Bankless - 57 - Ultra Sound Money | Justin Drake

Starting point is 00:00:01 Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. I'm Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, that's got to be the most bullish episode on ether we've ever had. And that's saying a lot. That is saying a lot. Ultrasound money with Justin Drake. Justin Drake is a researcher at the Ethereum Foundation. He also was the guy that led the charge behind one of our previous most beloved episodes ever, which is Moon Math, the Bull Case for Cryptography,

Starting point is 00:00:54 where in that episode, Justin Drake took us through the innovations behind cryptography and made the claim that the current state of crypto-economic systems designed, basically Bitcoin and Ethereum, are just in the very primitive ages of the deployment of cryptography. This is a very similar episode, but instead of the current system, but instead of talking about cryptography, we're talking about economics, specifically crypto-economics. And Justin, again, makes the claim that we are just in the very beginnings of economic innovation when it comes to crypto-economics.

Starting point is 00:01:24 And he takes us through his vision of the future, his vision for the future of Ethereum, and the future of ether, the asset. And what can it really do when we apply all of the research and development that we've done ever since 2009 when Bitcoin got started? You know, I think historically, David, there's been a little bit of a taboo in Ethereum culture to talk about price. So we use terms like economic security. And to be clear, we're not, we weren't talking about the price of Ether on a given day in this episode. But the monetary premium of the asset, Ether as a store of value in the assets relationship to the economic security of Ethereum. I've actually never heard an Ethereum researcher or someone very plugged into the Protector. to call design talk about it in this way. So for me, honestly, David, this is kind of like a dream episode. It's one thing for listeners to hear Ethereum Bulls like you and I talk about this. It's another to hear from somebody who's actually designing the engine and designing that engine

Starting point is 00:02:28 with the intent to produce what? To produce a sound money, to produce an ultrasound money. This to me was like really a fantastic episode, like a dream episode. I've been waiting for an engineer, a developer, somebody who's working on the engine of Ethereum to come out and say this. And you know, the takeaway here is, hold your half folks, like Ethereum is coming. Ether, the asset is coming for a store of value position in this ecosystem. It's like we've been saying from day one on bankless, David, ether is money. Justin Drake, to me, is a true cypherpunk.

Starting point is 00:03:08 He is really leading the charge of what the legacy of the cypherpunks have left behind, where they maximized innovation in cryptography. It exploded onto the scene. Cryptography exploded on the scene with the emergence of Bitcoin and crypto-economics. Justin is a cypherpunk 2.0 because it's now not just cryptography, it's crypto-economics. And to me, he is the absolute expert on crypto-economics and what crypto-economics can do. There were so many takeaways in this episode, and there's just too many to list here. But I think the one takeaway that I do want to mention is that there has already been the sound money culture in Ethereum.

Starting point is 00:03:44 It's just been hidden under behind the scenes. And with the emergence of things like EIP-1559 and the reduction of ether issuance in proof of stake, we actually get to talk about how that creates a sound money in Ethereum and the beneficial tailwinds that that creates for Ethereum and also for the world. If the world can have the hardest, most sound money possible, it deserves that. And ether, according to Justin Drake, is ultra-sound money. I would make the statement, guys, that you don't know Ethereum, and you certainly don't know ETH the asset until you've listened to this episode, because ETHI asset is going to be defined, and Ethereum, the network is going to be defined

Starting point is 00:04:27 by the next engine upgrade it's receiving. And it's receiving that economic engine upgrade now with proof of stake, this has just been live for a few months, EIP 1559, and the eventual merge an ending of proof of work. So if you want to understand the future of Ethereum, if you want to understand ETH the asset, you have to listen to this episode. It is well worth your time. The other thing I would say is you might not understand Bitcoin the asset or Bitcoin, the network, until you listen to this episode. And that's the hidden spicy take. David, should we get right into the episode? First, we want to tell you about our sponsors.

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Starting point is 00:07:12 minutes at jemini dot com slash go bankless get $15 in bitcoin after you trade your first $100 that's jemini dot com slash go bankless all right bankless nation we are super excited to once again host justin drake who is a brilliant mind and researcher at the ethereum foundation we just had Justin on for one of our most popular episodes, one of my favorite episodes, I think David would agree to. My favorite as well. Moon Math and the Bull Case for Cryptography. The last episode really focused on cryptography. We touched the economics, but we didn't get into it in detail. I think in this episode we are about to. So think of this as the sister episode to the MoonMath Bullcase for Cryptography episode. Justin Drake, it is fantastic to have you. How are you?

Starting point is 00:08:03 you doing today, sir. I'm doing great. Thanks for having me again. This being sort of the sequel, the sister episode, I felt like the theme from the previous episode was cryptography is really in the Stone Age, and we have so much further to take it. And there are all of these cryptographic innovations that are coming down the pike that we are going to incorporate in crypto, going to incorporate in Ethereum. But we didn't talk as much about economics. Is there more to talk about on the economic side here. Right. I mean, that's a legitimate question to ask. You know, we have, you know, these huge improvements in cryptography. Do we also have huge improvements in economics? And I argue that we're still also in the Stone Age when it comes to economics. And in the

Starting point is 00:08:51 way, I mean that literally, right, because we're still in the age of gold-driven economics. So, and gold, you can think of it as a stone, as a shiny rock. So Bitcoin has taken the approach to mimic gold and the economics of gold as much as possible. So you can think of it as skeuomorphic economic design. It tries to copy the real world. This is very similar to what happened in the early days of the Internet. When people were designing websites, they had these buttons which looked like actual press buttons. But when you take a clean slate approach, you have new possibilities.

Starting point is 00:09:36 And when you really embrace the digital aspect of trustless sound money, actually, you can really transcend to a large extent this Stone Age economics. And when preparing this podcast, I actually realized that the gap between the economics of Bitcoin, which is kind of, of Stone Age economics and kind of the future of Ethereum, which you can think of as sci-fi economics, is enormous. It's 10, 100x, a thousand X, you know, better. So I guess I'm excited to dig into concretely what are the improvements of the economic system as a whole. We have various components that are individually improved. So for example, we have an improved consensus engine, where we go from proof of work to proof of stake. We have an improved fee mechanism

Starting point is 00:10:35 where we go from this first auction mechanism to this EIP-1559 mechanism. And we also have various other economic innovations, such as the issuance policy. And all these things together in this latest design really come together really, really nicely. And so in the same way that Bitcoin is engineered money, and it's engineered to be as close as possible to gold,

Starting point is 00:11:09 we can ask ourselves, what if we push forward this economic engineering as far as we can? And we have 12 years of, I guess, innovation that are compounding. And when you compare what we have to what we will have, The gap is enormous. So Justin, our last episode with you was all about the bull case for cryptography. And the claim was that cryptographic hashes and signatures were really just like the stone and the fire when it comes to cryptography.

Starting point is 00:11:41 And there's so much more left to tap into, so much more potential to tap into. And I think we're about to do this again with economics, where you're claiming that with economics, the progress of humanity and innovation behind cryptonomics is just at the very beginning. Yet, I want to plant an idea, an image in the listeners' heads where while innovation in economics can progress, economics as a discipline still follows the same patterns. And this is the patterns that humans have come to understand. With every economic system, there is an economic engine. The engine of an economy is a metaphor that we hear, both inside and outside of crypto. And what I think you're going to lead us through is a metaphor that we're going to keep

Starting point is 00:12:26 on returning to is how economies are engines and the design of said engine impacts the economy and also the fuel that we put into this engine impacts the economy. And so as a frame of reference, you're going to take us through all of these different ways in this comparison makes sense. So to kick this off, I want to throw the ball back into your court. Maybe you can elaborate on that metaphor. How is an economy like an engine? And where does this conversation start when it gets turned to Ethereum and cryptography and crypto-economics. Yeah, so I actually stole an idea from Michael Saylor. So Michael Saylor loves to say that Bitcoin is this economic battery that can be charged

Starting point is 00:13:08 with kind of monetary premium. And I kind of agree, you know, with this metaphor. And I was thinking to myself, okay, what if we extend this energy metaphor to the other pieces of the blockchain, not just the battery. So I guess we have monetary energy, which you can think of as kind of electric energy. And this monetary energy is stored in battery cells, right? So you can think of one token, for example, one Bitcoin or one ether as being a battery cell that can store this energy.

Starting point is 00:13:48 And I guess if you look at that. the battery, there's kind of two separate ways to charge and discharge the individual energy battery cells. So the first one is kind of an exogenous process. So you have the market with supply and demand that will pump in energy into the battery and the battery will store this energy into the battery cells and the reverse can happen. You know, you can sell and remove energy from from the battery. So buying the, buying the token is charging the, the token, selling the token is discharging the token, right? And so if I can pay you to do push-ups, right? I'll pay you like one ether to do 100 push-ups. And I can pay you to do that labor. I can pay you to do that work.

Starting point is 00:14:39 And that is how the stored energy in an asset in gold, Bitcoin, ether can turn into real labor, real work in the real world. Exactly. Yes. And like one of the, of the things that we're trying to design for is the concept of soundness. So what does soundness mean? It means that the energy storage holds over time, right? So in 10 years time, I still want the energy to be stored in those battery cells. I don't want basically the battery cells to leak. And so that's one way where you can charge and discharge the battery is just by buying and selling the supply and demand. And by the way, when we're talking about energy, here, Justin, right? The metaphor that Michael Saylor used is the same metaphor that you're using.

Starting point is 00:15:25 Energy here is value. Specifically, it's monetary value. We're not talking about like proof of work energy or anything like that. We're actually talking about value being the monetary engine of these crypto economic systems, correct? Yeah, that is correct. I mean, there's various analogies that are rooted in engineering when we talk about money and value. You know, you can think of it in terms of fluid mechanics, fluid dynamics, where you have fluids, you know, we talk about liquidity, right, and liquidity pools and things like that. And you can also use heat kind of as, you know, like heat travels from one place to another. But yeah, I guess for today's podcast, we can use energy as the metaphor for monetary value, as you say, exactly.

Starting point is 00:16:14 We've got the energy, we've got the battery cells. Take us further into this metaphor. Right. So there's another mechanism, which is basically issuance and burn. So here, what you're doing is that you're creating new tokens, so new battery cells, or you're removing battery cells. And here you're not really charging or discharging the battery as a whole. Like the amount of energy stays the same, but you're redistributing things. So when you add, for example, battery cells, you create new token. tokens, these battery cells have the property where they all want to have the same value, right, because they're fungible. So you print new containers, these battery cells, and then

Starting point is 00:17:01 you have this flow of monetary energy from the existing battery cells into the new ones until they all have the same value. And it's the exact same mechanism when you're burning. And from the point of view of a bitcoins, you know, issuance is the root of all evil. in the sense that when you create these new tokens, well, it's kind of leaking from the existing tokens. And so as a Bitcoin holder, you don't like that because you're being diluted. Your energy is getting stolen from you, right? Because new Bitcoins or new dollars or new ether are completely fungible with old Bitcoin's, old ether.

Starting point is 00:17:47 The issuance is just stealing that energy. It's not creating new energy. It's just tapping into the energy that already exists in these other monetary assets. Exactly right. Yep. Now, that is one component, which is the battery. And then there's kind of another extremely important component in the world of blockchains. And to continue this energy metaphor, think of an electric engine, the engine.

Starting point is 00:18:13 So specifically, the engine is going to be a metaphor for our consensus engine. The consensus engine takes in economic fuel, right? And that could be in the form of issuance, right, which is a way to basically discharge individual cells and take energy and give it to the engine, or you could feed this engine with another type of fuel, which is the transaction fees. And then the whole point of this economic engine

Starting point is 00:18:41 is that as an output is going to give you economic security. And this economic security, which is output, is meant to secure the whole system. And so when you look at the engine, you can look at various things, like how powerful is my engine? Like how much economic security is it giving me? Or you could look at how fuel efficient is it?

Starting point is 00:19:06 Like how much power do I get per unit of fuel? Or you could ask yourself, okay, what is the best type of fuel to feed into my engine? Is there like one type of fuel which is better than the other? Or you could look at what is the ratio of the load under which the engine is and the power that it has. So if you have an economic engine of power, let's say, $10 billion. You have $10 billion of economic security, meaning that it costs $10 billion to attack the system.

Starting point is 00:19:48 But your load is going to be the economy living on top of that. So if we look at Bitcoin, for example, it's a $1 trillion system. It has $5 billion of economic security. So the load to power ratio is going to be $200, $1 trillion divided by $5 billion. And then you can look at all sorts of metrics like that about your engine and try and understand, okay, what are the properties of my engine? And it turns out that if you take your engine, which is proof of work and you replace it with proof of stake, pretty much on every single metric, you get an improvement.

