On The Brink with Castle Island - Christine Kim (Galaxy Research) on the merge and what comes next (EP.353)

Episode Date: September 26, 2022

In this episode, Christine Kim from Galaxy Research joins us to discuss the Ethereum Merge and prospects for future protocol development:  Reactions to the merge and network changes that flew under the radar Finding a focus area in core protocol development on Ethereum EIPs (Ethereum Improvement Proposals) on the near-term horizon Threats to decentralization and censorship resistance and potential solutions Intro and outro music: Daniel Allan's Collage #344

Welcome back to another episode of On the Brink. In this episode, I sat down with Christine Kim from Galaxy Research, whose focus is core protocol development on Ethereum. We debrief on the merge and the networks transition to proof of stake. We talk about what EIPs or Ethereum improvement proposals that the community is prioritizing next. We discuss how institutional investor interests. and the asset has changed heading into this upgrade, as well as challenges that the network is facing related to decentralization and censorship and potential solutions to these threats.

Christine has an incredible ability to break down technical concepts, and I hope you'll learn as much from her. Before we get into it, could you start off by telling us a little bit about yourself, pre-crypto, how did you get your start in crypto? How did you become the Ethereum Whisperer at Galaxy? Thanks for having me, Rhea. I really appreciate it. And the Ethereum Whisper is such a strange title to me,

because I've been lately going by this actually horrible title, The Merge Lady, which makes me sound like the crazy cat lady. So I embrace this Ethereum Whisper much more than The Merge Lady, which sometimes, you know, for how delayed the merge has been. It made me sound like one of those crazy people that's like, the world is ending, the world's going to end. And everyone's like, but when? Well, I definitely didn't know very much about crypto at all until my first job in the industry. So I was studying economics and international relations at the University of British Columbia.

I'm Canadian. Go Canada. but I had always thought that I wanted to work in public policy and in government. But right after I graduated from my degree, I found it was very hard, actually, to get a government job. Partially because of a language requirement, working in international relations and public policy, you need to be quite good at French. And my language skills in French were not very good. So I was at a disadvantage. I was jobless. I needed to find something to do. And I applied for an internship to be a writer at Coin Desk. And I had thought it was just going to be like a fun summer in New York because that's

where their internship was. And I had found out about Coin Desk because my older sister was investing at Bitcoin at the time. This was 2018. And my sister had told me, hey, Christine, you should really look into Bitcoin. This is something you should, you know, take a look at because I know you're in economics and you're interested in monetary policy, et cetera. So, and at the time, CoinDusk was really like the top news hits if you search up like what is Bitcoin and search up things happening in the crypto industry. And it still is, I think CoinDisc is still a really big publication. So while I was searching through that site, there was also, you know, job listings around CoinDesk. And I was like, oh, I've read some of their articles before. And I got in touch with

the editors there. They did an interview with me. And then I flew out for my mini internship, my son-internship. But when I was doing that internship, it was like a huge learning curve. I really fell in love with crypto. I fell in love with the team at CoinDesk. I fell in love with everything that it really clicked in my brain, like what Bitcoin and subsequently Ethereum could be. and how revolutionary this technology was. And at the time, there wasn't very much activity of innovation happening around Bitcoin. A lot of the activity, a lot of the cool use cases around how you could use blockchain technology for things beyond just peer-to-peer payments was all happening on Ethereum at the time.

There wasn't like a Solana or an Avalanche back in 2018. It was just on Ethereum. So as a reporter, a lot of the headlines were somehow related to Ethereum rather than Bitcoin. So as a general summer internship person, I naturally gravitated towards Ethereum and learned about it a lot more faster than Bitcoin. And I just kept at it. I think after that internship, I was given a job to stick on as a tech reporter. I had kind of an affinity towards explaining the more technical,

concepts around Ethereum. And then, you know, more and more I wanted to dig deeper into certain topics rather than just general news. And CoinDest gave me the opportunity to switch over to research and do more long-form reporting, which I specialized even more into digging deeper into Ethereum's code and its protocol. And then as the CoinDusk research team was kind of winding down, I jumped ship and joined a new research team here at Galaxy. And I've still continued to do a lot of the same work,

like focusing on Ethereum, focusing on Ethereum's protocol development. And it just so happened, but as I was doing this, one of the biggest, most complex changes to Ethereum's protocol, the merge, actually happened, you know, a week ago. So I feel very lucky and grateful to have started my journey into Ethereum back in 2018 and to have been able to win.

and cover a pretty historic upgrade here now in 2022. Yeah, I'm sure you feel vindicated for spending so much time researching Ethereum over the years. I remember when you were still at Coin Desk, you launched a weekly newsletter. I think it was with Will Foxley that covered all things related to, you know, leading up to the merge. And that was one of the few newsletters that I actually made a point to read regularly. So a huge fan.

