THE HARDEST FUCKING THING
We live in a society in which almost everything is about money. And as with everything, money exists on a quality distribution. That means not every money is created equal. Some money is better than others. We refer to the quality of money as hardness. The best money is therefore the hardest poss...
MEMO W39 SEP 2024
"But what about the inverted yield curve", can we hear them asking. And to me it is just all noise. People in crypto land are concerned with so many inversions on the 4D chessboard, and often I can't help but think, you are all just playing against yourself. If you want to make it, long term, then all you need to do is to bet on human progress. Technology equals human progress. And however you wish to express that bet on the human race, somewhere there between the lines of technology you will...
MEMO W26 JUN 2024
I want to talk about how everyone is building a worse Ethereum in the L1 blockchain space and explain what this has to do with the way the internet happened. Back in the 1990s nobody really understood the internet. Nobel Prize-winning economist Paul Krugman wrote this around 1998: "By 2005 or so,...
Writings on strategic execution in a decentralized world.
The universe is dark by default. Making light is on you. - xh3b4sd
"Dictum meum pactum" is the latin form of "my word is my bond". And with that promise comes an invisible social contract that must be honoured. Humans are inherently social creatures, which means that several trust assumptions are built right into every one of us. Social contracts work because of their implied reputational value. The word of a drunkard may be quickly dismissed in the face of a magistrate, because the reputation of either proceeds them. The proverbial skin in the game here does then describe the basic concept of Proof of Stake in its purest form. Proof of Stake is essentially all about having something to lose. And that very concept of an economical threat upon misconduct and dishonesty is called slashing. If you lie to me, then your reputation gets slashed by virtue of the underlying social contract between us. Once you lied to me, I have a harder time believing in your future trustworthiness. The socioeconomic principles that allowed human societies to thrive across the millennia turn out to be so fundamental and universal that some clever mechanism designers translated Proof of Stake into the digital realm in order to secure blockchain networks. Proof of Stake blockchains come in a variety of flavours. Some versions define different staking requirements, so that different amounts of economic value have to be staked or even locked for long periods of time. Some variations of PoS define their own centralization vectors explicitly by allowing the delegation to specific operators or validator sets. Others implement various mechanisms to do leader election, or define different roles of network participants all together like Ethereum's proposer-builder separation. Following into the footsteps of the previous Powerlaw memo, below we want to talk about Proof of Stake at its core, how staking compares to mining, and how Ethereum might differ from Bitcoin.
Unlike with Bitcoin, there are no mathematical puzzles to be solved in PoS. Staking is simply the act of committing collateral in a contract that is enforceable by some agreed upon set of rules. The collateral staked here must have tangible economic value, so that received rewards and slashed penalties may have the desired effect of incentivizing network participants to act honestly. We just established that PoS has a capital component that is economically relevant. That staked capital and its risk adjusted price of time dictate a certain amount of yield to be received for honest network participants. And were network participants ever to be found dishonest, then some or maybe all of their staked collateral may be slashed at once. That economic threat provides every network participants within the PoS context with a game theoretical dilemma. Being dishonest may result in an economic gain if an entity becomes able to deceive the majority of the network. That anticipated gain must then be greater than the potential loss of slashed collateral that the malicious entity has at stake. And that is fundamentally why PoS as a consensus mechanism is able to support blockchain networks that secure hundreds of billions in USD denominated economic value. Because there is no free lunch, and because the amount of money that one can lose is far more painful than the amount of money that may or may not be gained by trying to deceive other network participants.
