones that were appointed by the government. And then you have this rotating member of five of the 12, uh, presidents of those banks, right? So you have this kind of hodgepodge, uh, mix of federally appointed and bank-appointed officials determining what, what the policy is going to be for that network. And that's, you know, generally over time, that tends towards centralization because as debt builds up and as the system starts to break down, they increasingly get captured by the government system because they have to monetize debts.

• 1:06:31Speaker 03

  And they have to basically bail out the system and provide liquidity when no one else is, is providing liquidity. And so basically with the invention of Bitcoin, you have kind of the reintroduction of commodity money. And it kind of allows that system to potentially reset over the long term and allow people to opt into a different system. And so those, those systems can continue to exist side by side. I expect that they will for a very long period of time where you have that more existing stake system. And then you have introduction of basically, you know, kind of a For lack of a better word, digital gold. And then, of course, with that, you know, as people innovate, they come along and say, hey, we can also, if we have digitally native commodities, we can also come along and have essentially digital native equities.

• 1:07:14Speaker 03

  And so we're still kind of exploring the total adjustable market of what all these things are going to be and what their different use cases are going to be for. And I think the one thing I would just point out is that the more that any given system tries to do, usually, not necessarily all the time, but usually, the worst it's going to be at any one of those things. And so one example is that as, say, Ethereum has tried to somewhat harden its monetary policy, it's also arguably lost market share in DeFi. So for example, in late 2020, Ethereum had something like 97% of total value locked market share. As we speak now, it's down to 55%.

• 1:07:55Speaker 03

  So you have all these different, basically, ecosystems then competing on fees, on usability, on network effects, things like that. So you have kind of, you know, Ethereum obviously has the largest network effect, the most Lindy of all of them. Then you have these other ones coming in, often with increased complexity, often already proof of stake from the beginning, and they're doing their own thing. And we're seeing this kind of diversification over time, whereas so far Bitcoin doesn't really have competition from other systems. You know, we had these kind of brief periods of competition. You have like a meme of Doge for a period of time. You have temporarily Bitcoin cash is relevant, and these fade over time. And so you have these kind of two different worlds. And so I think one of them is based more on governance and making your ecosystem as

• 1:08:39Speaker 03

  attractive as possible, and the other one comes down to which one is the hardest and essentially what is the one that is basically the best at being money.

• 1:08:47David Hoffman?

  I definitely want to throw that to Justin, but just a quick follow-up, Lynn. I think baked into that argument is kind of, or maybe I'm just pulling this again from other Bitcoiners who make these, make similar arguments, is that the nature of how kind of like proof of stake represents the fiat system and proof of work represents like, you know, the commodity money like gold on which the proof of stake system rests on top of. I think is some sort of like a subjective argument about people of the world will like this system more, that like the proof of work system more because it feels more fair versus, or how much, how much of this do you think is actually like a technical objective argument

• 1:09:29David Hoffman?

  of this is objectively a better system? Or how much do you think this is a subjective argument of people think that this system is more equitable and more fair to them? So therefore they're going to choose this new proof of work commodity money system?

• 1:09:41Speaker 03

  So I think, I mean, it's a good question, right? So I think you would get different answers depending on which person you talk to. I think that there are some that would make the, you know, the kind of the fairness argument. I personally approach it more from a tactical risk perspective. And so I view what is the, what is the system that is less likely to have tail risks? What is the system that is optimized for what it's trying to do? And, you know, kind of the whole like, you know, Ethereum maxi versus Bitcoin maxi versus multi coin, all that debate, you know, I approach this as someone who I own dozens of different stocks. I mean, I'm happy with diversification. I'm happy with going out to different systems and going out to distribute my capital in a diversified way. And the only