Another question I had was, how do you, you know, there's so much going on in the Ethereum community at any given time. Even from a technical perspective, there's so many conversations taking place about the future of the network. How do you keep a pulse on everything that's happening? First of all, I will say that now that Ethereum has grown so much since it's launched back in 2015, but also since I started covering the network in 2018, it is impossible to stay up to date with everything that's happening on Ethereum. And trying to be the expert at all of the different aspects of Ethereum's development is the wrong move. Like if you really want to understand Ethereum, you have to pick a part of it that you really are interested in. So when I think of what I'm interested in and what I've really started to specialize in, it's a very niche area of Ethereum, and that's Ethereum core protocol development.

And the way that I stay on top of that is by scouring through the Ethereum Research and Development Discord channels, the ETH magician threads, and primarily the Ethereum core developer calls. This is where developers discuss protocol upgrades on Ethereum. They do planning around big upcoming upgrades before it was the merge, but now it'll be Shanghai. But that means that I don't actually have very much time to understand like the growing layer two ecosystem on Ethereum or dive into different, interesting, defy protocols and how they work. a lot of the use case part of Ethereum is not something that I'm extremely knowledgeable in. And that is a very important part of Ethereum's value proposition, what the network is actually being used for. And this idea of specializing around one thing is something that people can take broadly around how they navigate the crypto industry in general.

If you try and stay on top of everything that's happening on this industry, it's quite likely. that you know, you won't really understand anything. Like you'll just become a very general generalist, which still has its strengths, of course. But I think it's definitely like a misperception that like somebody can be an expert at Ethereum. Chances are they're an expert at like one part of Ethereum. And that's kind of become their branding. But yes, to be clear, I really only know like a small part of what's really really going on on Ethereum. And that's, that's, that's really like EIP development, Ethereum Improvement

Proposal Development. And within that, I'm really more focused on the things that are going to be implemented within the next six months to a year on Ethereum. There are Ethereum improvement proposals. EIP changes to Ethereum coming up in the next couple years. For example, Dinksharding, proposer builder separation. These are all changes to Ethereum's protocol that's going to be coming up in the next couple of years, but I'm not an expert on those ones. I'm really more an expert on like the short-term protocol development. So I've been really focused on the merge because that's coming up. That was coming up. That was like in the near-term horizon. And now I'm really like focused on Shanghai, which is the immediate next upgrade. So even within this realm of the

theorem of the protocol development, there's like a specific specialty or like a specialization of my knowledge that perhaps maybe not many people may. know, but this is the truth. Yeah, I think the need for specialization within the industry is getting more and more important by the day. I actually didn't even realize the extent of specialization that you have to have within the Ethereum community, but even outside, you know, I think like in terms of the use cases today versus three years ago, it's exploded. So it's impossible to keep a pulse on everything that's going on, it will certainly lead to burnout. Pulling on that thread of EIP development, and I'm going to jump around here, I do want to get

to the merge, but what EIPs are in consideration now in the next six to 12 months that you're thinking about and keeping a pulse on? It's a great question. So right now, what's most likely slated for inclusion in Shanghai are staked eth withdrawals, a couple of efficiency improvements to the EVM, the Ethereum Virtual Machine, as well as an early version of dank sharding. It's called proto-danksharding. These are a little bit more technical terms, but the EIP number is EIP 4844. And what it does is it creates like a new transaction type on Ethereum that and a new transaction, probably a new fee market on Ethereum just for roll-up transactions. So like on layer 2s, whenever you confirm down a batch of transactions to the base layer

of Ethereum, currently on Ethereum, those are all regular transactions. They're just like user transactions. They're part of the same fee market. But after EIP 4844, what could happen is that these, the cost, of these roll-ups confirming down a batch of transactions to the protocol layer, it could get significantly cheaper because there will be a dedicated fee market for just those types of transactions and dedicated block space specifically to support the roll-up ecosystem of Ethereum. So those are like some of the scalability improvements that are now being discussed for Shanghai

and developers, I believe, are going to start more rigorously testing these EIPs after DevCon. But I think those are the three, or those are the two main ones, like stake teeth withdrawals and then prototank sharding that I think are being considered. And some other minor improvements. And then one last thing that I'll include

is perhaps some minor changes to reduce the redundancy in Ethereum's protocol now that the merge is complete. So there was a little bit of a discussion in the developer call right after the merge of removing certain values like total terminal difficulty, which is based on the hash rate, like the mining, the computational energy expended by miners. And those are like metrics and data that will not ever be used on Ethereum again, now that it's a proof of stake blockchain, but it was necessary for the merge.

So there are aspects of Ethereum's protocol that could be simplified now that it is fully proof of stake that could go into Shanghai so long. as their low-hanging fruit and it's not like a heavy lift for developers to just continue to optimize the and reduce the complexity of Ethereum's code base. Could you just at a really high level because you mentioned it explain what dank sharding means? I have heard different explanations for this and I highly recommend people to read John Charbonneau who's a researcher at Delphi. He has this excellent report called the Hitcher Hiker's Guide to Ethereum, where it explains Danksharding more.