Starting point is 00:20:25 And it's not just like a tiny improvement like 10% or 20% or 50%. It's 10x better, 100x better, or in some cases, a thousand times better and more. So we're going to dig into all of these components in more depth. But just to kind of establish these components as part of the intro. So the engine, as you said, is the consensus. this mechanism. And so Bitcoin, of course, uses proof of work. Ethereum in the future we'll use proof of stake. We're going to get into that. And you also mentioned the fuel is basically it's economic fuel. This is not gasoline or petrol. This is a fuel that comes from two sources,

Starting point is 00:21:04 generally in a crypto economic system. Issuance is the first source of economic power, economic energy, and transaction fees are the second source. But let me ask a question about the the engine. So an electric car engine produces something, right? That is motion. It enables the car to go from point A to point B. What does a crypto engine for a layer one like Bitcoin or Ethereum produce? Is this consensus? Is this, or more abstractly, does it produce trust? Right. What is the output of the engine? Right. Okay. So the output is what I call economic security in the context of consensus. So the way that I kind of think of it kind of graphically is that imagine you have like some sort of Star Wars or Star Trek kind of shield around your spaceship. It's providing

Starting point is 00:21:58 security. It's like your economic shield. And just to be very concrete, in Bitcoin, it's, hash rate, right? So basically, what is the dollar equivalent to your hash rate? So in Bitcoin, the hash rate is 150 million terra-hashes per second. And each terra-hash, if you were to go buy mining hardware, each terra-hash will cost you about $30. So you have roughly $4.5 billion of economic security. So if you want to overthrow the Bitcoin system, if you want to perform a 51% attack,

Starting point is 00:22:37 you're going to have to buy $4.5 billion of, you know, mining hardware in order to get that hash rate. And so you can denominate economic security in dollar terms. Like it's basically your moat, your defense moat. And for Ethereum proof of stake, your economic security is also denominated in dollars. And the way you get the number is basically by looking at the total amount of eF staked. So right now we have 3.5 million if. At current prices, this is over $6 billion. So, you know, even today, you know, this very nascent proof of stake system in the Ethereum has more economic security than Bitcoin. Justin, there's an interaction here between the energy and the engine, right? And this is the

Starting point is 00:23:34 difference that we often talk about on the bankless podcast is there's Bitcoin, BTC, the asset, and then there's Bitcoin the network, right? There's Ether the money, and then there's Ethereum the economy. And then there's the Ethereum consensus mechanism, which is proof of stake. And all of these things interact. They're all a part of a composed system. And the viability, what we're going to get to is the viability of the engine and the efficiency of the engine ultimately impacts the moneyness that goes into the engine, right? Because the strength of one impacts the strengths of others. And before we get into the differences between like how crypto economics is different than gold economics, because there are important differences there.

Starting point is 00:24:15 I want to ask you about, like, well, when all of these things get integrated, when all of these composed systems and we maximize the benefits and efficiencies of all of these systems to generate this maximally efficient engine, that is what gives monetary premium. Can you talk about that? Yeah. I mean, so one of the things you mentioned is that all of this is a system, right? and it's important to consider them in combination. So for gold kind of one of the very nice things is that the engine you get for free, right? The engine is mother nature as the laws of physics. The laws of physics kind of give us for free censorship resistance.

Starting point is 00:25:00 It gives us for free no double spend. And it gives us for free no forgeability and things like that. unfortunately in the world of blockchains your consensus engine you just have to keep feeding it you don't get it for free you have to pay for it now if you look at the economic design of bitcoin especially in the long term when there's no more issuance basically what it's done is that it's it's kind of made a mistake right and the mistake is that it's it tried to mimic gold a little bit too much And so what it's done is that it's basically isolated, segregated, the battery and the engine. So today, the battery, the engine is connected to the battery. And so that's providing this constant source of fuel that will give you economic security.

Starting point is 00:25:56 But in the long term, you know, this link is severed. So there's two separate systems. There's the battery and then the engine. And then the risk is that you have this amazing battery, which is the BTC asset with like 21 million Bitcoin guaranteed. But, you know, it's the real liability is the engine here. Now, going back to your question around, I think it's a question around reflexivity, which is basically what is going to be used as a store of value? and it's kind of, it really, it kind of starts, in my opinion, at the technology level, right? Because once you have the best candidates for something that could be a good store value,

Starting point is 00:26:40 you can have very nice properties, it could be digital, it could be programmable, it could be scarce, it could be secure, all of these things. Then, kind of people start using it as a store value and then, you know, you have this reflexivity going on. And so, you know, in the same way that we've seen, you know, the stores of value radically changed over time. You know, we've had, you know, sea shells and, you know, salt and, you know, yapstones and gold and Bitcoin. I think we're at the cusp of something new here,

Starting point is 00:27:14 where technologically speaking, we have something which is radically better than what we have before. And then that is kind of this weird, reflexive loop that kind of discharges the previous store value and then and then charges the other store value, the successor. Let's talk about that for a minute because that is a, it's a, it's a, it's a property and I'm going to use the term magical because it's almost a magical property that some assets, some scarce assets get to have, which is this magical meme power of monetary premium. It's the thing that a bunch of humans have collectively decided,

Starting point is 00:27:58 should be valuable and that they should store their wealth in. And it's reflective, as you say, is because the best store of value is the store of value that community, the entire world, comes to consensus on effectively. So when you're betting on a future store of values, you're kind of betting that society and culture and communities around the world will choose to store their wealth into one thing. So not everything can have this. You mentioned like this history of money where gold had that throughout the centuries, throughout the ages. There were times where silver had it, but assets like copper never had strong monetary premium, or it was like smashed by some of these harder, more sound assets. You also mentioned,

Starting point is 00:28:44 Dustin, that the interesting thing about gold is it's imbued with this economic security due to physics, right? The birth of a explosion of a star, a supernova, has created gold on the periodic table of elements. And that is its security budget for its lifetime. It doesn't have to keep repaying it, whereas Bitcoin does. Bitcoin has to keep repaying its economic security, keep feeding the engine as it will, or else it will no longer work. So we're drawing these kind of comparisons, I think, but can you talk a little bit more about this mystical property, this magic meme energy behind a monetary premium? So where does it come from? People still don't really understand that, Justin. We know that it's in gold, but we've grown up with gold being a store of values

Starting point is 00:29:32 before our lifetime. We see it maybe emerging in Bitcoin. We see elements of it emerging in ETH. What is this monetary premium thing? Where's the magic here? Right. So if you were to use kind of economic terms, I'd say that, you know, it's all about the shelling point. As you said, there's coordination involved. You have various candidates for stores of values, and you want to look at their merits. And you want to have some sort of mechanism for society to agree on one of them, to coordinate on one of them. Basically, you want to have the winner, you know, the natural processes for the winner to stand out in some way. And the fact that it stands out means that it becomes the shelling point. And then that becomes the place where everyone, you know, congregates.

Starting point is 00:30:22 you know there's there's various ways to achieve a shelling point right one could be like simplicity security one could be like the lindy effect like how long has this thing existed you know one could be you know how useful how useful is it this is where commodity monies came from right like the shilling point was that the the money is useful already so you know it's a natural place for everyone to coordinate because they already had value and you know you can think of gold as being you know commodity money to an extent, right, because, you know, gold has been used, you know, for jewelry, but also for, you know, industrial use cases. And I think once we're in the digital world, you know, there's, there's many properties that are very important to have if you want to be

Starting point is 00:31:14 that, that shilling point where everyone congregates and where the narrative kind of does its, does its magic, as you say. And I think one of the big ones is programmability. And this is one of the things that is a distinguisher between Bitcoin and Ethereum. But beyond that, if you look purely at economic considerations, I think there's two of them. The first one is economic security. right so bitcoiners care very very deeply about security and for very very good reason you know they're paranoid you know it's part of the culture and one of the amazing things is that from an economic security standpoint um ethereum is miles ahead than bitcoin um so that's kind of one check uh in the checklist that we have i guess another aspect for being a shilling point is for being an economic

Starting point is 00:32:11 selling point is economic efficiency, right? So how efficient is your system, you know, going back to the security, like how fuel efficient it is. And this is going to have real impact, you know, on security, on issuance and things like that. And it turns out, again, that Ethereum is orders of magnitude 10 to 100 times more fuel efficient than Bitcoin. And then, when you combine these two things together, economic security and economic efficiency, then out pops kind of something amazing, which is economic scarcity, but not just the standard vanilla kind of cap supply economic scarcity, but a new paradigm, which I guess you could call ultrasound money, right? So if Bitcoin is sound money, because it has this cap supply,

Starting point is 00:33:10 and thanks to all sorts of innovations, you know, that go really, really deep, at the very surface layer, you have, you know, ultrasound money. And the idea here is that the total supply is actually decreasing over time. And this is actually somewhat similar to Bitcoin in the long term. So, you know, it's a natural process for people to lose their keys. For example, as they die, you know, if they haven't set up, you know, a proper inheritance mechanism and whatnot, then these coins could go missing. So, you know, if you estimate that, let's say, one in a thousand coins goes missing every year,

Starting point is 00:33:50 then in roughly 30 years, you know, Bitcoin is going to become ultrasound in the sense that the amount of money, Bitcoin that is lost through natural mechanisms will outpace the inflation. thus the issue. I guess Ethereum will be ultrasound kind of 30 years earlier and then Bitcoin, and it will be ultrasound by not just 0.1%, but potentially much, much more than that. So I want to recap where we've gotten to so far, and then we're going to get into the details about how this comparison works out. Monetary energy, which is the monetary asset, the units, Bitcoin, gold, ether, that's the battery. That's the battery. the fuel going into the system. And gold has this privilege because it was birthed in supernovas,

Starting point is 00:34:41 right? And there's no such thing as a supernova money printer. That doesn't exist. That's nonsensical. Yet when we talk about this realm of crypto economics, what you're saying is that just focusing on the battery side, the energy side, the value side of things is only half of the equation. And if we really want to maximize what is the potential here, we need to both have the best fuel. fuel possible, the best energy possible, the best value possible, but we also need the best economic engine. Because if we have a good fuel but a poor engine, our aggregate output is less. And just focusing on one of these two things is missing the whole picture. And so this is where I think, Justin, you are particularly optimistic about researching both how to make the best value possible

Starting point is 00:35:30 with also making the producing the best engine possible. And it's really the aggregate of all of systems that is what we are calling a new paradigm. Rather than a skeuomorphic backwards design of replicating what we already know, we are actually using innovation, research, and development to actually progress forward. So I think at this point in the conversation, I want to turn to the engine design. So not talking about the value or the fuel, but instead talking about the system, the engine that consumes that fuel and comparing and contrasting the efficiency of proof of work and proof of stake. Could you lead us into that conversation? I guess just before we do that, I just want to add one more essential component. It's actually three components in the system.

Starting point is 00:36:14 We have the battery, we have the engine, and then the third one is the solar panel. Okay, so what does the solar panel do? It's a way to convert one form of energy into another form of energy, right? So solar panels will convert solar energy into electricity. And the metaphor here, is the fee market, right? So you have this transactional utility, right? People have a desire to transact, and that translates into transaction fees. And this output of the solar panel, you know, can be fed into the engine. And this is how it is right now with both Bitcoin and Ethereum proof of work, the solar panel is connected to the engine directly. And the solar panel captures the energy of the economy, right?

Starting point is 00:37:13 There's a GDP behind Bitcoin. There's a GDP behind Ethereum. There's a GDP behind the United States. The IRS taxes that GDP, you know, gas fees on Ethereum taxes that GDP, Bitcoin fees tax that GDP and injects it back into the system. Right. Exactly. So it's important to take into account the solar panel.

Starting point is 00:37:34 And I guess one of the key innovations that we have in Ethereum is EIP159. And you can think of EIP 1559 as finding a way to basically use the output of that solar panel and connect it to the battery so that you're charging the battery. So instead of connecting the output to the engine directly, you're connecting it to the battery. And, you know, this has very significant, you know, consequences in terms of security. And I'll, I guess we can talk about that. So I guess, you know, you're asking, you know, what are these characteristics of the engine? Can we go through them one by one and try and compare and contrast proof of work and proof of stake?

Starting point is 00:38:20 You know, I already mentioned, you know, just in terms of raw power. What is the power of the engine? Right. Bitcoin has 150 million terahe hars per second. $30 per tarah hash, that's $4.5 billion. Ethereum has about $6.5 billion of economic security with the eFAT stake. In the beacon chain. In the beacon chain, exactly, right. I just want to camp on that for one second, Justin, because I'm not sure like everyone understands that.

Starting point is 00:38:53 So what you just did was you multiplied the value of all of the hash rate, and you came up with a number because hash rate is essentially it's capital it can be converted into units of value it can be converted into dollars right and you compared that and you said what that's 4.5 billion or 5 billion 4.5 yeah let's say 5 billion 4.5 billion okay and then what you did was and that that that that is essentially the economic security of bitcoin so somebody wanted to attack bitcoin they would have to have what 51% of that 4.5 billion? Is that correct? Well, let's assume that the 5 billion is honest. They don't want to attack. So you as an external attacker, if you want to have 50%, you need to match what's already there. So you kind of need to double the hash rate and then. So I need to double the hash rate.