• 1:10:23Speaker 03

  challenge is that in, in this particular ecosystem, it's inherently very speculative, right? So we're still in some ways early stage in many of these things. And so you basically have one that looks the most Lindy, 13 years of operating history, very simple, proof of work. And then you have these kind of a large number of kind of VC type of investments, and they're rapidly innovating, competing on capturing that market share. And so, you know, when it comes to the fairness argument, I think partially that that gets mixed up in a bunch of different things. So one is the proof of work and one is like the scarcity of the tokens, right? So basically in the current system as designed now, the argument is the cantillon effect. So the closer you are to the money printer, for lack of a better

• 1:11:05Speaker 03

  word, the more advantaged you are. And a tangible example of that is say during COVID, corporations, large corporations are able to issue public equities debt, I mean, public debt. So public securities able to issue debt, they had no problem getting finance. Small business relying on bank loans and things like that. You were far less able to get access to that liquidity when you needed it the most. And then the Fed came in and exacerbated it because even when the corporate sector kind of freeze up. That's when they said, okay, we're gonna start buying corporate bonds to help liquefy that system. And you didn't get to reliquify the lending market until later, right? So you had kind of these, you know, restaurant, you know, small restaurant would close.

• 1:11:48Speaker 03

  Whereas large restaurant chains, for example, had had better access to capital. And so that's an example of how the kind of current system is kind of designed to, you know, advantage those who have that scale or that direct access to public markets. And I think I would separate that from, you know, the idea of of proof of work versus proof of stake in the technical sense.

• 1:12:11Speaker 00

  I I like to think of, I like to look at things from from a technical perspective. And so these these these labels equity and commodity, you know, I'm I'm trying to to define them and understand what they mean. Like for for me, you know, equity, there's kind of two aspects to it. One is that you're kind of financially exposed to some sort of upside for some sort of project. And I think all blockchains have this, any blockchain with a token, including Bitcoin, including Ethereum are, you know, exposed financially to some sort of upside, you know, in terms of adoption, in terms of the the block space being more valuable, in terms of the the token being used as as a store value as a money, et cetera, et cetera.

• 1:12:50Speaker 00

  And then there's the other aspect of the equity definition is the the voting aspect. And I would argue that there's that there's there's no distinction there either. You know, both BTC tokens and Eve tokens are non-voting equity tokens. And so, you know, I've, this goes back to the the second kind of label that that you that you're talking about, which is commodity. And I think really what you mean by commodity is the non-voting aspect. Well, guess what? They're both commodities in that sense. They're both non-voting. And, you know, we we we've been talking about, you know, consensus participants, you know, exercising some form of governance, you know, by basically doing 51% of tax.

• 1:13:31Speaker 00

  Kind of the the the the extreme scenario, but like in the in the default situation, it has nothing to do with with with a company, with a board of directors and a CEO and all of these things. By default, the governance is exactly the same for Bitcoin and Ethereum, which is namely governance by rough consensus off-chain through the community. Right? This is how Taproot went through. This is how SegWit went through. There's lots of debate, lots of discussion, very chaotic and organic. And then ultimately, the way that these, you know, these governance decisions are enacted is through users, you know, installing software and and agreeing that this is the canonical piece of piece of software.

• 1:14:16Speaker 00

  The whereas on the other hand, if you look at other companies completely, that's just not the case. By by default, you've you've enshrined governance powers that are that are just exercised on on a day-to-day basis. Whereas with consensus participants, there is no day-to-day exercise of governance powers, unless maybe you're in this kind of special type of blockchain like Tezos, Polkadot or Definity, where you have on-chain token voting. Now, one of the things I think David said is, you know, around like the the objectivity of of of of of labeling things.

• 1:14:57Speaker 00

  And I think, you know, I think memes play a huge role here when we want to look at at a monetary premium. And it's it's kind of interesting because proof of work and proof of stake from a meme perspective are almost the exact opposite. Now, let me elaborate. With proof of stake, you have what I call a scarcity engine. Proof of stake is a mechanism to turn liquid ETH into this frozen ETH, which is used as collateral. Right now, we have roughly, you know, 10.5 million ETH, which is staked. But my my projections basically say that we're going to have roughly half of the whole supply of ETH being staked eventually.