Yeah, in a really good depth. Yeah, and I really need to reread that piece too. But I think at its essence, it's about introducing data sampling into Ethereum to boost the network scalability. And I know more about EIP 4844 than the full vision for dank charting because I believe that the scalability for dank charting, the scalability, gains through dink sharding will take multiple years in order to fully realize. And dank sharding, I think is a little bit of a misnomer because we think about sharding like partitioning of the

blockchain. You're going to have like these mini blockchains and they're all going to be processing transactions in parallel. But that vision for boosting Ethereum scalability has been completely scrapped. There is not going to be actual sharding happening on Ethereum. Transactions will still be processed on one main protocol. However, Ethereum through Dinksharding is going to be pursuing a more modular approach to scalability. And Deng sharding, I think the purpose of it is really to better support a layer two ecosystem so that if all of user transactions, decentralized applications live on a layer two, the protocol level of Ethereum should still be able to support really, really cheap finalization for these roll-ups.

And validation of the actual data contained in the roll-up transactions, yeah. Exactly. And part of that could look like, you know, creating dedicated block space for Ethereum and creating that fee market, like I said, through early versions of dank charting. through EIP 4844, but over the long term, I think what it will mean is some vision of of data sampling so that perhaps over the long term, I think that's like the full realization of the vision. But I have heard developers saying that maybe, you know, folding sharding is not even needed. We've seen that usage of Ethereum today is quite low and gas fees are also are very cheap right now.

And there's this question around like, what's the next big narrative of Ethereum? So perhaps for the use cases that we're thinking of now and the development that we're seeing in the application ecosystem, I'm not 100% sure that we even need like crazy amounts of scalability on Ethereum. But that said, it's always too late if a use case does. does start to materialize on Ethereum for that kind of scalability. So I understand the effort for it, but some developers do say that perhaps certain scalability gains in the near-term future could be enough to support the use case for Ethereum in the next couple of years.

So I sped ahead a little bit, but I do want to rewind back to the merge. So last week we merged. The uneventfulness of the upgrade exceeded all expectations. as someone who has so much of their professional and personal career and interest invested in the ecosystem, how do you feel? Is there anything about the event that surprised you? I feel ecstatic about the merge. It's been such a long time coming.

Really, and it's such a feat too. I think what developers have pulled off perhaps. people don't understand really how complex it was and how all of the test nets leading up to the merge had given indicators that we shouldn't, that perhaps expecting, you know, a 97% network participation rate is, is not doable. And that, you know, for the merge to be successful, I was really under the impression that developers and the community would settle for something like an 80%, 70%, 70%. percent network participation rate. So I think the most surprising thing about the merge was that it had gone off without a hitch. And a lot of the concerns around its execution risks were not, there was like no major

bug or issue discovered with this transition. That being said, I think that there are some bigger existential risks around Ethereum that were raised before them. merge that I think is now just continuing to be like a reality on Ethereum that is very important. So things like censorship resistance, centralization of block builders, how Ethereum developers think about the concentration of stake to staking providers. These are questions that people will still talk about. And now that Ethereum is a proof of stake blockchain just matters a ton more. So when it comes to celebrating the merge,

I think first it was the price activity of ETH, ETH tanking after the merge and continuing to tank even to this day as we record this podcast now that the Fed has raised interest rates, 75 bibs. Like the macro environment has not been great and ETH price activity has not been great. But also there's these broader conversations around centralization and censorship of resistance around Ethereum that I think has kind of given little room for celebration. So I think for me, like, when I was watching the merge, I was so happy that night watching the merge go off without a hitch. And then because it happened around 3.30 a.m. my time, I slept. And then when I woke up,

I didn't wake up to something really great. Like, I just woke up to kind of, okay, now it's it's done, like heads down, we should start working and talking about these other big conversations that really we don't have like immediate, you know, implementable solutions for, especially when it comes to centralization, when it comes to scalability, when it comes to statelessness, like you name it. It's just more bigger problems to kind of tackle. And I think that has kind of been discouraging, to be quite honest. And the markets have not like rallied post-merge. But we're only a weekend, so maybe, maybe Ethereum just needs more time. Let's just take a step back and maybe talk through all of the changes that were included in this upgrade.

You know, the headline is that transactions are now validated. The way that transactions are validated change from proof of work to proof of stake. But there are, were there, other changes that are included in this upgrade that you think flew under the radar. Talk about that a little bit. I think me included, most people probably now do not fully understand how blocks are produced on Ethereum. Because of the fact that now you've got a consensus layer client, a consensus layer network that's fully, you know, a proof of state consensus protocol. But Ethereum, I will clarify, has a very different proof of state consensus protocol than say other proof of state blockchains. So just because we say it's proof of stake doesn't mean that, you know, it works

the same as other proof of stake blockchains. Everyone has their own kind of vision or design. And then you've got the execution layer network, which is where decentralized applications and users interface with. That's where they first execute their, transactions. There's a certain amount of communication that happens between validators on the consensus layer side as they produce blocks and communicating that to the execution layer client and the execution layer side so that users and decentralized applications can be updated about what the state of the network is and updated about the state of their contract, the state of their tokenomics, the state of their account balances.