Starting point is 00:39:44 So I'd need to have like, you know, 5 billion or so of equivalent hash rate. Okay. And let's, let's remind Bitcoin, just like Ethereum, gives two security guarantees, no double spends and no censorship, right? So that's why security is so important. That's why we're talking about it. Now, with Ethereum, you just use the number that is based on the amount of ETH staked right now in what we call ETH2.0, right, in the beacon chain, essentially. And the value of that is what, $6 billion at this point in time? Right. Let's say $6 billion. So it's $6 billion. So what you're saying is already, you know, post-merge, whatever, that happens in Ethereum. Ethereum as a economic network is already provides more economic security than Bitcoin.

Starting point is 00:40:34 This is what you said. And this is what I just wanted to emphasize because I'm not sure people have fully wrapped their heads around that and understand that. The Ethereum network is potentially already more secure economically than the Bitcoin network, at least post-merge, once proof of stake is fully activated. That's what you're saying, right? Yes, that's correct. I mean, someone might ask a very natural question, which is, what about in addition to the, you know, $5 billion of mining hardware that you need to buy? What about the electricity that you need to, you know, expend to perform the attack?

Starting point is 00:41:08 Exactly. It turns out that the electricity per day, you know, is negligible. It's like, you know, 10 million, 20 million. So if you're happy to pay, you know, 4.5 billion, surely you can, you can afford, you know, 20 billion, 20 million. And, you know, like being able to do the attack just for, you know, one day or one week or one month or even a whole year, you know, that's totally possible once you already made the investment of getting $5 billion of hash rate. Let's talk about that engine then, the horsepower. Because I think this is where you're leading to. It's like the question in my mind after I hear that is, okay, how is that possible? How is Ethereum providing more economic security with less total market cap? It's like it's a lower value asset from a market cap perspective compared to Bitcoin. So how is this even possible? Right.

Starting point is 00:42:00 So I guess this goes back to the kind of the next point after we cover economic security is economic efficiency, right? So it turns out that, you know, skipping ahead, that Ethereum is roughly, you know, 20 times more fuel efficient than Bitcoin. So, you know, you get more bang for the buck. So in Ethereum, you know, if you have $1 of fuel, let's say, you get, you know, $20 of security. In Bitcoin, you put in $1 fuel, you get $1 of economic security. You know, one of the reasons why even just out of the gate, Ethereum is more secure than Bitcoin is due to this efficiency, which we can talk about later. I think an important point I want to bring up is the way that this interacts, the way that the engine interacts with the money is extremely salient here. Because with the Ethereum economy, which runs on ether, and the Bitcoin economy runs on Bitcoin.

Starting point is 00:43:02 And when we were talking about how do you charge in a unit, how do you make Bitcoin have more value or how do you make Ether have more value, it's by buying it and not selling it, right? So the ratio of bias to sells is how you charge the battery. But if your economic engine of Bitcoin requires 15 times as much value to achieve the same result as Ethereum does, be under proof of stake, that means you have to discharge 15 times, as much Bitcoin versus Ether, right? So you are selling, because Bitcoin miners receive Bitcoins, and then they sell them to pay for electricity and hardware. And so as a result of the way that the Bitcoin engine is designed, it discharges 15 times faster the rate of value than the

Starting point is 00:43:51 Ethereum economic engine under proof of stake. It forcibly sells BTC the asset on the secondary market, which is like the battery of the unit battery of Bitcoin leaking because of the persistent selling. Did I get that right? Yes. So if we assume that there's no transaction fees, then it's exactly right. Let's assume that the engine is fully powered by the battery. Then, you know, for an equivalent amount of economic security, the proof of work engine is drawing power 20 times more than the proof of stake engine. And so, you know, I guess you could compare this a little bit, you know, to, you know, electric cars versus gasoline cars. So if you want to do, I don't know, 100 miles, you know, it's going to cost you X number of dollars to charge the battery and do 100 miles if you're using electric car.

Starting point is 00:44:48 If you're using fuel car, you're going to have to buy, you know, 10. or whatever the number is, the multiple is. It just turns out that the multiple between proof of work and proof of stake is 20. So even though right now, Bitcoin is kind of providing much more economic fuel to the engine than Ethereum, is actually providing, is getting as a result less economic security. and, you know, one of the, you know, my projections, if I were to look into the future, I actually expect that the Ethereum economic engine to be at least 10 times larger than Bitcoin. One of the reasons here is that we're going to have more people staking.

Starting point is 00:45:35 So, for example, you know, Coinbase hasn't really launched yet. You know, they're going to bring in, let's say, one million extra Ethereum to stake. and then that's going to increase the power of the engine. And my expectation is that we'll get, let's say, 10% of all ether or 20% of all are staking, and that's going to dramatically increase the economic security of the Ethereum system. And I guess another possibility is that the ratio of the price of ether relative to the price of Bitcoin will increase.

Starting point is 00:46:13 and if that happens, you know, that will also improve the relative size of these, well, the relative output power of these economic engines. So, Justin, that increased economic value or that increased efficiency means that the Ethereum economy can secure more on top of it, right? So when we think about all of the tokens, all of the assets, all of the in the future roll-ups and layer twos that are secured. on top of Ethereum, you know, that value has a certain dollar amount, right? There are 85 billion or so defy tokens out there. Right now, there's 30 billion-ish stable coins. All of these things have

Starting point is 00:46:58 economic value. But the Ethereum base layer needs to be able to secure that economic value. And this goes to a concept I think you were talking about a little bit earlier. You hinted at this load to power sort of ratio. And what I think you mean there is maybe you can explain it further is how large of an economy can the base layer actually secure? Can you get into load to power and talk about that? Right, exactly. So the load to power, the load is kind of the economic load of the whole system, the whole economy that relies on this engine. So for Bitcoin, we have an economy of a size $1 trillion dollars and we have an engine economic security of five billion dollars so the ratio is 200 you know the greater the ratio the worst things are and the reason is that the incentive for an attacker to attack

Starting point is 00:47:53 the system is is greater right so he oh the attacker only needs to expend you know five billion dollars and they could potentially break a system of size one trillion dollars so really you want to be reducing that ratio as much as possible. And I think the metaphor here is simply a truck towing something, right? So you have a car, you have a vehicle, it has torque, it has power, and then it also has a load that is pulling behind. And if that load is too big in relation to the power of that engine, that can cause misalignment or misaligned incentives. It will cause, you know, choking and stalling. You know, the engine will stall.

Starting point is 00:48:33 is not capable of pulling the load. It's not adequate for the amount of load. And, you know, one of the scary things with Bitcoin is that the issuance is going to zero. And if the transaction fees can't compensate for the reduction in issuance, then, you know, this ratio is just going to get worse and worse and worse. So, you know, let's imagine, you know,

Starting point is 00:48:55 a success scenario for Bitcoin. Let's say that it reaches the market cap of gold. Let's say, you know, 12, 12, 3,000. billion dollars. Now, if there's no issuance, it needs to get all of its economic fuel from transaction fees. Now, let's assume every single transaction on average pays $100 in transaction fees. Now, there's only, I think, 120 million transactions per year. So, you know, we that gives us a low to ratio of roughly 1,000 to 1. So over time, even in like very conservative estimates, I'm expecting the ratio to worsen from 200 to 1 up to 1,000 to 1. One of the good

Starting point is 00:49:52 news in Ethereum is that like we, I'm expecting let's say 10% of all the EF stakes, all the EF to be staking. And so here is very easy to calculate the ratio. right? Because it's just going to be 10 to 1, right? So if you look at all the if out there, there's going to be 10 times more if out there than there is Eif staking. So the ratio is 10 to 1. But actually, as you said, David, we shouldn't just look at EIF because that's not the only thing that Ethereum is securing. It's securing also all sorts of defy and non-EF assets. And so let's let's make some sort of projections, you know, let's say that DFI is 10 times as large as the the Ethereum economy,

Starting point is 00:50:40 the EIF economy, then, you know, the ratio worsens to 100 to 1, but it's still nowhere near the 1,000 to 1 that this projection would give us. So, Justin, when you describe this, this load-to-power concept, and as David was talking about it, I get this mental image of like a pickup truck just trying to haul a massively large trailer and it gets to this hill and it just it just can't it's just not enough like throttle to be able to to make it up this this hillside or this mountain can we talk about what actually happens so if bitcoin gets to a place where it has in a thousand to one ratio in terms of the amount of value inside of it versus its economic security right what what practically happens in a

Starting point is 00:51:28 transaction so we can i think see glimmers of this when you you use lower economic security chains like Bitcoin Satoshi's vision is one. I mean, I think exchanges, they will sometimes take days or even weeks to confirm transactions from very low economic security chains is because they need all of those blocks to come through before they'll actually like certify that the transaction is valid and can't be double spent. Is that sort of what we're talking about here is in a Bitcoin that is way overloaded here, the transaction speeds will slow down, or at least not transaction speeds, maybe I should say confirmation times will slow down, settlement guarantees. Settlement assurances. Right, exactly. It's actually worse than that

Starting point is 00:52:19 in the worst case. So let's imagine that Bitcoin becomes systematically relevant for the internet and the world, right? It's like, let's say it's a hundred trillion. dollar kind of asset. You know, if you put yourself in the shoes of a government like China or the United States, you think to yourself, okay, I have the power to manipulate the economy of the internet, this one hundred trillion dollar beast. And I only have to spend, what, $10 billion? You know, it's like, it's like a no-brainer, right?

Starting point is 00:52:56 I'm obviously going to, you know, my military budget is like 100 times that or, you know, a thousand times that. I'm obviously going to, you know, to spend that $10 billion to have control over this world economy. So, yeah, if we want to look in terms of the long-term success, basically you should think of the load as being the carrot, kind of the incentive for the attacker. The bigger the load, the more kind of value there is. to potentially extract and steal and manipulate and do all sorts of bad things.

Starting point is 00:53:37 It's actually worse than just being conservative in terms of confirmation times. You know, it could just simply break the system. I mean, it's actually shocking, right, that there's only $5 billion securing Bitcoin. Like a government like China or the United States could definitely pull this off and break Bitcoin as it is today. Hey, Bankless Nation, we told you guys that this. is going to be an epic episode, and the epicness does not stop. Coming up next, we talk about how a monetary premium gives a boost to the economic fuel for Ethereum, and how that adds security to the Ethereum economy.

Starting point is 00:54:16 We also talk about how this Ethereum engine also has the power of invisibility. It actually can't be detected by nation states. We also ask Justin about what the resultant product is of all these different optimizations of Ethereum economics. And then lastly, we finish up with a conversation about sound money culture in Ethereum. And whether or not Ethereum has always been a sound money culture all along. I hope you guys are enjoying this episode. But before we go any further, we have to talk about some of these fantastic sponsors that make this show possible.

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Starting point is 00:57:03 I want to draw another connection here because this is something that we've talked about on the bankless podcast. I think you're pointing a fine tip on. When we brought on Charlie Noyes from Paradigm, we talked about this concept of a base layer like Ethereum, the importance of monetary premium, right? Because monetary premium, as we talked about earlier, is sort of this magic meme power. If you are the underlying base asset, is viewed as a store of value, then it just gives you an insta boost to your economic security, right? And so we had kind of this, this not a debate, but a discussion about where, like, my take is kind of that the winning defy platform has to have the highest amount of economic

Starting point is 00:57:51 security, right, in order to host the 20x defy valuation that you were just talking about, Justin, right? So at some level, all layer one chains are in this competition for monetary premium. And if you are trying to be a layer one chain and your base asset is not money, right? So I'll throw one out there. Love the Cosmos ecosystem, fantastic projects, fantastic team. Adams are not competing as a base money. They're not competing as a base store of value. Like the project teams will tell you that. But if you're not, you're at a disadvantage because there's a lower threshold of economic security that you can guarantee and settle on top of it. Is this a conclusion that you would draw as well from the discussion so far that it's vitally important that a layer one asset, base layer

Starting point is 00:58:45 asset, have a monetary premium in order for it to secure the most amount of economic activity on top? you know absolutely um very well said um you know this is part of the the the shilling point aspect right you have various options for what can be you know money and what can be stores of value um and you know as a community you know we're going to go through the catalogue and look at what is what has the best properties and security is going to be you know one of the very top of the list um and if if your success scenario means having a load to uh to uh to power ratio of a thousand or more, then that's scary, you know, because, you know, let's, let's say that the ratio is 1,000 to 1. So let's say that your economy is, is $100 trillion.