• 1:15:43Speaker 00

  So on the one hand, we have this gas energy engine. For proof of work, it's the exact opposite in the sense that issuance and transaction fees, which is basically the income that miners have, to a very large extent, needs to be sold to cover for expenses, to cover for electricity, to cover for the hardware. And so basically, what you've created here is a liquidity engine, where you're adding liquidity to the market by being a forcing function to sell this issuance and to sell these transaction fees.

• 1:16:17Speaker 00

  And so, you know, if you were to ask yourself, which is the best system to create money for the internet? Is it the one that's like constantly market dumping? Or is it the one that's encouraging people to hold their token? I think it's pretty obvious which one is more valuable for, from a meme perspective, to push forward this idea of being the internet of the money for the internet.

• 1:16:43Ryan Sean Adams?

  I want to get Lynn back on kind of that last comment of her reply and sort of the meme aspect of this money. And I think you were talking about like deflationary supply, maybe Justin, or just kind of, you know, lower supply and greater issuance in a proof of work system. But it strikes me that the distinction that you're making as I'm going through this is, it seems to be the case, Lynn, that you're saying, you know, proof of stake is the thing that really moves the asset from a commodity to an equity generally. And you're taking like historical reasons for why that's the case. And I think, Justin, you are saying it's not proof of stake,

• 1:17:24Ryan Sean Adams?

  it's actually governance control that moves the thing closer to an equity versus a commodity. And if that's the case, I want to get, you know, your thoughts on that, Lynn. So if Justin indeed is saying that it's more about governance control and less about proof of stake as a consensus model, would you agree with that? Because I think, and I want to think, maybe clarify this, Justin, that... I don't think you are saying all proof of stake systems have like are more commodity like than equity like. You were saying like Tezos and other, you know, systems that retain governance

• 1:18:05Ryan Sean Adams?

  control at the token layer are maybe more equity like using Lin's definition. But let's get Lin's thoughts on that first. What do you think? Do you think this maybe hinges upon governance control rather than maybe proof of stake versus proof of work?

• 1:18:20Speaker 03

  I think proof of work versus proof of stake is one aspect of governance control. And so, you know, as we touched on earlier, there are multiple different models, but you know, at the minimum, what a proof of stake system gives is that the more of the units that you hold, the more say you have over what transactions are valid. You don't get to necessarily change the other rules of the system, but you get to say what transactions are processed, which ones are censored and so forth. So there's that. The other aspect is really who gets to change the protocol and how and when. And so, for example, and that's the part that goes outside of the proof of work versus proof of stake debate, because you can have proof of work systems that then start to look more equity like.

• 1:19:02Speaker 03

  An example would be, you know, he mentioned the SegWit and Taproot updates. Both of those were opt in. So they were soft works, meaning that, you know, and I think this also ties into the meme idea. So what makes a better marketing message essentially? So obviously Bitcoin and Ethereum and other systems come at it from, you know, different, you know, marketing perspectives where kind of the meme of Bitcoin is self sovereignty. So you run your own node. Nodes are small. You know, it doesn't take a lot of resources to run a node. Even 10 years from now, it shouldn't take a lot of resources to run a full node and have the whole blockchain. And that any updates that occur, you can choose to opt into, or you can retain your, you know, your existing node.

• 1:19:46Speaker 03

  And of course, the smaller it is, the more auditable it is, the less trust there is. There is always some degree of trust unless you go line by line about how that system works, but the smaller and more compact you make it and by making all updates opt Opt in, you basically maximize to the extent possible that self sovereignty. Whereas if you, for example, put in difficulty bombs, you then say, okay, so, you know, it doesn't really matter what you think because the developers are going in a certain direction. And you don't really get to opt in, you know, you're existing, what you have there is going to die if you just leave it like that. And that becomes a matter of marketing. So Ethereum says, okay, well, that's, that's a trade off we're willing to make for now.

