The Breakdown - After the Merge, How Do We Think About Change Within Bitcoin?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, September 18th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. Now, it is only fitting for Ethereum Merge Week that we do a merge-themed

Starting point is 00:00:53 long read Sunday. Although what we're actually going to look at is the contemplation it is prompted around Bitcoin and its relationship both to Ethereum as well as to itself. So first we're going to read a piece called Bitcoin should change slowly, reconsidering the first cryptocurrency's slow and steady approach to development as Ethereum's merge nears. The piece is by Chris Castiglione, who works on a secure chat platform for Web3 called console.xyz, is a general manager at trust machines, which is building on Bitcoin, and is an adjunct professor at Columbia University Business School. Chris writes, Bitcoin is slow to change. Transaction speeds are too slow for a global payment system. The community is reluctant to embrace novelty, and the rate of new innovation in comparison to nearly every other

Starting point is 00:01:36 blockchain is tortoise-like. Fortunately for Bitcoin, I believe its slow and steady pace will ultimately be its superpower. This year, Ethereum will undergo a radical upgrade known as the merge. The events scheduled for mid-September will change the underlying consensus mechanism that allows blockchain to function, from something like Bitcoin's proof-of-work system to a more experimental model called proof-of-stake. It's a development that has been underway for years. Vitalik Buterin, the co-founder of Ethereum announced at a Paris-based Ethereum conference that after the merge, Ethereum will still only be 55% complete. There's a list of upgrades to Ethereum slated for the next two decades.

Starting point is 00:02:09 The Ethereum community, Buterin, caution, should learn to expect short-term pain and long-term gains. The mentality of development opens Ethereum up to new possible futures, but also risk. Herein lies the opportunity for Bitcoin, an opportunity to embrace its slow rate of change so that it can become the world's most valuable Forever Database. A Forever Database is a gift to humanity. I've heard blockchain described a million different ways, an immutable ledger, a shared system for recording data, a growing list of records secured by cryptography. All of this is fine, but for the average person, these explanations are confusing.

Starting point is 00:02:41 The simplest definition of a blockchain is a forever database. Maybe you're a total beginner and you can't picture a database. No problem. And a forever database is one in which when you write data, that data is stored, well, forever. Due to a series of design decisions, blockchains are immutable. Theoretically, the data store becomes a bulletproof record of truth for thousands of generations to come. Since Bitcoin went live on January 3, 2009, the network has never gone down, been hacked, or stopped storing new data. Bitcoin is also a currency that can't be inflated,

Starting point is 00:03:09 a selling point that has become the network's chief use case. The bookkeeping is never wrong. Imagine that being able to trust that 1,000 years from now, that your data and money will still be accessible. Not only that, but people living many generations into the future could verifiably trust that this ledger is true. That's powerful. Forever databases enable novel use cases beyond money-like instruments, which are primarily being explored on networks beyond Bitcoin. Mike Boge's Cryptoart Project, Zero X Infinity, allows you to publish love letters the site claims will last forever or as long as the Ethereum network is running. R-Weave is a file storage system that claims to store documents and applications forever. And Starling Labs is a project that, among other things,

Starting point is 00:03:44 has uploaded 56,000 Holocaust survivor testimonials to preserve evidence of human rights abuses and protect against future disinformation. A forever database ensures the integrity of our collective memories in a way that previous databases could not. And yet, consistency is the key ingredient. As long as Ethereum, Solana, and other blockchains continue to upgrade their codebase, they can't compete on consistency. In early 2022, the Solana blockchain, known for its move-fast and break-things mentality, suffer two outages, each of which took the network down for several hours. The key superpower that makes a blockchain a Forever database is being resilient to outages. A forever database should never go down. If it does, let's just call it database.

Starting point is 00:04:21 For Bitcoin to thrive, users need to do more than just hold their money. Bitcoin needs to become productive. There's an opportunity for Bitcoiners to harness the power of their Forever database through the use of additional layers, e.g. Lightning or Stacks, so that they can build new applications. The Race to Embrace Layers. Stacks is an example of a layer that adds programmability to Bitcoin. With Stax Clarity Smart Contracts, you can create applications, social networks, photo sharing apps, chat apps, where the underlying transactions are secured by Bitcoin. On Ethereum, similarly, Polygon is a popular layer developers used to scale the Ethereum network. The difference is that if Ethereum were to fail, Polygon and all of Ethereum's additional layers would follow, falling like a

Starting point is 00:04:59 house of cards. We need a new layer, one that can access Bitcoin's forever database. It and only it can be a complete system on which we build the future. In 2010, Satoshi Nakamoto, Bitcoin's founder, first encouraged the idea of building layers on Bitcoin. Quote, I think it would be possible for a blockchain to be a completely separate network and separate blockchain yet share CPU power with Bitcoin. What Nakamoto saw back then was the opportunity for Bitcoin to be more than just money. Slow and steady wins the race. If we wish to create a forever database, we must celebrate Bitcoin's approach to long-term stability. This is what Vitalik Buterin was doing when he said Ethereum should become more Bitcoin-like by emphasizing