And so this back and forth, this communication between how execution layer clients and consensus layer clients talk is a new system. And this is in addition to a completely new like fork choice rule on Ethereum. For a proof of work consensus protocol, that fork choice rule is how do you know what the canonical chain of the blockchain is? You look at what the longest chain is, like how many, which chain. has the highest amount of blocks. But on Ethereum, now that it's a proof of stake blockchain, it's the longest chain rule doesn't work. It's now about, you know, achieving these certain checkpoints,

like the justified checkpoint, the finalization checkpoint, and what logic validators are using to determine which chain to build off of. And that is a whole nother. whole other topic of conversation and study that certain core developers like Ben Edgington is even writing a book about like an entire book just explaining how the consensus layer of Ethereum works. So truly I think there's quite a lot. There's probably quite a lot about Ethereum's code base that that has changed. But unfortunately, I only know the high level of, okay, well, the result of this is that energy electricity consumption has decreased by 99% issuance on ethereum is now dropped from

like 5% inflation supply inflation per year to below 0.5% it's probably even negative on certain days when there's lots of coin burns happening you know now validators can earn priority fees and miv and they can move that money around there's like a bunch of results impacts for from the merge that can be very easily explained. But the code base of Ethereum, like why certain blocks are getting validated versus other blocks, how orphan blocks are created, these conversations. I think there's a lot that's changed that, unfortunately, I think, is... Most people will never fully understand.

Yeah, including myself. What does this do to the narrative? around Bitcoin. Clearly, like you said, this upgrade reduced the energy that the network consumes by 99%. And I think there is some data point that said that global electricity consumption went down by, was it, 0.2%. I've seen this. Yeah. So that's, you know, talk a little bit about the narrative around Bitcoin.

through that lens and also through the lens of ETH, the asset potentially becoming now a deflationary asset. I think this switch from proof of work to proof of stake is a great narrative boost for Ethereum. And especially once activity, user activity ramps back up on Ethereum, which it will. It always has historically on Ethereum. historically like block space on Ethereum has been near at capacity like consistently. I really think that being able to point to the fact that block production doesn't consume as much energy, you know, ETH as an asset that is now incentivizing people to hold onto it, to stake it as collateral and earn yield on it, as opposed to selling it as a miner.

I think all of that is really great for the, investment narrative of Ethereum. But I would definitely push back on this idea that now that Ethereum is proof of stake, Bitcoin's narrative is somehow a lot harder to argue. Because for a very long time, the switch to proof of stake has always been on Ethereum's roadmap. So when Ethereum's, when Ethereum, the Ethereum community is kind of lambasted for using proof of work and the amount of energy consumed, Ethereum has quite often pointed to the fact that, no, no, no, well, we're going to transition away from proof of work at some point. I don't think that there was many arguments supporting proof of work from the Ethereum side.

So I don't think that Bitcoiners really linked arms with Ethereum as both as like proof of work blockchains and now suddenly Ethereum is like turning around and being like, oh, no, you guys suck. I think like Bitcoiners have always kind of been in this like in a league of its own in trying to argue the benefits of proof of work. That has always, I think always been the case. And I don't think that Ethereum being a proof of work blockchain was really ever something that Ethereum, the Ethereum community was all that happy about. I think that now that Bitcoin really is, now that Ethereum really is a proof of stake blockchain, there's an opportunity for Bitcoiners to once again defend their rationale for why mining machines are a very productive way to use electricity and correct this weird idea that somehow

energy, like the power mix and the energy generation for miners is like, is more negative to the ESG narrative. Even without Bitcoin miners, the way that we generate energy in this world is a certain power mix. And it's not really geared towards renewable sources of energy. And changing that does a lot more for protecting the environment, for creating sustainable ways of energy, then I think this idea of, then I think, then I think, looking at Bitcoin, yeah, looking at Bitcoin as the reason why there's like bad sources of energy. Like Bitcoin miners do not, they don't really, they're just looking for the cheapest way. They're just looking for the cheapest way to create wherever they can get,

their electricity. And if it is that like the power mix of our world today is that most of our energy is, you know, generated by coal or whatever it is, that's the way that Bitcoin miners are going to get fueled. Like that power has been created and that electricity is there. And, you know, part of it is going to Bitcoin miners and other parts of it are going to, I don't know, powering your TV or whatever it is that you use in the house. So, but that's a very nuanced conversation to have. And I think Bitcoiners traditionally have not done a great job in, and, explaining that narrative. So I think it's just an opportunity for Bitcoiners to like correct this very wrong assumption that miners are the reason why there's like bad energy sources and

a greater use of like unrenewable sources of energy. If anything, Bitcoin miners are are really trying to push and help, you know, improve the energy mix of the U.S. now that a lot of public Bitcoin mining companies are located in the U.S. And I think that battle and that conversation has always been their own to fight. Like, Ethereum's never really helped ever with that narrative. They were always like, no, no, no, we're not going to get involved. Like, we're going to switch to proof of stake at some point. So I think there's going to be a lot more media tension around the narrative for proof of work.