• 1:20:26Speaker 03

  But we're going to focus on the fact that our system's changing, that our, that our system is, you know, has a, say, a longer term timeframe. We want to, you know, you know, we're less focused on ossification now, we're focused more on change, on kind of having a system we want in the future. And so there are obviously different marketing messages for different systems. And then you have some of the, you know, the quote unquote Ethereum killers or competitors come in. And their marketing message is, hey, Ethereum is super expensive to use, it doesn't scale well. And, you know, it's mostly for the rich whales to, you know, play around in, we want to have low transaction fees. So, you know, there's all, there's, there's different marketing messages for different systems.

• 1:21:08Speaker 03

  I would separate that from meme in the sense that, you know, I think, I think memes are useful for, for marketing ideas. That there's, that's obviously that the whole point is they spread very quickly. You can, you can contain quite a bit of information in an analogy or a picture with a couple of words on it that people already know that what the picture's from. That's a way of spreading information, but it needs substance behind it. So if something is only memes, if it's like Dogecoin, where it's just, it's built on memes, the staying power is not going to be great. Whereas if something isn't, you know, the technology's there, it's doing what it's advertising that it's doing. Then it becomes, you know, marketing can spread the message faster than others. But the, but the underlying foundation is still there for it to have staying power.

• 1:21:51David Hoffman?

  Justin, I'll let you respond to that. But Lynn, at the beginning of what you, of your statements, you were talking about how the unit is the thing that gets to say the transactions are valid. Like Ether, the unit is the thing that approves or declines transactions. And that is governance in of itself because it's baked into the app. Asset itself, Bitcoin has, and one of the mental models that we, we talk about in the Ethereum land is like Ether is like this virtual ASIC. Right? It takes the properties of the ASIC and it imbues it into the asset itself. And I think what you're saying is that that represents some sort of governance. But then doesn't that by in, by that same rule, also apply governance to the physical ASICs?

• 1:22:34David Hoffman?

  And what, what does the separation of the ASIC from BTC? How does that meaningfully change governance? And doesn't that just mean that the mining facilities then just have the same governance powers that you alluded to ETH, token holders having?

• 1:22:52Speaker 03

  So historically, one of the big challenges of say, wealth concentration is that wealth begets more wealth. Because as you get more wealth, you can influence, say, laws to further support your wealth. And you can, you know, basically just have that virtuous cycle of more and more wealth. And so one of the difference between a proof of stake system and a proof of work system is in a proof of stake system, if you acquire stake in the system. And then that, that, you know, inherently provides income from itself. You, you essentially acquired a, a permanent stake in the system for as choose as you want to hold it with no ongoing input cost to retain your control of the system.

• 1:23:29Speaker 03

  It kind of over time inherently collects, it inherently consolidates into more and more, you know, fewer owners, holding larger and larger shares of it. Whereas in a proof of work system, you're essentially renting your ability to govern the system. And again, only with transaction ordering, right? So you're, you're, you're putting in capital and you're buying machines that will degrade. Your, your energy source could over time become less efficient. So your facilities that you set up, the energy sources that you're arbitraging could change, could, could dry up, could, could become less efficient. And the hardware itself becomes less cutting edge over time. And so your decision to actively maintain your, your control of that network, or at least the control of the transaction ordering

• 1:24:14Speaker 03

  is required on continually recycling your capital into the system. So it's a, it's a constant series of decisions. Rather than kind of the system that inherently benefits people that bought in first than hold it forever. And so in something like a proof of work system, you know, obviously the early token buyers get more money. Right? So if you if you buy early and hodl it, that's great for price appreciation. And you can over time influence price by buying more. But you can, you know, no matter how much, say Bitcoin Michael Saylor has, he has zero control over what transactions are going to be processed. And so I would say that, you know, but that's again, only one aspect of it.

• 1:24:54Speaker 03

  So even though this this particular bait is a proof of work versus proof of stake, rather than Bitcoin versus Ethereum, or, you know, simple money versus smart contract money, whatever the case may be. But there's, it's kind of one piece, I think, of the puzzle, which is if you're going to have something that's commodity like, what you have is some degree of immutability. You're never going to have as much immutability in the digital realm as in the atomic realm. Right? So just atoms of gold or atoms of copper. But if you're going to approximate as much as possible, what you're designing is a system that is, you know, very decentralized, very hard to force changes on. And that, you know, if anything, there are either no changes or there are opt in changes.