Starting point is 00:59:35 That means that your security is a hundred, a hundred billion, right? A thousand times less. That's still peanuts in the context of a government like China or the US. Justin, we were talking about this potential attack on Bitcoin by a nation-state level actor. But proof-of-work versus proof-of-state offers another property, too. And that is kind of the property of being able to bounce back, almost like an anti-fragile-type property, I believe. Vitalik has talked about this on the bankless podcast in the past a little bit. Can you talk about how a Bitcoin proof-of-work type system would recover from such an attack versus Ethereum and proof of stake?

Starting point is 01:00:19 Right. So this is one of the places where the, the, the improvement between Ethereum and Bitcoin is not just 10x or 100x. It's kind of infinity. It's like, it's like black and white zero to one. So let's assume that there is an attack. Some sort of government does attack Bitcoin. Well, it turns out that it can permanently attack Bitcoin.

Starting point is 01:00:45 It's kind of game over. It's a knockout. And the reason is that you can do what Vitalik calls a spawn camp attack is that you can just repeatedly attack the system over and over and over again. And like the key issue is that with Bitcoin, you don't really know who is attacking you, right? Like the mining power is kind of anonymous. But maybe even more fundamentally,

Starting point is 01:01:14 the other big problem, is that even if you knew who was attacking you, you have no way to defend yourself. So you have no way to kind of destroy that mining power. But with Ethereum, we have these two superpowers. The first superpower is that every EVE staker is identified. So you have a, you know, a pop key, which identifies you as a as a staker. And whenever you make an action, whenever you make an attestation, for example, which is one of these votes in the context of proof of stake, we know where this vote came from with cryptographic security. Hang on. I just want to rephrase that really quick. When somebody mines a Bitcoin block, they publish it to a network, but anyone can publish it.

Starting point is 01:02:03 But in proof of stake, when you attest to a block, that attestation comes from a specific address with a specific amount of ETH in that address. When you say identifying the person, or we're not identifying, this isn't KYC, this isn't like naming a person, this is just the stake, which is where the security comes from, comes from a very specific address, which is not true with Bitcoin. Bitcoin validation comes from miners, which don't actually exist anywhere inside the Bitcoin protocol. It's just anyone can publish a block. So just you could be a Bitcoin miner and you could find a block and then you could send that to me. You could send me that information and I can publish that block, but it's you still have the miners.

Starting point is 01:02:46 I just wanted to make that clarifying point. Absolutely, yeah. There's no KYC involved. This is just the pseudo-anonymous identification that we have, for example, in Bitcoin and Ethereum with the addresses, right? You hold some Bitcoin, but that doesn't mean that you have to do KYC to hold Bitcoin at this specific address. Not only can we identify where the economic security comes from,

Starting point is 01:03:10 but we have this other superpower in Ethereum, which is that we can slash. So we can penalize. So the idea of proof of stake is that you put something at stake, which is if, for example, and if you do something bad, we'll just remove that if. So this would be the equivalent of setting on fire, the Bitcoin mining rigs.

Starting point is 01:03:33 And so we actually have two separate types of slashing mechanisms. We have, well, I guess you can, could call layer one slashing, which is that within the protocol itself, if you do something which is obviously wrong. So for example, if you do two conflicting votes, two conflicting attestations, then we have a mechanism to automatically slash you for doing that. And that will deal with, you know, many of the worst attacks out there. You know, for example, if an attacker tries to create two finalized blockchains, which are inconsistent, then we can prove mathematically at least one third of the EF stake will get slashed. So a very significant portion of the EF will get slashed.

Starting point is 01:04:21 Once you slash that kind of malicious EF, then, as you said, it's anti-fragile. The system is self-reparing because now there's less malicious folks and we're left with the honest folks. The people that were malicious got penalized and the people that were honest did not. And by proxy, we're rewarded because it's reverse dilution. It's the elimination of ether from the people that were bad. And then therefore, the people that were good own a larger percentage of the ether, which means that the Ethereum is moving into the hands of naturally moving into the hands of people that are good and honest. When you look at the economic game, you know, in context of game theory, you can look at the game in two.

Starting point is 01:05:03 different ways. You can look at it as kind of a one-shot game. You know, can the attacker break the system? Yes or no, if you were to play the game once. And then there's the notion of an iterated game, which is, what if you play the game multiple times? So, you know, for example, imagine that you're playing poker, you could play one hand of poker and that would be this one-shot kind of game, or you could play the, you know, a thousand hands of poker. And, you know, when you have this iterated game, you know, things change because you could learn about your opponent, you can mix things up and whatnot. And it turns out that for Bitcoin, the one-shot game is a knockout. So you can't play, you can't play the game anymore once you've been knocked out. On the other hand,

Starting point is 01:05:48 with Ethereum, every time you get, you get attacked, you know, that's pretty bad. You know, I don't want to downplay this. So, but, you know, the, the, the system was, you know, the, the, the, the, the system was, was broken temporarily, it was attacked. But it has this, so, you know, for some period of time, let's say, a few days, there will be chaos, right? Because people won't know what is the real finalized change, because there's these two inconsistent finalized change. But after, you know, the chaos settles a few days later, the system will be in a stronger position. And now we can start again with the second round of the game. So let's say that the attacker wants to attack again, right? Well, now he needs

Starting point is 01:06:29 to go acquire more if and then do the attack again and then get slashed again. And every time you do that, as you say, the amount of eph in circulation reduces and reduces, and you can actually put a cap on the number of times that the system can be attacked. So let's say, for example, that there's 10% of all eif that is staking and they're honest. So they don't intend to attack the system. Well, there's only, you know, nine times that the attacker could do the attack, right, because he will need to buy at least 10 million Eiff, and then every time he does the attack, he loses the 10 million if he needs to re-buy another 10 million. And there's only 90 million there. So in the worst case scenario, If Fyrim would get attacked nine times. So that's a very nice property, which I

Starting point is 01:07:18 guess you could call engine repairability. This engine, if it does break and, you know, things happen in the real life, at least you can repair it. Bitcoin, coin, the engine breaks, you just scrap it. And importantly, under proof of stake, if somebody, if there's a hundred million supply of ether and there's 10 million ether staked, an attacker needs to mash that with another 10 million ether. But because of the nature of proof of stake in slashing, we can punish that person. So they better have gotten an equal amount of value off of that chaos that they created.

Starting point is 01:07:50 Otherwise, why would they do this? But the important thing is like, A, there's only nine possible times that they could do this before the world runs out of ether. But every time they do this, the value of ether on the secondary market goes up because this person bought 10 million ether and then they deleted it and then they bought 10 million more and then they deleted it. And so it actually becomes increasingly costly because the cost of ether goes up. The value that you needed to sell to buy that ether keeps going up every time you try and

Starting point is 01:08:20 do this. So not only is they're reducing ether available to you to attack the network, it's also getting more expensive to purchase that ether. And not only do we have this anti-fragility at the iterated game level, but we also have this anti-fragility property at the single game level. And the reason is, okay, you want to acquire 10 million if, you know, you buy your first million and then your second million is going to cost you more than your first million because the price gone up, et cetera, et cetera.

Starting point is 01:08:51 And this is actually the opposite of Bitcoin. Bitcoin has economies of scale for the attacker. The larger the attacker is, the cheaper he has to spend per terra hash per second. In Bitcoin, you have this economy of scale. The more ether you want to buy, the more expensive is going to get to you. So let's say that in Bitcoin, you're Apple, right? If you're going to manufacture 150 million terra-hashes per second of hash rate, you bet they're going to pay much less than $30, right?

Starting point is 01:09:28 Because the $30, that's, you know, including like the profit margin from Bitmain and including all sorts of inefficiencies. But if Apple were to do it, you know, maybe they'd only have to spend, let's say, you know, $2 billion. Like one of the reasons, for example, is that Apple has priority access to TSM's leading note. So TSMC is like those, the company,

Starting point is 01:09:51 Taiwan Semiconductor manufacturing company, that produces state-of-the-art silicon for the whole world. And whenever you have a new node, so for example, the three-nometer node that's up, Apple has monopoly kind of access, and every time you improve the node, you get better power efficiency, so that your cost per per tera hash kind of improves.

Starting point is 01:10:20 And there's all sorts of other economies of scale. that you have when you attack Bitcoin, which is the exact opposite to Ethereum, where if you want to attack it, you have this economy of scale from the point of view of the attacker. So, Justin, it just strikes me that the reason Bitcoin has never been attacked, or Ethereum on proof of work for that matter, has never been attacked, is because no one's tried. Like, nation states just haven't tried. That's the only reason. I mean, what you're saying, I think, is, in the case of proof of work with Bitcoin, if I am a bad gov, a. Let's say I'm badgov US.

Starting point is 01:10:55 I've got Apple that's located within my jurisdiction. I go, I team up with Apple. I spend $5 billion or so on ASIC hardware that they manufacture for me. And because I'm making such a large purchase, they give me 20% off. So thanks a lot, guys. It's, you know, less than $4 billion now. And then I go and I attack the Bitcoin network. And then this point about repairing the engine and anti-fragility with proof of work,

Starting point is 01:11:21 because I own all of those ASICs, there's nothing, there's no way for Bitcoin to recover using the same hashing algorithms is how I'm understanding it. Now, what would happen, though, if Bitcoin decided to just use a different hashing algorithms, algorithm and like, you know, kill all of those ASICs. We've seen Monaro switch around their, their hashing algorithms in the past. Is that a path for them to get out of this conundrum that badgov US has caused? Yes. So actually I simplified the situation a little bit. When I said that Bitcoin is a one-shot game, it's actually a two-shot game. And the reason is that the first shot, you kill the double shot to 56A6. They're no longer worthwhile. You move to a new proof-of-work system. But what is this proof-of-work system going to be based on? It necessarily has to be based on commodity hardware. And by commodity hardware, I mean some something like GPUs or CPUs. You know, you can't go manufacture A6 for another proof of work.

Starting point is 01:12:28 There just isn't enough time to organize all of this. And then the attacker, he simply has to do the same thing, but this time with commodity hardware. So just buy sufficiently many GPUs. And then that's your second shot. The second shot is the real knockout. So it sounds like that if we really want Bitcoin to be, its maximum potential, the only, it would be a much more radical change and it would probably have to be proof of stake. Yes. So that is one option to migrate to proof of stake. I guess another

Starting point is 01:13:03 option, and this is something we discussed in the previous podcast, is simply for Bitcoin to use the Ethereum blockchain as its base layer for security. Which is using proof of stake. Just in a different way. Yes. Well, okay, so Justin, just one point on this, right? Because there is this, we don't to get into the concept of strong like weak subjectivity right but one thing that bitcoiners will point out is that hey the great thing about bitcoin is that the the token the staking token which is a6 plus energy of the bitcoin network is external to the system right so we can always restart it we just have to funnel more energy into it and more like like a hashing algorithm they see this as a virtue rather than a, you know, a, like a flaw in the engine design.

Starting point is 01:13:58 Right. Do you think there is a virtue here in having the economic token that powers the Bitcoin system, be sort of external, be ASIC plus energy consumption? Is there any merit? Is there a trade-off here that we want to highlight? Yes. So, you know, as is, you know, almost always the case in engineering, they are trade-offs. There's things that you improve on, and there's.

Starting point is 01:14:21 things that you have to give up. Now, we haven't gone through the whole list of advantages of proof of state, but let's jump ahead and look at the trade-offs. From what I can tell, there's three different trade-offs. One of them, as you said, is this notion of objectivity versus weak subjectivity. Another one is the concept of complexity of your engine. and the other one is the distributive nature of Bitcoin. So I guess we could go through these trade-offs one by one.

Starting point is 01:14:57 The first one, which is the easiest to understand, is the engine complexity. The Bitcoin proof of work is extremely simple. It's so beautifully simple. You could write pseudo-code for it in like 10 lines of code. And that's an amazing property to have, you know, simplicity. Unfortunately, you know, Ethereum is, you know, two orders of magnitude more complex than proof of work. So, you know, you could write the state transition function for the beacon chain in a thousand lines of code.

Starting point is 01:15:33 So, you know, that's roughly 100 times more complexity if you measure complexity in terms of lines of code than Bitcoin. You know, that's a real trade-off. The good news is that, I guess, we've already paid the complexity cost, right? we've proved that it is possible to overcome this complexity. We have four different production grade implementations, you know, securing the beacon chain right now. And this complexity is manageable. And this is found in other places in engineering. I mean, a computer is, what, a hundred times more complicated than a calculator, let's say, right? It's, you know, it's not necessarily a bad thing. Right. That's a great point. Yeah, there's an astounding amount of

Starting point is 01:16:13 complexity, you know, in your iPhone. You know, millions of man hours have gone into designing iPhones. Yeah, for sure. I guess it's just a necessary evil to innovation. Another aspect is kind of the fuel emissions. So it turns out that there is one advantage of proof of work in terms of the fuel emissions, the engine emissions, is that it's a forcing function for miners to sell their Bitcoin. And this has a, it's a distributive kind of forcing function. So this is great for distribution. And it's a property that the proof of stake doesn't have in the sense that to become a staker, you need to have EF to start with.