But I think the fight against that, like, Bitcoiners are not weaker or like, they're not any more alone than they always were in. this argument and in this debate. I'm sure in your role at Galaxy research, you have conversations with a lot of institutions about the investment case for digital assets, but especially given your focus on Ethereum, Ethereum. Leading up to the merge and maybe following the merge, what would you say, has been the reaction or affinity from institutional investors around allocating to Ethereum?

I think there's been greater interest in what Ethereum is trying to do and its vision of being a world computer. One of the good things about Ethereum constantly having these protocol upgrades and the merge being one of the biggest ones yet for Ethereum. Ethereum developers to try and tackle is its renewed interest around, okay, we've been hearing a ton about the merge. We've been hearing a ton about proof of stake. Like, educate us about what the core value proposition of this network even is. Like, why does a general purpose blockchain matter?

And I think that has been really, really good because one of the things that my boss, Alex Thorne, who's a great shout out, Alex Thorne. Shout out Alex Thorne. The way that sometimes he likes to talk about the difference between Bitcoin and Ethereum on a very fundamental level and explain it to investors is that Bitcoin is unstoppable money. It's a currency that's not issued by any government and it's not a currency that any one sovereign can control, but is issued by this like credibly neutral permissionless network. But the network itself doesn't really have the components or the mechanisms to be able to support other currencies and other applications and other use cases.

So where Bitcoin is very narrowly focused on being unstoppable money and being this global currency, Ethereum was created and built to be unstoppable software, where developers can deploy code, that in a very similar way can't be stopped by any government, is not operated by a single government, is a credibly neutral network, but is for the creation of other types of money.

That may not be hard money, like the 21 million supply cap, but could be, you know, currency that you use as a voting token or some other utility token. Like the possibilities are endless, but there is a world in which in which these two visions are very different,

and they present very different value propositions to the investor. So I think this kind of conversation around the fundamentals behind these two blockchains has definitely been reignited because the merge has gotten so much attention in the media. And it's a conversation that perhaps has gotten a little bit muddied throughout the bull cycle that we had when NFTs and when NFTs were, we're getting really hot and we had the defy summer. I think it was a very extended bull cycle,

but I think that going back to the fundamentals, I think has been quite refreshing to talk about with investors, especially around the time of the merge. What are your thoughts on this narrative of ETH being ultrasound money? Maybe you can unpack what exactly people mean by ultrasound money as it relates to ETH and then if you have any opinions around it. My opinions are very negative around that concept. However, I will explain it because I think it is a very common meme in the Ethereum industry.

So people say that Ethereum is now ultrasound money and has become ultrasound money post-merge. Because what the merge did was it allowed for issuance, new issuance of ETH, to drastically decline. Ethereum never had a supply limit like Bitcoin did. It just is perpetually, infinitely being issued by the network. And the network has always been paying miners a significant amount for the energy, or for the electricity usage that they expend. But now that Ethereum is relying on validators and validators don't expend very much electricity at all to be able to validate the network, the issuance of the network has.

has declined to say something extremely small, like 0.02% annual inflation or something like that. But that's still inflation. That's still a very small amount of increase throughout the network. But with coin burns and what EIP 1559 did, which is a network upgrade that Ethereum had executed before the merge, the London upgrade, when there are periods of significant transaction activity, there's ETH that gets burned out of circulation. And so even the minimal amount of inflation that is happening on Ethereum is very easily able to become deflationary. So where Bitcoin has a supply cap and is sound money for this idea that if you buy, Bitcoin and if you assume that demand stays constant, like over time, that supply will never increase.

That's what allows people to think that Bitcoin is like a digital, almost like the digital version of gold, that it's a very reliable store of value. This idea that Ethereum can be in a reliable store of value because now there's a high, there's a, there's a very high probability and And also there's like quite a quite a good rationale for why ETH as a supply will go down over time and be dependent on network usage. That narrative is like, well, you guys have this supply limit of 21 million coins. Our supply is going to be decreasing over time. So that's why it's ultrasound. Like it's not just sound money.

It's ultrasound money because the supply. of Ethereum is not just capped, it's actually going to get smaller and smaller over time. And so value for that token or value for the eth as a coin is going to even skyrocket even more. I think where that narrative kind of falls apart, though, is that part of why Bitcoin is sound money is because its monetary policies don't change. It's not just about the supply cap. Like, I think people really focus on what the actual policy is, but I think it's important for sound money to be sound because the policy doesn't change. For Ethereum, yeah, for Ethereum, it's, the monetary policy is constantly changing. You know, we've had these ad hoc changes towards issuance to minors, even before the merge at random points in Ethereum's history where a block issuance decreased from 5-Eth to 3-Eth,

to two ETH. And this didn't happen according to a very fixed schedule like it did on Bitcoin. Bitcoin has like, you know when the halving is going to happen on Bitcoin. On Ethereum, you don't know when that issuance is going to go down. And I think with now with this dynamic, this dynamic burn and the fact that supply on Ethereum and issuance on Ethereum changes according to how many validators are on the network versus not, I think it's still pretty hard to predict the growth of supply on Ethereum, even with like now that we are merged. So when,

so my back to like this ultrasound money idea is just that monetary policy on Ethereum just continues to be a little bit unreliable and hard to predict. So while I 100% believe that Ethereum is is going to be declining in supply over time, it's still unclear, like, at what rate and when and these questions. Whereas on Bitcoin, it's set in stone. And there's a low likelihood, low probability of users actually changing that. Though maybe with the fee crisis, you know, once Bitcoin's, but once the subsidy falls apart, I mean, who knows what the Bitcoin community will do then.