The universe is dark by default. Making light is on you. - xh3b4sd
"Dictum meum pactum" is the latin form of "my word is my bond". And with that promise comes an invisible social contract that must be honoured. Humans are inherently social creatures, which means that several trust assumptions are built right into every one of us. Social contracts work because of their implied reputational value. The word of a drunkard may be quickly dismissed in the face of a magistrate, because the reputation of either proceeds them. The proverbial skin in the game here does then describe the basic concept of Proof of Stake in its purest form. Proof of Stake is essentially all about having something to lose. And that very concept of an economical threat upon misconduct and dishonesty is called slashing. If you lie to me, then your reputation gets slashed by virtue of the underlying social contract between us. Once you lied to me, I have a harder time believing in your future trustworthiness. The socioeconomic principles that allowed human societies to thrive across the millennia turn out to be so fundamental and universal that some clever mechanism designers translated Proof of Stake into the digital realm in order to secure blockchain networks. Proof of Stake blockchains come in a variety of flavours. Some versions define different staking requirements, so that different amounts of economic value have to be staked or even locked for long periods of time. Some variations of PoS define their own centralization vectors explicitly by allowing the delegation to specific operators or validator sets. Others implement various mechanisms to do leader election, or define different roles of network participants all together like Ethereum's proposer-builder separation. Following into the footsteps of the previous Powerlaw memo, below we want to talk about Proof of Stake at its core, how staking compares to mining, and how Ethereum might differ from Bitcoin.
Unlike with Bitcoin, there are no mathematical puzzles to be solved in PoS. Staking is simply the act of committing collateral in a contract that is enforceable by some agreed upon set of rules. The collateral staked here must have tangible economic value, so that received rewards and slashed penalties may have the desired effect of incentivizing network participants to act honestly. We just established that PoS has a capital component that is economically relevant. That staked capital and its risk adjusted price of time dictate a certain amount of yield to be received for honest network participants. And were network participants ever to be found dishonest, then some or maybe all of their staked collateral may be slashed at once. That economic threat provides every network participants within the PoS context with a game theoretical dilemma. Being dishonest may result in an economic gain if an entity becomes able to deceive the majority of the network. That anticipated gain must then be greater than the potential loss of slashed collateral that the malicious entity has at stake. And that is fundamentally why PoS as a consensus mechanism is able to support blockchain networks that secure hundreds of billions in USD denominated economic value. Because there is no free lunch, and because the amount of money that one can lose is far more painful than the amount of money that may or may not be gained by trying to deceive other network participants.
THE HARDEST FUCKING THING
We live in a society in which almost everything is about money. And as with everything, money exists on a quality distribution. That means not every money is created equal. Some money is better than others. We refer to the quality of money as hardness. The best money is therefore the hardest poss...
MEMO W39 SEP 2024
"But what about the inverted yield curve", can we hear them asking. And to me it is just all noise. People in crypto land are concerned with so many inversions on the 4D chessboard, and often I can't help but think, you are all just playing against yourself. If you want to make it, long term, then all you need to do is to bet on human progress. Technology equals human progress. And however you wish to express that bet on the human race, somewhere there between the lines of technology you will...
MEMO W26 JUN 2024
I want to talk about how everyone is building a worse Ethereum in the L1 blockchain space and explain what this has to do with the way the internet happened. Back in the 1990s nobody really understood the internet. Nobel Prize-winning economist Paul Krugman wrote this around 1998: "By 2005 or so,...
Writings on strategic execution in a decentralized world.
Proof of Stake leverages core principles of the human experience, just like Bitcoin does, even though on different dimensions. Reputation on the PoS side of things has deep evolutional roots, because reputation is one fundamental aspect of human coordination. We can believe in something. Mathematics on the PoW side of things has deep roots in reality, because mathematics provides one fundamental framework to reason reliably about our understanding of the universe, and everything within. On the surface of it all, consensus mechanisms allow for coordination. How well any given consensus mechanism performs, or which consensus mechanism should be preferred is once again highly contextual. Saying that Bitcoin is better because it uses Proof of Work is like saying humans are better because they breathe air. It is a nonsensical statement to make, because not everything is breathing air, and the question everyone ought to ask is still this. Better at what? And why does that matter anyway? Fish do not breathe air. Fish extract oxygen through their gills. On the face of it fish rather look like breathing water, and even if that were to be wrong, then fish are still better swimmers than humans. What we try to express here is that the nature of any underlying consensus mechanism may not be definitively useful to judge the quality of any given blockchain network at a moment in time. So we have to look at other utility maximizing functions, if we want to figure out which blockchain is good at a particular use case, because all surrounding technical details and network configurations are distinctively selected to maximize those specific utility functions.