Starting point is 01:16:53 And then the EF stays with you. I mean, you kind of accrue EF, but you're not forced to sell it. And the reason you're not forced to sell it is because proof of stake is so efficient that you don't have to sell it to pay your bills, you know, your electricity bills and whatnot. But, you know, that is... So, Justin, I've heard one manifestation of this as a Bitcoin maximalist or, you know, Bitcoiners to have any proof of work will say, proof of stake just installs a permanent plutocracy would be a term,

Starting point is 01:17:23 a way that that's been described. Right. I mean, the way that, the way that I see it is that we kind of get the best of both worlds with proof of work and proof of stake in terms of. of distribution. So we've we've had the five years, you know, probably six years of proof of work. We've had plenty of distribution. And then, you know, this hybrid approach where we, after the distribution phase, we move away from the distribution phase, then with proof of stake is, and then the final point, which is the objectivity point. And I put it at the end because it's a subtle

Starting point is 01:18:02 point. So, okay, what is this objectivity all about? And if we were to take the engine metaphor, I think of it in terms of jumpstartability. Okay, right? So the way that it works is that you have this master engine, right, which is meant to be replicated all around the world. And when you sync up to the blockchain, you kind of want to, you have your local copy of the engine and you want to get to the same state as kind of the master. state. So in a way you kind of want your local copy to be jump started by the main engine. Now it turns out that for Bitcoin, the length of the jump lead, the cable, is infinite. You know, you can go all the way from Genesis. So basically, you could sync from Genesis

Starting point is 01:19:01 and, you know, you'd get to the, you'd still be able to sync to this. master engine, even though you started from Genesis. In Ethereum, you have a constraint on the length of the jump-starting lead, these cables that you need to connect between the two engines. It's limited to three months, right? So if you've been disconnected for more than three months, then you won't be able in a purely objective way to sync up to the engine. What you're going to have to do is you're going to have to ask a friend or ask a

Starting point is 01:19:37 group of, you know, semi-trusted sources, you know, what is this, what is the state of things, and then take that as an extra assumption that you have. And so Bitcoiners hate this, because this is compromising with trust, right? And I would say that Ethereums are more okay with this because it's, in our opinion, it's more pragmatic. Like, I could probably find someone I trust who's got the state of Ethereum, where Bitcoiners are like, you always, always, always, always need to be verifiably going back to Genesis. And Ethereum's are like, well, you can just go find someone who, who, like, that you can trust and download the state from them. And this is the kind of the trade-off that we've made. Yeah. And it turns out that if you

Starting point is 01:20:21 look at the practice as opposed to the theory, they're essentially equivalent. And why are they equivalent? The reason is that as a bit coiner, you do have some hidden sources of trust. Now, for example, One source of trust is when you go download the client, you're not going to read every single line of code. You're trusting, you know, you're trusting, you know, Bitcoin.com, whichever websites you've downloaded the client from. And, you know, you're also trusting what I call the seed nodes, right? So the very first time you connect to the network, to the peer-to-peer network,

Starting point is 01:20:59 you're going to connect to so-called bootstrap nodes or seed nodes. they're going to allow you to connect to the broader system. But if for some reason your seed nodes are compromised, then you're going to be in a little fake universe that could be controlled by the attacker. So there's various hidden trust assumptions in Bitcoin, which means that in practice, we have weak subjectivity anyway.

Starting point is 01:21:26 So it's on an equal footing from a practical standpoint. All right, Justin, I want to return. We just went on it. little bit of a detour talking about how these systems, how these engines work. I want to return back to the metaphor of a truck pulling a load up a hill, right? And the truck is the engine, the load is the economy, the fuel is the money that we put into this engine. And there's different types of fuels. Can you walk us through that metaphor? Yes. So as I mentioned, there's two types of fuels. There's fuel A, which I'll call grade A, because it's the best of the best in terms of for

Starting point is 01:22:04 security is issuance. So basically it's energy that's drawn from the battery. And why is it grade A fuel? It's grade A fuel because it's predictable. It's low volatility. And you can set it to have a guaranteed minimum for security. And then there's this grade B fuel, which is not so great, you know, unrefined fuel, if you will, which are the transaction fees. And this is energy that you receive from your solar panel. And the energy that you receive from the solar panel, the transaction fees, are unpredictable, highly volatile, possibly slash likely insufficient for security. And even worse, the transaction fees have this subtle property that they're stealable in the sense that if you have,

Starting point is 01:22:52 and this I briefly talked about it in the last podcast, but if you have a block with transactions, these transactions will pay transaction fees, and the next minor is incentivized to steal those transactions and the associated fees as opposed to building on top of the block. So that leads to chain instability because these fees can be stolen. This is minor extractable value, which, you know, bankless listeners may be already familiar with. Exactly, yes. And, you know, there was this episode, I think, with, you know, the Binan, chain when, for example, they got hacked and, you know, there was like rumors that maybe, you know,

Starting point is 01:23:37 Binance would, you know, reveal the private keys associated to the hack. And then, you know, there's an incentive for miners to basically rewind the hack and then give themselves the money and, you know, basically stealing the fee. Anyway, hang on, no, I do want to go into that. So there was an episode where Binance, Binance was hacked for like 3,000 bitcoins or something. And there was, it was like $15 million, my numbers might be off. And there was a big conversation about how CZ could publicize the private keys to the Bitcoin address. And that would instigate a minor competition to start building a new longest chain at the block of the moment that the bitcoins were stolen because the miners could go and go and reclaim those stolen BTC, right? So the, the, the

Starting point is 01:24:30 conversation and if there was $15 million stolen and it would take there was a three day window for this to be an economically viable activity to do because at the end of three days it was going to cost more than $15 million to go back three days and so there's a three day window where there was this possible time where CZ could publish the Bitcoin private keys and then all of a sudden the game theory is on where the Bitcoin miners are all in competition to go back to claim this block for themselves and take those BTCs for the miners instead of the attackers, right? And this is a, this is where the conversation about good fuel and bad fuel comes from, where fees or, or minor extractable values are highly volatile and not dependable versus issuance. And if you don't have

Starting point is 01:25:16 issuance that dwarfs fees, then your, then your engine can be unstable. Exactly. And actually, you're right. So grade B, you know, I said transaction fees, but it's actually more general than that. It's, as you said, it's M-E-V. And you can, there's actually different types of grades of B, like B-plus and B-minus. And like, you can say B-plus is, you know, the transaction fees, you know, they're not so volatile.

Starting point is 01:25:40 But then you have the extreme, what I call spike volatility. So every once in a while you have this huge spike, which would be the Binance case. You know, you just have 3,000 Bitcoin or whatever it was kind of as one big spike. And that would be the B-minus type of fuel. which is the most explosive and most dangerous type of fuel. And so one of the questions you want to ask yourself as a designer, as an economic designer for these blockchains is what kind of fuel do you want to put in your engine?

Starting point is 01:26:12 And, you know, obviously, well, it's obvious in hindsight, but I guess it wasn't obvious for Satoshi is you want to maximize the use of grade A fuel, right? And you want to minimize the use of grade B fuel for security. And so what we're doing in Ethereum is we're connecting the battery directly to, well, we're connecting the engine directly to the battery. So that gives us this nice, great A fuel. And then we have MEV minimization techniques, you know, the main one being EIP 1559, where we take this great B fuel and we, we destroy it. You know, we just don't want it to touch the engine. you know, it's actually a liability to have the grade B fuel.

Starting point is 01:27:01 And then Bitcoin has taken the exact opposite approach, which is we're going to, over time, we're going to exponentially decrease the amount of grade A fuel that we're giving to our engine, right? The insurance is going to zero. All the good stuff is going away for security. And, you know, we're just going to hope that this green B fuel is going to be good enough to power the engine. Justin, that's always been crazy to me because arguably, actually right now, Bitcoin has better grade A fuel than Ethereum has, because it has a stronger monetary premium. It has a stronger

Starting point is 01:27:35 narrative meme value, right? So its grade A fuel is worth more on a percentage basis than ether's grade A fuel. And yet, Bitcoin is the network with this wonderful premium grade A fuel that is forsaking that and going to this far lower, poor quality grade B fuel. And I love that analogy you were talking about. It's like solar panels, right? It's like solar panels on a cloudy day, just like they don't work very well, right?

Starting point is 01:28:05 And this is like solar panels on steroids. This is as if when you have an episode like the Binance one you're describing as if someday the sun is magically a hundred times stronger and like really gives you a ton of energy, right? So it's like solar panels on steroids. Or only for 10 minutes. Yeah, for five seconds. Exactly.

Starting point is 01:28:23 So that's always been curious to me, and not something that I think most Bitcoiners internally rationalize, maybe, that they're swapping out fuel for their economic engine midstream and what the hazards of that might be. Yeah. I mean, my mental analogy is, imagine an electric car, remove the battery, who needs a battery to power the engine? Just put a solar panel.

Starting point is 01:28:45 And then, you know, you drive through a tunnel, and then the car just stools. Or maybe, you know, as you said, it's cloudy and, you know, you can only do 10 miles an hour. And this is something that has been, you know, predicted academically for Bitcoin. So, for example, there's, you know, this paper that looks at the instability of the blockchain once you rely on transaction fees. One of the observations that they make is, you know, we have a dip in transaction fees, for example, during the weekend, right?

Starting point is 01:29:12 So what will happen is that during the weekend, some miners would just not be profitable. So they turn off their miners. And then the block times, you know, become, you know, 20 minutes, 30 minutes, one hour block times. And then, you know, doing, doing peak hours, I guess it would compensate, you know, with, you know, five minute block times or three minute block times. It would get really, really funky very quickly. I want to take these metaphors all the way to the very end. And so we have two vehicles, two engines towing two different loads, right? And Bitcoin does have a battery.

Starting point is 01:29:46 but it has a battery that it can't recharge because it only issues BTC, right? It doesn't. There is no long-time issuance. And so once this 21 million BTC is completely issued, the Bitcoin battery is completely drained and it never gets recharged. And so the solar panel for the Bitcoin vehicle gets plugged right into the engine, right? And the Bitcoin engine is completely subject to the whims of the Bitcoin economy. Is Bitcoin generating high fees today or is it generating low? fees today. And imagine like a truck going up a hill, towing a load, and it doesn't really know

Starting point is 01:30:23 how much energy it's going to be able to receive, like, in a moment's notice. Like in the next mile and the next mile after that, it just runs on transaction fees. And if the transaction fees go into the engine, then the engine can push it forward according to how much transaction fees there are. But it doesn't have that sustainability, that assurance is that it's going to be able to get up that hill because transaction fees are volatile. Also, if one block comes in with like 10 times as much transaction fees as the next block, it can't actually, imagine just like stomping on the gas pedal and then immediately releasing it. Like, that's not how you get an engine to go up a hill.

Starting point is 01:31:00 Like, that's not sustainable. And so what Ethereum has done with putting this solar panel into the battery into the engine, is it allows that volatility in transaction fees to get filtered through the battery first and stored in the battery, and then the battery trickles the energy at a sustainable rate, at a dependable rate that we can count on within long-term assurances into the future. And it's that battery that depresses and dampens the volatility in transaction fees and allows that Ethereum, the proof-of-stake engine of Ethereum to consistently climb that economic hill with its load.

Starting point is 01:31:39 How is that metaphor? Yeah, absolutely. the economic battery is a dampener of the energy. I mean, one of the things you said just a slight correction. At the very beginning, you said that when there's no more issuance, the battery is fully depleted. It's not that it's fully depleted, is that you can't discharge it anymore.

Starting point is 01:32:03 So it's kind of the opposite in the sense that it becomes the perfect battery if you're in kind of in isolation, in a vacuum, it would be kind of an ideal store value mechanism because there wouldn't be this leak in terms of issuance. But the problem is that you can't consider this battery in isolation. You have to consider the whole system. You know, one thing that strikes me, Justin, is that people forget Satoshi was an engine designer.

Starting point is 01:32:34 It's almost become like this narrative that suddenly, like, in the beginning, meaning there was Bitcoin, and it was perfect at the very outset, and the engine was perfect, and it was bestowed upon humanity, right? And then Satoshi disappeared because it was finished, right? But the reality is, Satoshi was a crypto-economic engine designer. And this was his first kind of iteration of the engine. It's kind of a Model T. in all of the

Starting point is 01:33:06 I guess religious warfare and tribalism Justin I think people forget that this is a human being designing an engine this is not gold that is an asset bestowed to humanity via nature this is an engine design absolutely right so this is economic engineering

Starting point is 01:33:26 and you know the progress of engineering generally speaking is exponential and you know 12 years is a lifetime, especially in the blockchain world. And as you said, this was the very first design. And, you know, it was heavily inspired by gold. And, you know, we have this skeuomorphic idea.