But aside from that, I think Bitcoin has just proven itself to be extremely. extremely reliable in terms of monetary policy, whereas Ethereum historically has never been quite reliable in that sense. So you mentioned a few conversations that have obviously emerged in the last few weeks that are now front of mind for the Ethereum community around existential risks for the network potentially, right? So one is the centralization of staked eth within a few validators. And maybe let's just start with that. Could you summarize the challenge that we're facing as it relates to that topic

and what some of the responses have been to addressing it over time? It's a great question and it's a very important topic that I hope everybody gets very educated about because this is going to be a big, big conversation for the next couple years to come. So the concern is that Ethereum, the amount of stake that an individual or an entity controls, that's directly what enables them to be validators on Ethereum. and validators are the people that are able to propose blocks and confirm transactions. So they're core to the operation of the blockchain. And in order to be a validator, you need to stake at least 32E. So the importance of staking pools, staking providers, and large amounts of ETH getting concentrated to a single entity, that is a direct, it's a direct threat to Ethereum as a blockchain and its operations.

Because if you're able to halt a significant amount of validators by halting, you know, the few entities that control those validators, then you can significantly damage, you know, the liveliness of Ethereum. So, but, so that's like kind of why stake really matters and why the control of stake really matters. one kind of push back to this idea is that, well, okay, so there were a handful of mining pools that also controlled block production on Ethereum before the merge. And, you know, targeting those mining pools and the operation of those mining pools would have the same impact as targeting, you know, those large staking providers on Ethereum and, you know, disrupting the operations of Ethereum in that way. So like staking pools and mining pools, it's the same kind of centralization.

That's like a common pushback I hear. And I see like part of the merit to that argument. But I think one of the things that changes a little bit with the merge dynamics and with the fact that now we've got staking pools is that some of the staking providers are publicly traded companies like Coinbase that are a lot more that are a lot more vulnerable to regulatory capture than say. I think private mining pools that perhaps regulators were not so aware about. Whereas now they are very aware about cryptocurrency exchanges, which are some of the biggest staking providers on Ethereum. So there is a lot of conversation around how do we decentralize the amount of state controlled by these entities, controlled by Coinbase, controlled by Cracken,

controlled by Lido. And one of those is, well, you know, the largest staking as a service provider is not necessarily a publicly traded company, so that's good. Lido is trying to pursue a roadmap towards decentralization of fully handing over all operations to a smart contract protocol. And that's great. There's also conversations around perhaps making the capital efficiency of decentralized alternatives like Rocket Pool, which is a fully decentralized stinking provider.

Like, how do we make them more competitive so that people start using them over, say, entities like Coinbase and Cracken? But to do that, you need to enable stake-eath withdrawals because right now it's not possible for users to really even switch over their stake, even if they wanted to. So that's like one big area of conversation that's happening. But then there's also another area of centralization on Ethereum that's connected to M-AV. MEV is maximum extractable value and it's basically the additional amount of profit that validators can earn by reordering transactions in a block in a certain way. And in order to prevent validators from becoming centralized towards because of MEV profits, like a single validator just becoming really, really great at identifying profitable MEV opportunities and also constructing the block themselves. FlashBots and Ethereum core developers have created an additional layer.

where that kind of competition for MEV can happen on an off-chain market operated by third-party relays. So there's a lot of conversation around how do we decentralize from that front as well, from that attack factor. So this conversation is a pretty big one, and there's lots of different solutions. But I think one of the core takeaways from this conversation is that it's very less. that there won't be like one single solution and that decentralization is going to happen to have to happen in stages. So if there was a concern around the centralization of Ethereum around mining pools premurge, that concern around centralization for Ethereum, in my view, has gotten a little bit more intense and a little bit more concerning post-perge.

merge. I know I'll probably get pushback for this, but I do think that Ethereum as a proof of stake network, the concerns around centralization have gotten a lot more concerning because of the block builder centralization, because of these regulated entities now being the top staking providers on Ethereum, I think these are conversations that ideally it would have been great to have some some solutions ready to implement during the merge, but the merge itself was kind of a beast and very complex in its own right. So, you know, we can't do everything. Ethereum developers can't do everything at the same time. But yeah. Yep, one problem to address at a time. So ETH staked within the network and ETH issued

is still not subject to withdrawals. It's still locked within the network. It's still illiquid. can you talk about why withdrawals weren't enabled with the merge and what plans are to enable withdrawals in the next upgrade? Yeah, so it really comes back down to the merge being so complex. There's not a ton that needs to be figured out in relation to enabling state-Eath withdrawals. It's really about the two technical conversations as it relates to Staked Heath withdrawals. Or do we make it full withdrawals or partial withdrawals? Do we make this like a pull transaction versus a push transaction? These are more conversations around like how do we enable state Eath withdrawals?