Starting point is 00:05:35 long-term stability. Both Bitcoin and Ethereum will do great things for humanity. I'm excited to see them each take their own approach to building the future. As Ethereum evolves swiftly, I believe it will continue to innovate. However, until Ethereum settles down, it will lose its standing in the race to become a forever database. It's taking on too much risk, and the world. The world may never know exactly what Ethereum will look like until decades down the line. This is Bitcoin's moment. Bitcoin needs to embrace building layers. Bitcoin should not remain as money. It must learn how to be productive. Ultimately, I believe slow and steady is the secret to winning the race, because while fast may get all our attention, it's slow that has all the power.

Starting point is 00:06:10 All right, so here we have a vision for how Bitcoin evolves, at what speed and in what ways. Chris argues that it needs to be productive, more than money, but needs to do so at its own pace and based on layers. However, that piece still kind of presents Ethan Bitcoin adversarially, as though there is one winner. And maybe that's just the convention of the analogy of the tortoise and the hair that runs throughout. Nexo is a security first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds. Making Nexo the right place for you to buy, exchange, and borrow against your assets safely.

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Starting point is 00:08:10 Download the FTCS app today and use referral code breakdown to support the show. Let's now turn to Dan McArdle, a co-founder at Masari and one of the folks behind case for Bitcoin, and his take, which kind of breaks apart this dialectic of Ethan Bitcoin running the same race. Apologize to you guys who heard this thread on Thursday, but I thought it was relevant enough to read it again. The Ethereum merge is bullish for both ETH and BTC. Merge being bullish for ETH is pretty much a consensus view, and I think merge will differentiate Bitcoin from Ethereum even more, which is long-term, good for both. Yes, short-term, I think a lot of people see Merge as a negative for Bitcoin, specifically because it reduces Ethereum's energy use by 99%, thus making Bitcoin more of a lone

Starting point is 00:08:54 ESG target. That is indeed annoying and will have an impact near-term. But over the longer run, I think proof of work will be an asset to Bitcoin, well proof of stake will be an asset to Ethereum. These two assets and networks have fundamentally different goals, designs, and approaches. Proof of work and proof of work and proof of stake have fundamentally different tradeoffs and guarantees. Proof of work can be optimal for Bitcoin while proof of stake is for Eith, no contradiction there. And so I think this makes Bitcoin core's properties more clear. While Ethereum is executing an extremely complex, in-flight change to core properties of network and monetary policy, Bitcoin keeps both simple and reliable. Coming out of this, Bitcoin,

Starting point is 00:09:29 will be the sole large network with a simple, battle-tested, and more clearly egalitarian consensus model. ETH will come out with a brand-new monetary model and a lot of new complexity. That's fine for Eith. Merge optimizes the network for being a widely used tech platform. While Bitcoin's simple, battle-tested, egalitarian proof-of-work model is better for something trying to scale socially as global money and store of value. Additionally, I think the narrative on proof of work will change over time. The ESG-based attacks are ludicrous on many levels, and enough people and politicians will see that eventually, and the remaining haters will matter even less. Also, proof of work brings

Starting point is 00:10:02 geopolitical advantages. We'll see both power companies and nation states generally wanting to use Bitcoin mining to both monetize stranded resources and act as grid-stabilizing technology. This is happening now. Proof-work is therefore a vector for Bitcoin to become more geopolitically relevant and embedded. That offers a form of long-term security that I still think is pretty underappreciated. Anyway, I think it's more clear than ever that Bitcoin and Eith are not competitors. They're going after different markets with fundamentally different tech and approaches. Merge will make the differentiation even more clear, which is good for both. So Dan is doing two things differently than Chris. First of all, he's not necessarily arguing that Bitcoin needs to become productive or be more

Starting point is 00:10:41 than this store of value type of money. Second, he's starting to articulate a world in which Ethereum and Bitcoin are not running the same race, which they have different functions where different technical considerations might lead to different decisions. Now, Peter McCormick sort of got at that difference as well without even necessarily meaning to when he wrote, I can't help but feel that the Ethereum merge as their S2X moment, where Bitcoin defended against a push for centralization, Ethereum has failed. The consequences will likely be felt sometime down the road. The presumption that underlies this, and I don't think it's unreasonable for Peter