Starting point is 01:33:46 And I think Satoshi used gold because that was the best the physical world could provide. But once you enter this new paradigm of, you know, digital money, then suddenly the design space increases dramatically. And, you know, things happen that are totally, unexpected. Like to give you another analogy of skemorphism in the defy world is decentralized exchanges that will use an order book, right? The way that we have exchanges is with older books. So the way that you do it on the

Starting point is 01:34:19 blockchain is you try and try and build an order book on the blockchain. Turns out that's an utter failure. That doesn't work for various reasons. Well, and then out of nowhere comes this new concept of AMMs. And this, you know, this innovation is part of this new design space that's been opened up. And once you detach yourself from your preconceptions in the way of the past, then you can really open yourself to the world of possibilities that this new space offers. So, Justin, we are actually just getting started with the comparisons here because there's so much more to talk about. And I think something that might blow people's minds is that Ethereum doesn't have just one engine. It has multiple engines and it can start up even more engines or power down engines.

Starting point is 01:35:11 Can we talk about how Ethereum has multiple engines? Yeah. So this is implementation diversity. So it turns out that sometimes engines have bugs. So and this, you know, this happens to all blockchains. It happened to Bitcoin. has had various bugs, Ethereum had various bugs. And one way to hedge against these bugs to protect yourself is to have multiple implementations.

Starting point is 01:35:41 And so, you know, you can think of it as a helicopter, right? Do you want a dual-engine helicopter or do you want a single-engine helicopter, right? I would want to fly on a dual-engine helicopter, if possible, just in case the first engine has some sort of problem. And in Ethereum, we have, you know, a four-way redundancy. We have these four separate implementations, four different languages, four different, you know, teams in different parts of the world, which is in stark contrast to basically the monopoly that Bitcoin core has in Bitcoin.

Starting point is 01:36:22 And, you know, this is not only about bugs, but, you know, this is also about all sorts of external pressures, you know, like bribing, for example. You know, one possible attack scenario for the U.S. government is to give every Bitcoin core developer $100 million and to insert malicious code. You know, like it would be, you know, a possible kind of attack there. Whereas in Ethereum, we have, you know, more diversity and more robustness there. And we've actually already experienced this in Ethereum where one of our engines went down and thankfully we had a secondary engine to keep Ethereum up and running.

Starting point is 01:37:06 Can you talk about that scenario? In the earlier days of Ethereum, there was a bug in Geff, and Geff just became unusable. I think it was some sort of denial of service attack. And had it not been for parity, had it not been for this backup engine, the Ethereum network would have suffered a very extended downtime, because, you know, because it took a long time to fix the root issue, you know, several days. And that would have, you know, shattered the confidence in Ethereum in these very early days. Yay, diversity.

Starting point is 01:37:37 I guess one kind of point here is that the way that we've gone ahead with the EF2 protocol is that we've designed a specification. So this is kind of meant to be the root of trust in terms of what the design is. and it's meant to be maximally simple and readable and understandable. And we've even gone as far as making the implementation executable. So the specification is itself code. And so that makes it easy for implementers to coordinate around this protocol. In Bitcoin, the way that it has evolved historically is that you have Bitcoin core that came out and it had various bugs and there was no specification. So the only way that you could

Starting point is 01:38:28 write an alternative implementation is number one, you reverse engineer how this whole thing works. And number two, you need to be bug for bug compatible, right? Because if you're not bug for bug compatible, that's the possibility for a consensus failure. This friction of not having a specification and having to adhere to every single bug that is in Bitcoin and there's quite a few. subtleties, has meant that we haven't really seen an alternative to Bitcoin coin. Bitcoin. And we've actually also, similarly how Ethereum had its bugs that it experienced and then thankfully had a second client or now in proof of stake for clients, Bitcoin has also experienced a fault in the Bitcoin code, a breaking of the engine. Except it repaired that engine. Thankfully,

Starting point is 01:39:19 this happened very early in Bitcoin's history. I think in 2011. I think in 2011, and maybe another one in 2013, my Bitcoin history isn't super sharp. Can you tell us what happened there? I think it was before my time in Bitcoin. There was an overflow bug, you know, classic bug where, you know, you're storing a balance in some number of bits, like 64 bits or whatever, and there's an overflow, and then you kind of wrap around. And what that means is that, you know, someone was able to craft a transaction, which

Starting point is 01:39:52 essentially minted a huge amount of Bitcoin out of nowhere, like billions or trillions of Bitcoin because they exploited that overflow. How did the system get past this problem? You know, it caused chaos for a few hours. I don't know exactly how many hours, but it was on the order of 12 hours or 24 hours. So, you know, the Bitcoin core developers were very fast, and the mining ecosystem was, you know, had a rapid incident response, but, you know,

Starting point is 01:40:23 they could have been a more subtle bug or there could have been many bugs that are triggered at the same time by an attacker. Or, and, you know, even 12 hours of downtime is kind of unacceptable. And beyond the downtime, there's another issue, which is that now you have, you have potentially two forks which are legitimate.

Starting point is 01:40:44 And, you know, there's this mantra in Bitcoin that after six confirmations, you know, you have finality and so you're happy. But, you know, this is a way to basically bypass finality, whereby as an attacker, let's say, you do a $1 billion transaction, six blocks go through, the, you know, your counterparty gives you $1 worth of assets, and then you, you know, you trigger this attack

Starting point is 01:41:09 and then you can revert the six blocks of finality. So, yeah, it is scary, and, you know, that's one of the reasons why we want distribution. I guess another aspect here is that in Ethereum, the way that we achieve finality is for two-thirds of the network to come to consensus on states. And so the ideal situation is where the EF stake is equally distributed across the clients. So for example, 25%, 25% across all four clients. So that if there is a bug in one of the clients, then that's insufficient to, reach the two-thirds required to finalize a faulty state. On that note, kind of a quick PSA, it turns out

Starting point is 01:41:58 that in practice, Prism has more than 50% of the node. So if you're running Prism, you know, please consider no longer running Prism, I guess. This is nothing against Prism per se, but it's just too popular. And it would be good if other clients were more popular. One aspect I'd like to talk about with regards to all the client diversity in Ethereum is there's more choice and more options for people to use. And my optimistic scenario is that all these clients will compete, right? When you stake your ether to Ethereum, you need to choose a client and those clients want to be chosen. And so they are competing to receive ether to put their power into Ethereum, right? because power goes into the Ethereum economy via clients,

Starting point is 01:42:46 and clients attract Ether to be staked via their clients so that they can power the system. Do you see these clients, and competition is supposed to be good for the consumer, right? So do you see this competition aspect being healthy for Ethereum, or do you perhaps seeing a conversions on maybe just one or two clients in the long term because of, you know, monolithic tendencies? How do you see this playing out? Right. So one of the advantages of competition,

Starting point is 01:43:12 or actually of diversity is that each client can try and cater for a different niche. So, for example, Nimbus, which is one of the clients, they cater for very low-powered devices. You know, think mobile phones or Raspberry Pies. And you can be the best at doing that. And then, you know, you could have TechU, for example, which is geared towards like, you know, industrial-grade, you know, staking. and then you could have maybe lighthouse, which is geared towards the individual staker, for example.

Starting point is 01:43:51 I'm hoping that they'll be able to find their niches and that they will get distribution that way. What you mention about competition is correct, though. So if, for example, there's one client which is able to aggregate attestations and include them on chain much, much better, than the other clients, then when you're running this client as a validator, you're going to receive more rewards. So there's an economic incentive for you to use that one client. The good news is that

Starting point is 01:44:22 the clients, awful clients, are close to optimal in terms of doing their duties. And so they're all optimally receiving the rewards. And we want to keep it that way. All right, guys. So we are almost done talking about the design of the Ethereum engine and the Ethereum vehicle. And of course, when we stitch all of these things together, we get something that's greater than the sum of the parts. But we have two very quick parts that we want to run through first. And that is the first being stealth. And our truck that is pulling up a load up a hill also needs to be stealthy because these systems, these vehicles are supposed to be sovereign state level resistance. And so stealth is a fantastic feature for vehicles to have that state level resistance.

Starting point is 01:45:09 Think of F-117 Nighthawk, the first ever stealth fighter, or all the investments that the U.S. military is made into stealth vehicles. We want our economy, our vehicle, our engine to also be stealthy. So, Justin, how is the Ethereum system? How is the Ethereum vehicle a stealth vehicle? I guess that comes down to the physical footprint. To become an Ethereum validator, all you need really, is ether, which is, you know, purely in the digital world. There's no physical footprint for that.

Starting point is 01:45:39 And then you need, you know, a Raspberry Pi and an interconnection. And every, all the, the computational resources are very limited. You know, you need very little power, very little computation, very little bandwidth, etc., etc. Now, this is in, in stark, contrast to Bitcoin, whereby, if you want to be a miner, you're going to be in a very, very specific place. You're going to be where electricity is cheap. And you're going to be consuming huge amounts of electricity, which means they're going to be, you know, expanding a large amount of heat. And you're going to need huge warehouses where you're going to be housing these mining rigs.

Starting point is 01:46:21 And you're most likely going to be found in cold places like Iceland. And so this physical footprint means that you're not at all stealthy, right? the government can just show up at your door, you know, in Iceland or whatever, in China next to a dam where you have very cheap electricity and just, you know, confiscate your miners or do things like that. Whereas with a theorem, you could just, you know, be anywhere in the world, you know, you could be behind the, you know, the toll network for anonymity so you don't even leak your IP address and you can just do it on a Raspberry Pi. And I guess if you look at, you know, the fight against marijuana, right?

Starting point is 01:47:02 So if you're farming this stuff, right, you're going to be expending a lot of energy and you're going to be detectable by governments. Governments use the, you know, will analyze the electric grid to try and find these marijuana farmers. And you can also see them from space. You can see them from satellite imagery. And notably, you can also see BitMains,

Starting point is 01:47:29 mining facilities in China from space, right? And so if we're talking about nation-state level resistance, like if you can see them from space, you can send a missile there. Perhaps that's a crazy example, but it's within the realm of possibility. Absolutely, yeah. You can't send a missile to an affair mistake

Starting point is 01:47:45 for which you don't even know the IP address. Right. And even if you did know where the physical location of that little Raspberry Pi was or the validating node, that's not where the ether is. That's not where the security is. The security doesn't actually exist in the physical world. The ether is, if you will, in the ether.

Starting point is 01:48:04 So this is one of these advantages where it's hard to quantify. It's hard to say this is 10 times better or 100 times better. It's just, you know, infinity times better. Well, actually, maybe you could try and quantify it. So if you look, for example, at energy expenditure, right? So you have, you know, 1.5 million mining rigs. Each rig, one kilowatt. In comparison, you have, let's say,

Starting point is 01:48:28 10,000 nodes, each nodes consume, let's say, 100 watts. So that's like a thousand to one, right? So that's three orders of magnitude, more stealthiness, just in terms of the power consumption of the fair and proof of stake network relative to the Bitcoin proof of work network. All right, Justin. So we have our efficient vehicle pulling the load up the hill, but engines and systems can break down

Starting point is 01:48:58 over time. Let's lead into this conversation. How can we make sure to have our engine not break down over time? And what can we do about this? I guess you want to try and look at engine degradation. Like how does the engine evolve over time as you use it? Now, this is an aspect where Bitcoin, kind of the Bitcoin engine degrades extremely fast. So roughly, you know, every year, one-third of the mining hardware becomes obsolete. And so you have to remove it. So basically, the hash rate has this lifetime associated with it, and then it needs to be removed. And so as you're running this engine, the more you run it, kind of in a way, the more it's fighting itself and degrading. On Ethereum, it's the exact opposite, which is amazing. It's negative degradation. The engine becomes

Starting point is 01:50:00 stronger the more it is used, which is pretty amazing. One reason is because of the issuance, right? So the issuance in proof of stake goes to the stakers, and the stakers are naturally in the disposition to stake more, right? And so the ratio of the staking power versus the non-staking eph grows over time because of this issuance. You know, this is one of the advantages of not being distributive. Those who are ready to secure the FM network grow power over time. I guess an other aspect is, you know, the transaction fees, right? The transaction fees are burnt, and transaction fees come from non-staking if.

Starting point is 01:50:40 So that, again, kind of increases the ratio towards the stakers. And then the final thing is tip. The tip is the part of the transaction fee, which is not burnt. And that's even more obvious. The tip directly goes from non-staking if users to the stakers who are the validators and collect these non-burnt transaction fees. This has always been, to me, the most elegant part about proof of stake. Because what proof of stake does is that it rewards bullishness.

Starting point is 01:51:13 It rewards the people who make proof of stake work, right? So the people that make proof of stake work are the people that believe in the asset, that stake the asset. that stake the asset. And then proof of stake rewards those people in the asset that they stake. And because we've shed the inefficiencies of a proof of work engine, which must inherently sell the native asset into the market to pay for the upgrade costs of both the electricity and the engine, instead we have just rewarded the people with the more of the asset that they already believe in, right?