• 1:25:38Speaker 03

  Whereas anything that that deviates from that model and requires either, you know, ongoing kind of forced buy in from say, a small team of developers or kind of small development hubs. Right? So most of the proof of stake systems have these foundations or these kind of companies associated with it. That this kind of named this name, the same thing as the tokens named. So you have this kind of these hubs, you know, they could be one hub, there could be two or three hubs, depending on the protocol. And those are kind of inherently more equity like, even if they're proof of work. So even if they are proof of work, but difficulty bombs or proof of work, but super large blocks. So that, you know, people can't run their own node. There are multiple kind of ways you can then shift into be looking more like an equity system.

• 1:26:20Speaker 03

  Meaning that there are quote unquote managers of that system, rather than an unmanaged, mostly unmanaged system.

• 1:26:27David Hoffman?

  I want to just, I think, unpack that and define that again, just for the listeners and summarize. What you said is that, you know, because the ASIC is separated from the unit, it requires, in order to have similar levels of power over the system, it requires further investment, in addition, always, always, always more and more and more investment into the future, which bears risk. And I think a lot of Bitcoiners really like that risk aspect when it comes to investing in proof-of-work facilities, because it doesn't guarantee you anything. And I think that's a property of Bitcoin proof-of-work that I think Bitcoiners really, really enjoy.

• 1:27:08David Hoffman?

  But I just want to ask the question, doesn't that argument rely on the fact that returns on capital are less significant in proof-of-work than they are in proof-of-stake?

• 1:27:23Speaker 03

  Well, I think so. Historically, with commodity monies, the producers rarely have much control. Now, it, so, there are commodities, for example, that have very, very low stock-to-flow ratios, like, say, oil, where producers can get together and have a lot of control over the system, whereas something like gold, where most of the gold is already out there, so gold miners have virtually no control over the system. And that, so far, has been true in the Bitcoin ecosystem, where, you know, the power is not really residing in the miners. And we've seen that, for example, with the whole kind of, you know, kind of block-sized wars, where there's a period of time where the majority of miners were favoring the block increase, and they still couldn't get that through on that network.

• 1:28:07Speaker 03

  They basically, you had kind of the node rejection. And so, I think part of what maintains a commodity system, is, I mean, a decentralized system, is that combination of kind of division of powers, where you have the super-small node, where you can just run a node and you become, you know, all the memes, self-sovereign, all that. Then you have, you know, separately from that, you have the mining. And so, you can rent, you can put capital and risk the ability, you know, to Essentially give you a temporary period where you get to you get to essentially vote in terms of what transactions are going to go through. But it doesn't it doesn't give you any sort of permanent allocation compared to, you know, just holding tokens.

• 1:28:49Speaker 03

  And then that gives you a long term, you know, kind of permanent ability to to order all future transactions forever.

• 1:28:56Speaker 00

  One of the points that was brought up is this idea of the the rich gets richer in the context of proof of stake. Now, I see this as as as kind of not completely the truth. The way I see it is wealth preservation, the the rich stay as rich as they were. And the reason is that when you're staking, you have to pay for something. And namely, what you're paying for is opportunity cost. And it turns out that in an open market, you know, the API is just going to tend towards the opportunity cost. You might be paying 3% opportunity cost by placing your ETH in this black box and you can't touch it. You can't do DeFi and all this good stuff.

• 1:29:35Speaker 00

  So that's what you're paying and then you're getting compensated. And so net, you're basically just wealth, doing wealth preservation. The other point that you're that you do that you put forward is basically trying to distinguish Bitcoin, like proof of work to proof of stake, because there's this risk. Well, it turns out that professional miners, they will they will hedge this risk. And they're what they're interested in is the exact same thing as ETH holders. They're interested in a BTC denominated return, which will roughly match their opportunity cost. You know, that might be whatever, 5%. Now, how do you lock in as a professional miner, like 5%? Well, it's you use financial products.