Starting point is 00:11:13 to assume this, is that the defense against a push for centralization is Ethereum's primary goal. It is clearly, for most Bitcoiners, Bitcoin's nature as an apolitical, censorship-resistance store of value with a fixed monetary policy is what makes it Bitcoin and what makes it valuable, what makes it different. Ethereum has many visions for what it is. There are certainly those folks who are excited about the deflationary properties of the new tokenomics, who mean about ultrasound money, there are others who are focused much more on

Starting point is 00:11:44 different properties of Ethereum and all the things that can be built on top of it. So the question will be, will time show the purposes of these networks to be different enough that these different models, proof of work and proof of stake, do end up working fine for each, as Dan suggests. Or, and this is possible, will censorship issues remain important enough for Ethereum, that the increased difficulty of dealing with censorship requests from governmental pressure, due to having regulated entities be such big portions of the staking pool, actually be problematic. There is also finally a question of what Bitcoin wants to be. Around the merge, Hasu got into a very reflective mood. He wrote a question of,

Starting point is 00:12:23 couple of threads, and the first one said, I've never shared this before, but in 2019, 2020, I got very close to starting the Bitcoin Longevity Institute, a research hub with the mission to study very long-term threats that could potentially kill Bitcoin, like the declining block subsidy. I eventually folded the idea because of a mix of factors. One, strong resistance to the idea that Bitcoin may not be perfect as is, two, little interest from big companies to fund it, I think in part, due to the publicity risk from number one, and number three, Defi Summer happened and sucked me more into Ethereum. It's interesting to think about how that alternative timeline would have looked like. He went on in another thread. The merge has only convinced

Starting point is 00:12:58 me further that the intellectual state of the Bitcoin community is truly in shambles. The high-quality people who remain, e.g. Bitmeg's research, are mostly covering Ethereum now. I still have Bitcoin very much and hope for a restorative movement. In 2020, Paul Tudor Jones said, I've never seen an inflation hedge that had a kicker, that you also had such great intellectual capital behind it. Bitcoin is a bet on human ingenuity and entrepreneurialism. This concept that other inflation hedges are bets on the fallacy of mankind, while Bitcoin as a bet on the ingenuity and creativity of mankind, was one of the most bullish statements I had ever heard up to that point. But to what degree is that still true today? As of today, I think Bitcoin is still an incredible brand and network. But the human ingenuity

Starting point is 00:13:39 and creativity are gone, and frankly have been largely in 2020 as well. I just refused to see it back then. Simply speaking, a bet on Bitcoin today is still a bet on a great asset and network as is. And maybe that's enough for a bright future. Maybe not. But it's no longer a bet on human creativity, entrepreneurialism, and problem-solving. And that's what's making me really sad. Now, there were a couple interesting responses. BitMack's research, who Hasu called out as an example of some of the best that are still there, responded saying, be wary of viewing 2011 and 2017 with rose-colored glasses. I Am Nomad wrote, basically, it might just be you who has changed. He said, Git, LRC disagree. Newsgroup certainly disagrees. The chat around the

Starting point is 00:14:19 the actual work just doesn't happen on Twitter. People just want to fight here, so I don't blame devs for barely updating. Also, getting attacked from any bagholder of Garbage CoinX or underwater gets old fast. The major accounts liking this tweets are the same one using 2016-era arguments, cut-and-paste Bitcoin Cash Marketing, which their two marketing bros adopted in 18. I think your interests and revenues have shifted so that other things appear less interesting, and that's okay. Now, one of the questions of this discourse is the talking heads versus the builders. That's a problem everywhere, but particularly in crypto where there is such a disproportionately higher number of people whose quote-unquote contribution to the community is just them talking about the asset

Starting point is 00:14:57 that they like most on Twitter. What Nomad is pointing out is that the people who are actually providing that entrepreneurial energy to Bitcoin may just be quietly working in the background because they want nothing to do with it. However, the other question, though, that I think is worth asking is what do people really want Bitcoin to be? Most of the fights on Twitter are about is X or Y better? And then there are metaphites about how. how people talk to each other. But ultimately, the interesting question is what's the vision for the network and what's the path to get there? Even in the pieces that I've read today, Chris and Dan had very different views. A Bitcoin that wants to just be a global settlement layer that is

Starting point is 00:15:32 permissionless, hard to capture, and resistant to state-level attacks, might look different than a layered Bitcoin that feels that it needs to have productive functions built on top of it. Could also be that Bitcoin doesn't care, and different people will build off of it whatever versions of it they want. I think these are good questions to reflect on, and this is a good time to do so. Former BitMex CEO gave his vision retweeting Hasu and saying, Be not dismayed. Lord Satoshi is the one true God. Bitcoin doesn't need to do anything, just exist. That is all, and in time, all sinners will repent. I want to say thanks again to my sponsors, nex0.com.mysos and FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

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The Breakdown - After the Merge, How Do We Think About Change Within Bitcoin?

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