Starting point is 01:51:45 Proof of stake rewards bullishness. And what you were saying is like, we talked about the, tradeoffs behind distribution. Proof-it-est-take is not a distribution mechanism. It's a security mechanism. And it puts more and more ETH into the hands of the people that are willing to offer security to Ethereum. And so there's always this slight tilt in favor of the people that are going to provide security to Ethereum. And so anytime that any transaction is made on Ethereum, it always a little bit ends up in the hands of the people that are most incentivized and most willing to protect the network. And that, to me, is just perfect mechanism design because it aligns

Starting point is 01:52:24 incentives behind the Ethereum economy and the people that secure that Ethereum economy, which is East Stakers. Do you know, David, it's almost the difference between like hiring mercenaries for your national security and your army versus like hiring citizens who have a vested interest in the long-term benefit of the nation state that they're protecting. Who live in their own land and have something to lose if they lose, if they mess up. Right. And this incentive alignment is not as strong in Bitcoin, right? You don't have to be a Bitcoin holder to be a Bitcoin miner. And actually, we're starting to see this misalignment in the context of proof of work for EIP 1559. We have miners saying, I don't, we don't want this. And we might, you know, do a show of force and we might even, you know, forcefully fork things and attack the system. If it turned out that the miners were eave holders, it's likely that they would have come to a different conclusion there. Right.

Starting point is 01:53:23 Miners believe in silicon, yet stakers believe in the asset, right? And so miners want to maximize their chips, and stakers want to maximize the asset. And it's over, at the end of the day, it's the value of the asset that powers the engine, right? It has nothing to do with the ASIC. So, Justin, up to this point, we've talked about the design of the engine, and we've contrasted proof of work versus Ethereum proof of stake. We've also talked a lot about the efficiency of the engine, but my sense is there's still more to talk about around economic efficiency of the engine. What else do we need to understand about efficiency? So there's kind of two very key points for the economic

Starting point is 01:54:07 efficiency. The first one is around fuel efficiency. How much security do you get per unit of fuel? and here there's a very nice kind of metaphor. So it turns out that all the inefficiencies of the proof of work engine mean that for every $1 of economic security, you need to spend every year $1 of fuel. You need to feed it $1. And so if you think of the economic security as kind of being loaned, to the protocol, right? So the miners are loaning their hardware to the protocol,

Starting point is 01:54:48 and the protocol receives economic security and needs to pay for this economic security. The protocol, in terms of APY for that loan, it needs to pay 100% APY, which is insane. On the other hand, with proof of stake, because you're dealing with pure money, it turns out that the APY is going to match the cost of money, right? And what's the cost of money? That's, you know, 3%, 4%, 5%. This is really a paradigm shift in terms of economic efficiency where instead of paying the principle, you know, every year,

Starting point is 01:55:30 if you have $5 billion of security, every year you need to spend $5 billion to secure it because of the electricity that you need to spend, but also because of the hardware obsolescence. On the other hand, with proof of stake, the protocol only needs to pay for the cost of money, which is, let's say it's 5%, and that's 20x more efficient than proof of work. And this goes back to the conversation about money, right? And if the Bitcoin network needs to have all of this expenditure,

Starting point is 01:56:04 to meet its own expenditure requirements every single year, what that does is that is battery leakage. That's energy leakage out of the Bitcoin unit because all the miners that depend on BTC for revenue must sell BTC to pay for Bitcoin security. And so they sell BTC to pay for electricity. They sell BTC to pay for new hardware. And that is how the Bitcoin network maintains itself. In contrast, in proof of stake, stakers don't have to sell anything because staking it has been designed to be maximally efficient. All you need is a Raspberry Pi and an internet connection. And so that Raspberry Pi consumes some electricity, maybe $50 a year. That internet connection costs something, but it's nothing to, nothing in comparison to a turnover of ASIC chips and nothing

Starting point is 01:56:57 compared to energy consumption. And so what we're saying is the cost of Bitcoin security costs $5 billion and it costs $5 billion every single year. But with proof of stake, it's just the opportunity cost of capital. And that goes back to what we were talking about, about proof of stake inherently rewarding people who are bullish ether. The opportunity cost of capital for them, for people who are bullish ether, is nothing because there's no other asset in the world that they want more than the asset that they are staking. And so in theory, the opportunity cost of capital is almost nothing for them. And so almost nothing is the cost of proof of stake if we are incentivizing bullishness on ether, which is what proof of stake tends to do.

Starting point is 01:57:42 Absolutely. Yeah. You said it very well. So let's talk about the second piece here, Justin, of economic efficiency that you hinted at. What is that second piece? Right. So the second piece is EIP 1559. And the idea here is that if we have excess energy in the system, let's not waste it on fuel.

Starting point is 01:58:05 that is not going to be useful for security. There's no point in overpaying for security. And instead, we're just going to take that energy and charge the battery. So we have a system whereby the amount of fuel that we're giving is always the right amount. We're not underpaying for security and jeopardizing security, and we're not overpaying and jeopardizing efficiency. And one of the amazing things is that when you burn, you open up the possibility of actually reducing the total supply.

Starting point is 01:58:50 So the Bitcoiners will often think of issuance as the root of all evil. But actually, what they really mean is, is the increase in the supply. But it turns out that if your burn more than compensates for the issuance, you have a reduction in supply, and it doesn't matter that you have this issuance. The net result is still that your economic battery cells will not leak. And actually it's the opposite.

Starting point is 01:59:26 They might get charged over time as the burn is able to overcompensate for the issuance. When I wrote my article on EIP-1559, I think back in 2019, the way that I described EIP-1559 is that the Ethereum Protocol is issuing a stock buyback every time a transaction is made, right? That burning is Ethereum the Protocol buying back its own ether. And this is Ethereum the Protocol being a persistent buying pressure on ether. And going back to the very beginning of this podcast,

Starting point is 02:00:01 We talked about the way that you charge a monetary unit is by buying it. And Bitcoin is a charged monetary unit because everyone is buying it right now. But Ethereum the protocol is the net buyer, is a persistent net buyer of all ether that tracks the GDP of the Ethereum economy. And so there's always a buyer for ether and it's Ethereum the protocol under an EIP-1559 paradigm. And so anytime there's excess energy, anytime the sun is so incredibly bright that the solar panel is picking up that energy and it's too much to use right now because we don't need it. The truck is already moving up the hill, towing its load at a steady clock of 60 miles an hour. We don't want to go any faster. We don't want to go any slower.

Starting point is 02:00:45 So let's capture that energy and put it into the battery, put it back into the system. And that system is ether the asset. Absolutely, yeah. and if you look at the net difference between, you know, what we're expending today in transaction fees and which goes towards basically, you know, buying GPUs and paying for the electricity bills, you know, it's on the order of, you know, 10,000 if per day. And, you know, once we start burning that, you know, where the net difference is going to be twice that. right we're going to go from plus 10,000 to minus 10,000 so that's kind of a net you know 20,000 and when you

Starting point is 02:01:34 when you look at current prices and you also take into account the efficiency gains from from removing proof of work after the merge we're looking at you know 13 billion dollars per year roughly of buy pressure relative to what we have today. So just to put that into perspective, it's greater than burning all the EF locked in DFI every single year. It's also the equivalent of buying all the EF in the deposit contract and the N-grayscale combined every single year. So it's a kind of a tsunami of, it's a huge shock wave in terms of

Starting point is 02:02:21 the delta between what we have today, which is a huge amount of cell pressure relative to what we'll have in the future, which is a buy pressure. Now, the reason why I'm relatively confident that we're actually going to have a net buy pressure is because you can just look at the transactions today. It turns out that if you annualize over the 365 days, take a moving average where we have 6,000 ether per day in transaction fees. So you can make an assumption that some fraction of that is going to get burnt, let's say 70%.

Starting point is 02:03:05 When you compare that to the issuance, that's actually more than twice what you need in order to negate the issuance. So yeah, I'm relatively confident that in the future we will, will enter this ultrasound state where the total amount of if in circulation will go down over time. This is almost the climax of the entire episode. You mentioned this term ultrasound money. Of course, Bitcoin has famously called itself you sound money, but what you're referring to with ultrasound money is something even the next level above Bitcoin, something that has maybe negative issuance per year. I want to go to something that.

Starting point is 02:03:51 just is underappreciated in Ethereum. And I just want to make this statement. Then we'll talk about ultrasound money. And that's this. I think ETH the asset is the single most unappreciated thing in the Ethereum ecosystem. Like everything that you're talking about, people forget that ether is a cryptocurrency. They're very excited about Ethereum the network. And you'll get people who say things like, I'm bullish Ethereum, the network, but I'm not bullish on ETH. That from everything you've described makes absolutely no sense whatsoever. Because how can you be bullish on Ethereum the economy or Ethereum the network and not also be bullish on ether the asset when we're talking about these types of burn mechanisms, when we're talking about these types of staking lock up mechanisms.

Starting point is 02:04:38 So let's round this out. Let's talk about this, Justin. When you say ultrasound money, this whole thing, this whole engine has produced at the end of the day economic scarcity. what are we talking about here? What is ultrasound money? The way that this meme came about was really a joke. It was a play on words. The idea was that if Bitcoin is sound money and it has cap supply, then if you have a decreasing supply, you must be ultrasound, right?

Starting point is 02:05:08 And you know, you can use the bat emoji to kind of represent the ultrasounds that come from bats. but, you know, it turns out that this meme is much, much, much deeper, right? So one of the aspect that we've talked about at length is that economic security on Ethereum is much, much higher than Bitcoin, and that contributes to this ultra-soundness. And, you know, that contributes, for example, towards Ethereum becoming this selling point for a global world internet currency. I guess the other aspect is that Ethereum, once we have EIP-1559, is an income-generating asset.

Starting point is 02:05:56 So you can think of it in terms of profit and P-P-E ratios. So, you know, if we say that we have roughly 100 million ether, and we're burning a million ether every year, well, that's kind of a P-E-U ratio of a hundred. So, you know, Ethereum is in this really advantageous position where it can do multiple things at the same time. On the one hand, it can act like a stock, you know, we have a P-E ratio of, let's say, a hundred,

Starting point is 02:06:30 and it can also act as kind of a store value with this magic meme energy stored within it. And, you know, these things are complementary, right? So the fact that we now have money that behaves like a stock with a PE ratio makes it more amenable to become a store value because it makes the shunning points even more potent. I want to rehash what you said a minute ago, because I want to make sure that it lands with the listeners.

Starting point is 02:07:07 Once we integrate all of the research and development that has gone on from the Ethereum researchers about crypto-economic system design, once we improve our engine from proof of work to proof of stake, it's much more efficient. We don't need to put as much fuel into it, which means we need to sell less ETH to achieve the same result, which is keeping the ETH battery charged.

Starting point is 02:07:30 So we go from having to issue two ETH per block to much, much less than that, 0.1 eth per block. We bring the issuance down. And so, therefore, ether becomes much harder. Then we add an EIP-1559, which captures so much of the energy of the Ethereum economy and turns that into net buying pressure of ether, the asset, by Ethereum. And as a result of all of these efficiencies that we've talked about, we get to have as an Ethereum ecosystem, a net buyer of ether that is,

Starting point is 02:08:03 equivalent to the amount of ether that is in gray scale and the deposit contract combined every single year, reoccurring a new one of those every single year. And an additional metaphor is all of the ETH locked in DFI that we like obsess over on DFI pulse, the, I don't know what number of millions of ETH is locked in DFI. Or that it's 42 billion dollars. We get that net buying pressure every single year. It's recyclable. That buying pressure is recyclable. And so this happens every single year after year after year. And this is where the sustainability of both ether, the asset, and Ethereum, the economy comes from, is because we have created ultra-sound money because we have designed the system in the best possible way.

Starting point is 02:08:52 And this is why Ryan is so upset that people don't understand this. It's because it's the most underappreciated asset of all time. It's absolutely crazy. I mean, there are some questions, though. is this fee burn really sustainable? And this is a valid question to ask ourselves. So for example, what if the price of if increases, right? Does it mean that because people are denominating the transaction fees in US dollar,

Starting point is 02:09:20 does it mean that the total amount of if that is going to be burnt is going to reduce as the price of if increases? Well, it turns out that that's not the case. So you can look at it from an empirical evidence standpoint. So from Genesis to now, the price of EF has grown 1,000x, actually 2,000 X, from $1,000 to $2,000. And over that time, the amount of transaction fees has gone nothing but up. And so you can ask yourself, what is the possible explanation for the fact that the total amount of EF in transaction fees goes up, despite the price of EF going up. And one possible explanation is that as the price of EF increases,

Starting point is 02:10:08 that's highly correlated with user demand, right? The price of EF increases, you have lots of fresh blood coming in, new users. And so that puts more pressure on the fee market, and that compensates for the fact that the price of EF has been increasing. I guess another possible explanation is that EF is used as a bandwidth in this economy. And so as the price of Eiff increases, you have more economic bandwidth. And suddenly you have more opportunities, right?