• 1:30:17Speaker 00

  What you do is you you look at your uncertainties. What is uncertain? The price of electricity is uncertain. Well, guess what? You can just go buy electricity futures. And what else is uncertain? Well, the hash rate is uncertain. Well, guess what? You can go sell hash rate futures and ta-da. Like, you've you've you've locked in your 5% profit on your BTC. And now it's just a matter of executing it over four years. And so these these large professional miners, they're very much risk averse. And they're not going to take the crazy risk, you know, with hundreds of millions of dollars at at play. No, what they want is A essentially risk minimize return on your on your Bitcoin, which roughly matches the opportunity cost.

• 1:31:02Speaker 00

  You know, if you have an efficient market, then that's what it's going to tend towards. And so really, you know, there's this kind of distinction that doesn't really exist. And, you know, one of the sayings that we have in this space is that proof of work is just proof of step, a proof of stake with extra steps. And really, the risk that is being introduced can be removed with financial products. And at the end of the day, you're kind of walking back all the differences. And you can have essentially the same financial product with the same kinds of risks and the same kinds of returns.

• 1:31:34Ryan Sean Adams?

  Guys, this has been a fantastic conversation. And I, from my perspective, and I bet a lot of bankless listeners will agree, this has probably been the best proof of stake versus proof of work conversation. In history. That's, uh, that's ever been put out on crypto. So we appreciate both of you for having this very collegial conversation, for arguing points and for bringing a lot of rationality to what is otherwise a somewhat tribal and irrational conversation. So we appreciate you both, but it's now closing argument time. So just have a final question for both of you. I'll start with, uh, I'll start with, uh, Justin, since Lynn started with, uh, with her, with her part first. So I want to ask you this question, Justin.

• 1:32:19Ryan Sean Adams?

  Why is proof of stake the best way to create a crypto money? Summarize it for us.

• 1:32:26Speaker 00

  Right, so when we want to build a money, like the thing that we want to try and achieve is monetary premium. And it turns out that in the context of monetary premium, it's like a, you have this competitive landscape, right? Maybe Bitcoin and gold are competing for monetary premium. And it, it turns out that the reason why you have this competition is because you need society to kind of come to consensus on one particular asset to undow it with this kind of magic economic energy, which is monetary premium. And so what we need is a shelling point, a coordination point to focus our attention on one particular asset.

• 1:33:08Speaker 00

  And so really what we want to ask ourselves is which of proof of work and proof of stake distinguishes itself. Um makes basically stands out relative to to to the crowd. If it was only proof of stake in isolation in a vacuum, that could that could work fine for monetary premium. If it was just proof of work, that could also work fine as the internet of of of of value. But it turns out that we have this this competition and so we need to start comparing them. And there's there's various ways in which we can compare them. We can compare them in terms of economic security. This is one of the things that's most mind boggling for for proof of stake. And I haven't really made it explicit, so let me try and make it explicit.

• 1:33:54Speaker 00

  For every unit of economic and um security. So for example, for every hundred dollars of economic security, the consensus needs to pay for that. And how do they pay for that? It pays for it in the in with issuance and transaction fees. And that's about five dollars per year, right? Because that's the A P Y A P R that you give to your stakers. Now, if you look at uh proof of work, the maintenance cost of a hundred dollars of economic security is roughly a hundred dollars every single year. So the the cost is much, much higher, roughly twenty twenty X higher. And so that kind of means uh several things.

• 1:34:37Speaker 00

  But one of them, it means that for much, much lower issuance, you can have a much, much higher economic security. And we're already seeing this. The beacon chain has thirty two billion dollars of economic security. That's just the the market cap of all the E states. And if you look at Bitcoin, we have about ten billion dollars of economic security. And this is using like very, very fresh numbers. It's using numbers from the the grid purchase from Intel. Um and if you want, if you want the detail, I can give it to you. But basically it comes out of, you know, on the order of fifty dollars per per terahash second. And there's about two hundred million terahash per second. And so you get a roughly an economic security of of of of of ten bi- ten billion dollars.