The narratives of the day are digital gold, chain go fast, and world computer. If you truly want a blockchain to provide you with anything that resembles digital gold, then said blockchain must be robust beyond doubt and in consequence never change. And as we mentioned last week already, the cost to produce a single BTC will eventually become larger than the value anyone can extract from the market in exchange. So the notion of never changing cannot be true in the fullness of time. If you truly want a blockchain to be very fast then you rely once again on a relatively small set of very powerful computers, opening up various centralization and therefore censorship vectors. The many tradeoffs underlying any world computer may be defined by a large set of diverse validators, allowing for the minimal acceptable network throughput of economic expressivity that cannot be censored. One beautiful aspect of Proof of Work is its most egalitarian distribution mechanism for initial token distributions while the underlying blockchain network is bootstrapped in its early days. Anyone can run some software, contribute economic security, and mine native token rewards over time. This is beautiful because in the early days the economic barrier to entry is so low that anyone with a laptop and an internet connection may participate. But far removed from its early days, PoW blockchains must either dilute their own value proposition via token issuance, or allow for economic expressivity to generate significant network fees. And Bitcoin as it stands today does neither of those alternatives. Solana set out to build a better Ethereum by maximizing one utility function and sacrificing another. That is all good and well, but this is also why Solana can barely be compared to Ethereum. Both leverage Proof of Stake, but either has a different vision for the future. In summary, Bitcoin doesn't even try to compete on economic expressivity, because it is fundamentally not a smart contract platform. And having that said, Bitcoin is then not even good enough at its own game, because Bitcoin cannot remain Bitcoin in the fullness of time. Period. Full stop. Fast chains like Solana trend towards centralization and have reliability issues on multiple dimensions. Ethereum is in fact the world computer, because of its large and diverse validator set, because of its liveness guarantees and because of its proven censorship resistance.
Consensus mechanisms serve a distinct purpose, that is mechanical by nature. Any other attribution of decentralization, security or economic value have to be made within the context of the underlying blockchain network and its own distinct value proposition. Proof of Work consumes many orders of magnitude more electricity compared to Proof of Stake. And any utility and second order consequence derived from all of that energy consumption, is not only temporary, but also irrelevant in the world we live in today. Bitcoin is not going to solve climate change by forcing the use of renewable energy. Ideas like pooling and rehypothecating resources are alive and well in all the blockchain ecosystems. We see mining pools on Bitcoin. We see delegated validators on Solana. And we see liquid staking services on Ethereum. We see restaking services and networks of networks all around us. And not only are the ideas the same, but also their consequences. And while it appears that everyone is essentially trying to build their own inferior version of Ethereum, we have to conclude that there is still no second best.
Our number for this week is about 10,000 solo stakers on Ethereum. We can't really know how many solo stakers there are on the network exactly, but recent statistics suggest that there is a range with 10,000 being the lower end of the spectrum. Solo stakers help Ethereum's decentralization profile, because thousands of individuals from all over the world help to secure Ethereum using widely available computer hardware on home internet connections. No individual can possibly afford to help secure Bitcoin today with a single miner. And if you then look at distributions of token ownership and network nodes, the case can arguably be made that Ethereum is more decentralized than Bitcoin, even though the devil is in the details. In any event, Ethereum continues to execute on its roadmap to serve the cryptographic world economy, while Bitcoin advocates are eagerly waiting for a greater fool to buy their coins, which does frankly not help anyone with anything. Milady.
Proof of Stake leverages core principles of the human experience, just like Bitcoin does, even though on different dimensions. Reputation on the PoS side of things has deep evolutional roots, because reputation is one fundamental aspect of human coordination. We can believe in something. Mathematics on the PoW side of things has deep roots in reality, because mathematics provides one fundamental framework to reason reliably about our understanding of the universe, and everything within. On the surface of it all, consensus mechanisms allow for coordination. How well any given consensus mechanism performs, or which consensus mechanism should be preferred is once again highly contextual. Saying that Bitcoin is better because it uses Proof of Work is like saying humans are better because they breathe air. It is a nonsensical statement to make, because not everything is breathing air, and the question everyone ought to ask is still this. Better at what? And why does that matter anyway? Fish do not breathe air. Fish extract oxygen through their gills. On the face of it fish rather look like breathing water, and even if that were to be wrong, then fish are still better swimmers than humans. What we try to express here is that the nature of any underlying consensus mechanism may not be definitively useful to judge the quality of any given blockchain network at a moment in time. So we have to look at other utility maximizing functions, if we want to figure out which blockchain is good at a particular use case, because all surrounding technical details and network configurations are distinctively selected to maximize those specific utility functions.