How should they be initiated? Where should those funds go once the state Eath is unlocked? And these are conversations that developers have had before the merge, well before the merge, and have really figured out, and there's not too much research and development around just enabling that kind of activity. But developers had shied away from enabling this, even though they technically could have, because of the additional amount of complexity it might create during a very vulnerable time in Ethereum's protocol, which is transitioning and swapping out its consensus protocol. So they didn't want a ton of users to be locking their stake, their, their, their, eath staked,

or like locking new amounts of ETH stake from other staking providers, swishing them around, taking it out, adding a ton of more load onto the network during the merge, which is why they delayed that functionality. And some of these stakers have been staking since the launch of the beacon chain in December 2020. So it's been a priority on developers' roadmats that they have not touched and that they have not enabled on Ethereum. until the merge was complete. So now that the merge is complete, this, in my view, should be one of the highest priorities in Ethereum developers' mind. And the fact that, you know, a lot of these conversations around how to enable it have already happened and taken place makes me think that the roadmap now for enabling that, you know,

is within a six-month time period. Now that the merge is done, developers have their couple weeks to rest and, you know, celebrate during DevCon after that. that as they're having conversations around Shanghai, I've talked to a couple Ethereum core developers, and they say that more so than even scalability, like EIP 4844, enabling state-eath withdrawals will likely happen within a six-month timeframe from the merge. That being said, historically, Ethereum core developers have delayed several upgrades. And if we think about how delayed the merge is, like take these pieces of words with a grain of salt. I think that the roadmap for it is really

about testing that upgrade and just figuring out along with Staked Heath withdrawals, do we include any other EIPs in this bundle of upgrades? And whichever ones we do include, like would that delay the whole entire upgrade itself? So there's a possibility that if there's like if EIP 484, 44 requires a ton more research and it would just delay the activation of other more ready proposals like Ethereum Improvement Proposal for Staked Heath Withdrawals, then, I mean, potentially you could see Shanghai not include the scalability improvements and just include the Staked Heath withdrawals. Got it.

Tangential to the conversation about centralization of Staked Eath is censored. that's been raised. And I think they go hand in hand because, you know, the more centralized, the more of the risk and impact of potential censorship by these entities that that hold large amounts of staked eath. Could you walk us through OFAC's decision to sanction addresses that have used and interacted with tornado cash and why that decision has raised fear and concern that one of the core properties that we've come to expect from decentralized networks like Bitcoin and Ethereum, censorship resistance is at risk. Even though there hasn't been any kind of, you know, clear action towards staking providers around their need to censor transactions,

what is the potential risk that regulators will require? staked eth providers that are more centralized and that can censor, what is the risk they do? How does that impact the network? It's a big question. It's a big concern, too. That kind of risk of staking providers being required by regulators more clearly, like, do not participate in validating transactions and validating blocks that contain a transaction from an OFAC-sanctioned. account or OFAC sanctioned address. So going back to like the kind of the the core key event that

catalyzed all of this, it was when the U.S. Treasury sanctioned and added to their OFAC list addresses that were not externally operated accounts. They were not accounts that were owned by the hackers, like the North Korean hackers in question. These were accounts that are smart contract accounts. They're not owned and operated by any individual. They live on Ethereum and other users, other individuals can interact with that account. And the main purpose of interacting with the tornado cash smart contracts

was to increase privacy and was to, it was basically a cryptocurrency transaction mixer. So you could input in your ETH. And then you could take it out into another address. like another externally operated account and have the transaction history basically obfuscated. And there's like multiple reasons why you would want to do this even without any illegal, you know, use cases or like not for any criminal activity whatsoever. Because, you know, all of the transaction activity on Ethereum is happening in a very transparent way. If an individual, say your friend knows what your address is, chances are you might not want them to know the total amount of ETH that you have in your balance, like where that ETH is going to.

So it's, I think a more malicious person that's potentially tracking your address, right? Like this is everything is publicly available on chain. This is just theoretically a right that we should have to protect our privacy on chain. you would think but there's also this understanding that the tool can be used for supporting the work of North Korean hackers and so I think what was really shocking about this

was that the U.S. Treasury despite the use case for tornado cash and it being a tool for good and bad reasons has put the entirety of that application on the OFAC. list on the list of sanctions. And so now I think there was a lot of pushback to this. There was these things called dusting attacks where people were automatically dropping ETH that has, you know, went through the tornado cash mixer to like people's celebrities' wallets. And there was a certain

amount of like clarity that had, or additional, I guess, like, recognition of this by the U.S. Treasury, they had put out a couple weeks after their initial sanctioning, they had put out this memo, this additional note saying that people who have been dusted attack or people who have interacted with the tornado cash address, if you send us information about why you were interacting with tornado cash, we'll give you like the green light to take your eth out of that address and, you know, clear you of any, like, e-legal activity. Even though, again, like, you don't need to ask anybody's permission to interact with the Tornado Cash Address,