• 1:35:21Speaker 00

  The other thing that it unlocks for you is the possibility for a decreasing supply. And this goes back to the meme, like the, the fact that you have a 20x improvement in economic efficiency means that you don't need so much assurance. And so there is a possibility for transaction fees when they're burnt to be greater than the issuance. And that again is a distinguishing factor. It's a distinguishing factor because from a scarcity standpoint, we can build systems which are better with proof of stake versus proof of work. And then you want to look at the non qualitative, the non quantitative aspect instead the qualitative aspects.

• 1:36:05Speaker 00

  And here for security, the really, really big one is that we're empowering the community, the social consensus to do its job, to act as a backstop in case the consensus participants abuse their power, which has never happened in, in the history of Ethereum or really in blockchains, but could happen in theory. And if it was, if such an edge case were to happen in the context of Bitcoin, it is my belief that the community doesn't have this backstop power. And so to summarize, really, I think that proof of, a proof of stake system can really stand out because it has much, much bigger security, both from a quantitative standpoint

• 1:36:49Speaker 00

  and the qualitative standpoint. And then that unlocks memes that are backed by fundamentals. These are real memes in the sense that they spread virally and they're very dense, but they're also backed by real fundamentals behind them.

• 1:37:04Ryan Sean Adams?

  Lynn, closing arguments on your side, why is proof of work the best way to create a crypto money from your perspective?

• 1:37:11Speaker 03

  So historically, when we look at things that acquire a monetary premium, it's the things that are the hardest, the things that are the, the most immutable, the thing that, you know, technology cannot come in and find a better one or cannot increase the supply of. And so with

• 1:37:30Speaker 03

  Essentially, what you want is something, a commodity or an asset that is vast majority of its value is the monetary premium and very little of it is utility premium. And that's an example with, say, gold, where the vast majority of it is held for its monetary premium and very little of it is used in industry as a percentage of its value compared to something like oil that is entirely for its utility value. And you have things like silver that are somewhere in the middle. And so if you were to go about, say, designing a blockchain system and you wanted to maximize its monetary properties, you would make one that, you know, that the almost entire purpose of it is to be money, where you would sacrifice everything else in order to make the best possible money.

• 1:38:15Speaker 03

  And so, for example, if I want to make the best possible fork, it would just be a fork. It wouldn't be a fork and a spoon and a knife combined together because that instrument is going to be worse at all three of those things than the three separate things are at their own field, right? So basically, the perfect, you know, the quote, the close thing we're going to go to perfect money is something that is extraordinarily as simple as possible. And, you know, he talked before about, you know, how complexity works itself out over time, right? So that complexity is kind of a short-term thing, but then it becomes less relevant as we look out into the future. I would say that history shows that's not really the case. And so, for example, you know, up until like literally three years ago, the US Air Force

• 1:39:00Speaker 03

  used Aiden's floppy disks as part of their nuclear code launch process, right? They had mainframes and they had floppy disks. And that sounds hilarious, right? It sounds like they have to upgrade, but it's actually, the whole point is they keep it, they kept it as extremely simple as possible. They updated very slowly. They wanted to disconnect it from everything else because when it comes to the, you know, the software that manages the nuclear system, you want it to be absolutely rock solid. You want it to do nothing else other than not have bugs. You want it to work when you want it to work. You don't want it to accidentally work when you don't want it to work. And you see that with bank software.