The narratives of the day are digital gold, chain go fast, and world computer. If you truly want a blockchain to provide you with anything that resembles digital gold, then said blockchain must be robust beyond doubt and in consequence never change. And as we mentioned last week already, the cost to produce a single BTC will eventually become larger than the value anyone can extract from the market in exchange. So the notion of never changing cannot be true in the fullness of time. If you truly want a blockchain to be very fast then you rely once again on a relatively small set of very powerful computers, opening up various centralization and therefore censorship vectors. The many tradeoffs underlying any world computer may be defined by a large set of diverse validators, allowing for the minimal acceptable network throughput of economic expressivity that cannot be censored. One beautiful aspect of Proof of Work is its most egalitarian distribution mechanism for initial token distributions while the underlying blockchain network is bootstrapped in its early days. Anyone can run some software, contribute economic security, and mine native token rewards over time. This is beautiful because in the early days the economic barrier to entry is so low that anyone with a laptop and an internet connection may participate. But far removed from its early days, PoW blockchains must either dilute their own value proposition via token issuance, or allow for economic expressivity to generate significant network fees. And Bitcoin as it stands today does neither of those alternatives. Solana set out to build a better Ethereum by maximizing one utility function and sacrificing another. That is all good and well, but this is also why Solana can barely be compared to Ethereum. Both leverage Proof of Stake, but either has a different vision for the future. In summary, Bitcoin doesn't even try to compete on economic expressivity, because it is fundamentally not a smart contract platform. And having that said, Bitcoin is then not even good enough at its own game, because Bitcoin cannot remain Bitcoin in the fullness of time. Period. Full stop. Fast chains like Solana trend towards centralization and have reliability issues on multiple dimensions. Ethereum is in fact the world computer, because of its large and diverse validator set, because of its liveness guarantees and because of its proven censorship resistance.
Consensus mechanisms serve a distinct purpose, that is mechanical by nature. Any other attribution of decentralization, security or economic value have to be made within the context of the underlying blockchain network and its own distinct value proposition. Proof of Work consumes many orders of magnitude more electricity compared to Proof of Stake. And any utility and second order consequence derived from all of that energy consumption, is not only temporary, but also irrelevant in the world we live in today. Bitcoin is not going to solve climate change by forcing the use of renewable energy. Ideas like pooling and rehypothecating resources are alive and well in all the blockchain ecosystems. We see mining pools on Bitcoin. We see delegated validators on Solana. And we see liquid staking services on Ethereum. We see restaking services and networks of networks all around us. And not only are the ideas the same, but also their consequences. And while it appears that everyone is essentially trying to build their own inferior version of Ethereum, we have to conclude that there is still no second best.
Our number for this week is about 10,000 solo stakers on Ethereum. We can't really know how many solo stakers there are on the network exactly, but recent statistics suggest that there is a range with 10,000 being the lower end of the spectrum. Solo stakers help Ethereum's decentralization profile, because thousands of individuals from all over the world help to secure Ethereum using widely available computer hardware on home internet connections. No individual can possibly afford to help secure Bitcoin today with a single miner. And if you then look at distributions of token ownership and network nodes, the case can arguably be made that Ethereum is more decentralized than Bitcoin, even though the devil is in the details. In any event, Ethereum continues to execute on its roadmap to serve the cryptographic world economy, while Bitcoin advocates are eagerly waiting for a greater fool to buy their coins, which does frankly not help anyone with anything. Milady.
Subscribe to Powerlaw
Subscribe to Powerlaw
<100 subscribers
<100 subscribers
No activity yet