Starting point is 02:10:40 You have increased economic density, meaning that every single transaction will carry more value. And, you know, you maybe have more opportunities in terms of arbitrage, right? Because there's just more money slushing around because you have more bandwidth. I guess maybe another possible explanation is that you simply have a richer user base, right? And so the price sensitivity to transaction fees decreases. And maybe like a final kind of possible explanation for this empirical behavior is that if is a what I call it, I guess a unit of trading.

Starting point is 02:11:14 So this is a pretty amazing statistic, which is that if you look at the uniswap volume, right? Now we're doing a billion dollars of volume on uniswap. It turns out that 95% of that volume is in if pairs, what I mean by an eF pair, I mean that there's two EARC 20 tokens, one of which is the wrapped EF. So out of the billion dollars of transaction volume, 950 million is basically with EF. And so if you look at arbitrage opportunities, they're going to be EF denominated. And so it doesn't matter if the price of EF increases because if you have, let's say, a 0.1-EF arbitrage opportunity and your transaction fee is 0.05. if it's an invariant whatever the price of if is you're going to want to conduct that that arbitrage

Starting point is 02:12:04 opportunity and i guess we're starting to see if being used as a as a unit of account and the use of trading beyond just you know uniswap for example we're seeing it in nfts and the more if is used as a as a unit of account um the more the amount of transaction fees uh in if that we can burn is going to be insensitive to price increases. Well said, what we're seeing right before our eyes is Ether as an asset increasing in moneyness in its ability to be a store of value, unit of account, and unit of exchange, which is super exciting. And all of the reasons why this is important, I think we've gone through, right, ETH has to have value and a lot of value, tremendous amount of value, in order for it to host the world's open finance economic activity. It needs it in order to

Starting point is 02:12:58 secure itself. It needs it for economic bandwidth, trustless economic bandwidth. You know, one thing I want to talk about here as we as we get to a close here, Justin, is sound money culture, right? So Bitcoin very much has sound money culture, right? They, you know, thou shalt never touch the issuance schedule of Bitcoin. Even if it, even if it means the truck can't pull the economic weight up the hill, thou shalt not touch it, ever. Because why? Because hard money. That's why. Can we talk about this? Because we open this up and we were talking about shelling points and money is really sort of a social coordination game, if you will. Is sound money, it sounds like it's being baked into the Ethereum protocol, ultrasound money.

Starting point is 02:13:48 Is it also being baked into Ethereum's culture? Because that's important too. Is it? What do you think about Ethereum's culture, because ultimately, you know, the layer zero, as we've said so often, Justin, is people. It is culture. We are socially enforcing the value in the economic security of these networks. And if we don't have sound money, minimum necessary issuance in the culture of the system, we won't be able to enforce that as securely. How would you rate Ethereum on that? Right. So one of the big counterpoints of Bitcoiners of the ultrasound, monophysis is predictability, right? For them, a big aspect of soundness is predictability. And I guess that that makes sense, and that's a fair, you know, counterpoint, that basically

Starting point is 02:14:38 if you were at Ethereum at Genesis, it would have been unpredictable for you to foresee the various changes in issuance that we've seen historically. So historically, we've seen two major changes. The first one is the reduction of the block reward from 5-EF to 3-EF per block. So that happened in October 2017. And then we had another reduction from 3-EF per block to 2-E-per-Block in February 2019. And I guess we're in the process of doing another block reduction, like a third policy change, we're basically removing proof of work and going to proof of stake. And that's roughly a 10x improvement.

Starting point is 02:15:28 So we're going from two eph per block to roughly 0.2 eph per block. Now, you could ask yourself, isn't this bad? You know, we've lost predictability. And what I'd say to this is that, as you say, we have layers zero predictability. The community predictably only goes in one single direction, which is hardening, right? So every time we make a policy change, we're hardening, as opposed to, you know, the Federal Reserve,

Starting point is 02:16:04 which is often in the other direction. So, you know, Lynn Olden has this, you know, famous quote where she says, you know, the Ethereum developers change their issuance policy as often as the Fed. Well, first of all, that is just not true in terms of, in terms of a question. quantitative standpoints, right? In five years or six years, we're looking to make three issuance

Starting point is 02:16:28 changes, whereas, you know, in this similar time frame, the Fed has made more like 30, so 10 times more. But maybe more importantly, each of these issuance are in the hardening direction, as opposed to the, you know, inflation direction. I guess another thing that I'll say is that I think us Ethereum, we want to maximize for long-term predictability. And so we've traded off the short-term predictability where we have, you know, this initial experimentation, and over the long-term, we're going to ossify and we're not going to change. This is kind of a natural thing that happens to blockchain protocols. They ossify over time. And to my knowledge, we don't have any plans to really change the issuance beyond what is being delivered with.

Starting point is 02:17:18 with proof of stake. On the other hand, Bitcoin talks about predictability, but actually it's, it has, you know, skeletons in the closet, right? So it's optimizing for short-term predictability, but because it doesn't have sustainability, you know, relative to security, it's actually not optimizing for long-term predictability. So, you know, who knows what will happen in the future? We know it's unsustainable, you know, in 30 years, something has to change. We don't know exactly what's going to change. Maybe Bitcoin is. move to proof of stake. Maybe Bitcoin will move to the Ethereum network. Maybe they'll remove the 21 million limits. No one knows. And this is kind of a source of long-term unpredictability, which we hope to not have

Starting point is 02:18:05 in Ethereum. Justin, can you talk about hard money as a design goal of Ethereum? And that might sound foreign to a lot of people, because that is, again, like Ryan said, it's not, it hasn't really been baked into our culture. But I think it has. And it's actually just been unconscious in the culture. It's not in the consciousness of the Ethereum culture, but it's perhaps in the unconscious of Ethereum culture. Can you talk about that? Yeah, I think I would agree that there's been this, this unconscious desire to have sell money, and it's becoming more and more conscious, you know, partly thanks to you guys and others who can, you know, work on this narrative layer, I guess

Starting point is 02:18:49 you know within the kind of the research team I guess I you know there is also kind of a shift more of an awareness that there is a desire

Starting point is 02:19:01 from the community at the end of the day you know where we try to cater for for the community and there there is this this desire for soundness and so we're

Starting point is 02:19:14 we're making explicit design decisions towards that. So to give you one example, we want to cap the total number of validators to roughly 1 million validators. So that corresponds to 32 million if. And that will basically also cap the amount of issuance that the proof of stake system can do. So we we kind of estimate that 1 million validators is more than enough security. There's no need to overpay, so we just cap it. And it turns out that when you have 1 million validators,

Starting point is 02:19:55 that corresponds roughly to a maximum issuance of 1 million if, which is kind of a nice round meme number, that in the worst case scenario, we're going to inflate at 1 million if per year. But of course, you know, if we're going to burn 2 or 3 or 4 million if, the net amount is going to be negative. And why is capping validators a good thing to do? Why is that justifiable? Right. So that goes back to the efficiency. So EIP 1559 prevents overspending on security and allowing us to charge the battery, while the cap also allows us to not overspend on security by basically capping the amount of energy that we're drawing from the battery.

Starting point is 02:20:42 we're not going to be drawing any more than one million ether per year. You know, one thing I often think is when Ethereum's talk about sound money, they just use different terms. They talk about security. And of course, security is just one side of the same coin. When we talk about monetary premium and ether as an asset backing the security of the entire network. So Ethereum has always been optimizing for sound money in a way because it's always been optimizing for security. People also, you know, when you were talking about developers and

Starting point is 02:21:17 issuance, and we had Lynn Alden on the podcast, she sort of, you know, made this argument. I think people overestimate the ability for developers to just like Fed chair a change to issuance inside of the protocol. At the end of the day, the Ethereum network and the layer zero is minimum necessary issuance. And so if anybody, I'm sure you would agree, Justin, you know, on the Ethereum dev side of things or research side of things, tried to put in some sort of issuance change where, you know, funds were going to, ether issuance was going to a separate deposit to be used for, you know, who knows what. The community would reject that, right? So at the end of the day, this is backed by the same mechanism that Bitcoin is backed by, which is this layer zero.

Starting point is 02:22:03 You know, Justin, maybe we could kind of sum up what this means. Ultrasound money. This is kind of the the sister episode, as we said in the intro, to the bullcase for crypto economics. I feel like this episode has been almost the bull case for ether, the asset. Sum this up for us. What does this mean? What are some of the takeaways for crypto natives and people who are interested in these technologies? Yeah. So, I mean, I kind of see it as the bullcase of ephraim economics as a whole, and that includes many different aspects. One is being able to secure the blockchain. We have this crypto-economic system.

Starting point is 02:22:47 The economic part is kind of a necessary evil. It would be great if we could do it purely with cryptography, but we need economics. So let's make sure that the economics is as robust as we can get it. Let's basically engineer the crap out of it. The other aspect is engineering for soundness. and for this store of value aspect. So, you know, I mentioned that soundness, one possible definition,

Starting point is 02:23:16 is the ability to transport over time, right? So when you have digital money, it's trivial to transport over space, right? You can just use the internet and travel at the speed of the internet or, you know, at the speed of light. But travel over time is a difficult endeavor. Now, why is travel over time especially relevant for, if it's a very important? one of the reasons is that defy is built on eph as collateral right if you take for example a synthetic like a stable coin right you're going to use ether as collateral and you know we're going to see

Starting point is 02:23:54 tons and tons of synthetics right not just stable coins but you know stocks and whatnot and so we need when you when you have a synthetic what you're doing is you're putting if as collateral now it would be a crazy idea to put an asset which is not sound as collateral, right? Because basically what you want the collateralization ratio to improve over time, right, so that you don't get liquidated. So what do you want to be doing in a sound kind of synthetic framework is you want to be putting the hardest money as collateral and then using that as the backing for all your synthetics?

Starting point is 02:24:38 Another aspect of soundness, which is critical for Ethereum, is staking. You know, as David said, you know, staking doesn't work unless you have people who are bullish, ether and are happy to hold it over extended periods of time. Here we kind of have this reflexivity going on, which is that the more people are happy to hold if as a store of value, as a long-term store of value, we're going to have more value. we're going to have more validators, which is going to lead to more security, which is going to lead to more people being comfortable holding EF as a long-term store of value. So we have all these beneficial mechanics at play.

Starting point is 02:25:23 And then ultimately, when we try and sum everything up, really we have a new paradigm kind of in economic theory, I guess. We've never seen this before. We've never seen a kind of a deflationary. sound money. We're in uncharted territories and it's extremely exciting because, you know, people also don't completely realize what the amazing, you know, system that we're putting out there. Partly because right now the beacon chain is this skeleton chain, right, which is only securing itself, is not really securing anything else. But once everything comes together, which is a process which will take,

Starting point is 02:26:05 you know, about a year or a year and a half. So the rough roadmap is this year in one of the hard forks, I think is the London hard fork, we're going to have EIP-159 in July, and then in 2022, we're going to have the so-called merge, where we remove the proof of work and have proof of stake. And at that point, from an economic standpoint, we have something extremely exciting,

Starting point is 02:26:32 like the next level of economic, engineering, ingenuity, I guess. Guys, this year, burn next year, merge and reduced issuance. Justin Drake, we want to thank you

Starting point is 02:26:46 for joining us on the Bankless Podcast and explaining all this to us. It's been a pleasure, sir. Thank you, guys. What an episode, Bankless Nation. You know what? I think that's going to take some time to digest.

Starting point is 02:26:59 One thing, one of my takeaways, and I'm sure is yours, David, too, is Bitcoin, move over. There's a new store of value on the scene. Wait until this narrative leaks out into mainstream. We are early. This is the frontier guys. Super exciting stuff here with Justin.

Starting point is 02:27:14 Not just sound money, but ultrasound money. Justin, not only the creator of this fantastic episode, but also the creator of the theme that I think will carry Ether into the very end. Ultrasound money with Justin Drake. Justin, thank you for being here and delivering us this information. Thanks again for having me. This has been a canonical episode, some action items for you guys. There's another sister episode to this that we mentioned a few times.

Starting point is 02:27:41 We will leave that as an action item in the show notes. That is the bullcase for cryptography. Also, we've got to say, emphasize this. Of course, none of this was investment advice. We don't know what the short-term price of ether is going to do. Long-term, of course, we're bullish, but who knows, crypto is risky. Defi is risky. You could lose what you put in.

Starting point is 02:28:03 But as usual, we are headed west. This is the frontier. It's not for everyone. But thanks so much for joining us on the bankless journey.

Bankless - 57 - Ultra Sound Money | Justin Drake

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