• 1:39:39Speaker 03

  See that with like, you know, the most extremely secure things purposely change over their very slowly over decades. Because, you know, any new complexity adds risks, even though, you know, we're increasingly capable of handling complexity. When it comes to the absolute most critical things, we move very slowly and keep things as simple as possible. And we don't combine it with other things. And so when it comes to, say, a money that is suitable to, you know, put your corporate treasury in, or that you're gonna allocate part of your endowment into, or that as an individual, you might want to hold 10% or more of your net worth in. Or, you know, if these things get big enough, if you're a sovereign wealth fund,

• 1:40:23Speaker 03

  or if you're a, you know, if you're managing the sovereign reserves of your country, representing decades of accumulated trade surpluses, what asset do you put that in? And so historically, the best one's been gold. And so now we have this, you know, potentially these new competitors that can come in and do it. And what would you select? You'd select one that is the most decentralized, the most immutable, the one that doesn't sacrifice any of those characteristics to do other things. Now, that doesn't mean that other systems couldn't be valuable as well, right? So just because gold has value, doesn't mean Tesla stock does not have value. They're just two totally different things doing different things. And the last thing I want is like some sort of weird merger of like gold and Tesla stock, right? So it's like, I don't want them to compete in that realm.

• 1:41:08Speaker 03

  And so I would say that the reason that proof of work makes for the ideal money is that it's the simplest system, it's the most resistant in the sense that it's like, you know, it's non-volatile memory rather than volatile memory, doesn't have to be continuously online. It's kind of self-verifiable, self-correcting, and requires the least amount of governance. And then when you combine that, even that's not enough. You have to combine that with something like small nodes and various other measures that help ensure immutability. And even then, you can never be sure, it's all about, you know, basically aligning the probabilities. Because there's more ways to fail, there's more ways to accidentally become centralized and bloated and buggy

• 1:41:49Speaker 03

  than it is to preserve decentralization and to minimize the chance of bugs or security flaws and things like that. And so I would say that the perfect money... Is willing to sacrifice just about everything else in order to have the perfect attributes of money where its main purpose is to be held and occasionally transacted with compared to, you know, something that is trying to be a Swiss Army knife and to do multiple things while also being money. So that's how I would, I kind of view this whole ecosystem. And that's why I separate, you know, assets that are trying to be money versus assets that are trying to be operating systems, essentially.

• 1:42:27Ryan Sean Adams?

  What a fantastic conversation. I want to, once again, thank you, Lynn Alden and Justin Drake for joining us and having just the best debate I've ever heard, the best conversation I've ever heard about proof of work versus proof of stake. Thank you so much.

• 1:42:41Speaker 00

  Thank you.

• 1:42:43Speaker 03

  And also a special thanks to Lynn Alden, because I know Bankless definitely leans Ethereum pretty heavily. So coming into what other people might perceive as the away team, I appreciate that as well.

• 1:42:53Ryan Sean Adams?

  Someone once called David an ETH maximalist, I think. So, thank you, Lynn. We definitely appreciate you. Action items for you today. Wow, Bankless listeners, what can I say? I mean, first thing you got to do is just like, stop what you're doing and go listen to that episode again. I think it was that good. And there's so many takeaways. That's what I'm going to do as soon as we get this edited and downloaded. Also, of course, Lynn Alden has her proof of stake article, which we referenced in this episode. We'll include a link to that in the show notes. Justin Drake rattled off some numbers at the end on ETH versus Bitcoin economic security. We'll get those numbers for you in the show notes as well. Risks and disclaimers, of course. None of this has been financial advice. I

• 1:43:35Ryan Sean Adams?

  don't even know if it's consensus algorithm advice. But we definitely know crypto is risky, DeFi is risky. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.

• 1:43:51David Hoffman?

  Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcast, and community as a Bankless Premium subscriber to get the most out of your Bankless experience. You'll get access to our market analysis, our alpha leaks, and exclusive content, and even the Bankless token for airdrops, raffles, and unlocks. If you're interested in crypto, the Bankless community is where you want to be. Click the link in the description to become a Bankless Premium subscriber today. Also, don't forget to subscribe to the channel for in-depth interviews with industry leaders, Ask Me Anythings, and weekly rollups where we summarize the week in crypto and other

• 1:44:36David Hoffman?

  fantastic content. Thanks everyone for watching and being on the journey as we build out the Bankless Nation.