but it is now there is this concern that anybody who does interact with the Tornado Cash Address may be identified as, like, like, maybe penalized by the U.S. Treasury for interacting with an address that is on the OFAC sanctions list. So people who care, so many people, I think, do care about that. And many, and rightly so, I mean, this is a very powerful tool that the U.S. government has, this ability to sanction. And so there are people who are rightly concerned about, you know, I put ETH into the tornado cash address or I received ETH from the tornado cash address. And I didn't do it for any illegal purposes. What do I do? Can I still access that ETH? And I think those questions had been raised all the way up to the U.S. Treasury, and the U.S. Treasury had released this additional guidance around, okay, well, like, let us know.

But all that to say, now there's also questions around our staking providers. Are they in the clear for validating transactions that have touched the tornado cash addresses? And I think one of the arguments that are being made by staking providers is that even if we are not the ones to process these transactions, these transactions will get processed by an independent validator operator, which does exist on Ethereum, I think, around one third of validators on Ethereum are just independently operated.

And we will still be validating on top of a chain that has an history of transactions with the tornado cash address. So, like, is it really that effective to ask us to censor when we're still going to be validating the entire chain? But maybe that's also an argument that the U.S. Treasury really doesn't care, about. But regardless of that, I think there's been some pretty heavy pushback from the Ethereum crypto community. I think Coinbase is supporting a lawsuit against the U.S. Treasury, I believe, with support from different Ethereum core developers that are trying to really get more

clarity around this. And at the end of the day, I think there's a lot of development now trying to happen to make it so that even validator node operators themselves don't know the kind of transactions that are being included in blocks. So trying to enhance the privacy on Ethereum, I think, is now an initiative that is a lot that has grown in terms of priority. So I think the risk is there. And I think the risk is very, I think one of the things about managing that, risk from the side of staking providers is really about trying to gain regulatory clarity. Is the sanctioning of tornado cash? Does it mean that now staking providers will have to censor transactions out of the blocks that they create? And if so, how deep does that censorship

need to go? Is it just that perhaps people signing up to be a staker or a validator can't be an address on the OFAC sanctions list? Or does it mean, like, actual user transactions need to be censored from the block? What if it's a transaction that had interacted with the tornado cash address, but, like, two times removed? I think there's questions around, like, is this implementable? To what extent do you implement it? And it's really about getting clarity.

But sometimes no clarity, sometimes you could maybe take that as, let's just assume the best. and not do anything. But, you know, when you're playing with, when you're thinking about the U.S. Treasury and when you're thinking about, you know, sanctions and stuff, it's better to err on the side of caution, which is why this is a big, big topic

and why so many applications outside of staking providers, we're talking about like, Infura, we're talking about other layers of Ethereum's tech stack have already, at least on like the user interfaces and more front-facing, user-facing applications. I've already started to censor transactions. Yeah, I think it's also unclear. I think erring on the side of caution probably makes sense

because it's unclear if there's going to be any kind of like retroactive action against entities and providers that refuse to censor transactions and include transactions from sanctioned addresses. So you weren't kidding when you said that you have an incredible ability to break down really complex topics. This was awesome, Christine. We're nearing the end of our time together on the podcast. But I think we definitely need to get you on every time there is a major upgrade in Ethereum because this was incredibly detailed, easy to understand. And I'm excited for our audience to hear this.

Thank you so much for your time. Thank you, Rhea. I really appreciated our conversation. And thank you so much for all those kind words. I will say that throughout this interview, I had like 40 questions for you. And I was like, maybe I should be the one interviewing Ria. And the way that she's looking at the landscape of Ethereum,

now that all of this stuff has really blown up, and now that Ethereum is a proof of stake blockchain. So same thing goes to you. I think we're going to have to do a podcast on Galaxy Brains or some way for me to also interview you and pick your brain about things in the cryptic space. I would love that. We'll definitely make that happen. Christine, what's the best way for our listeners to stay on top of the work that you're doing,

follow you, read your research even? For sure. So the best way to stay on top of my research is by following me on Twitter at Christine. CHR-I-S-T-I-N-E underscore D-Kim. That's my handle. But I will also give a shout-out to the weekly newsletters that both me and the rest of Galaxy research puts out. We really cover so much around the crypto space and we do a weekly newsletter where we

identify like the three big stories of crypto. Some of it is Bitcoin-related. Some of it is Ethereum-related. Sometimes we even throw in a little salon-a-an-Avalanche in there. You know, somebody's something for everybody. but we give like our insights and our takes about like why this matters so if you're interested in signing up for that newsletter and that's also where we we we publish and highlight a lot of the work of our analysts if you want to sign up for that newsletter it's the galaxy research brief go to galaxy dot com and under insights you can you can sign up for all of our great content there i'll definitely link that second how incredible galaxy everything that galaxy research publishes is it is one of if not my favorite research team in the space so second that thank you so much christine my pleasure yeah thank you for

having me