Crypto’s New Class of Kingpins

pat Olga David. What a pleasure to have you both in the studio in the case of David and Vert trually in this studio. In the case of Olga David, why don't you introduce yourself? My name is David pant I'm a crypto reporter at Bloomberg. I cover crypto mining. Olga hi Um, I'm Olga Kreif. I'm a crypto reporter here at Bloomberg um for all kinds of stuff um, including happenings and upgrades on Ethereum. And it's great to be here Ethereum. I feel like we talked about that

a lot, because there's been a lot going on. One of the things that was going on was the Merge, and it's so weird that so many thousands of people spent years like preparing for this thing, worrying about this thing, criticizing this thing, thinking this thing was never gonna happen, and now we're like, yeah, it's totally happened. We've moved on,

we're in there, We're in the new era. As part of that new era, you know, both of you have worked on various stories about let's call it premerge and post merge, where premerge, the more important players in a proof of work ecosystem are some folks called miners. In a post merge ecosystem, you're starting to hear words like builders and you know, validators, And what I would love for you both to explain to our audiences is why these builders matter, what they do and where they came from.

And all girls start with you. Sure, So, before the merge, it was a fairly simple system. There were the miners and that was pretty much it. The miners essentially organized the Ethereum blockchain. And then after the merge, what was changed was they got rid of the miners. They did this because the miners consumed a lot of energy. They used they were basically very powerful computers that were used

to order transactions from the network. And instead of the miners, they now have three types of parties that essentially do the same job. They're valid laders, their builders, and their relays. And essentially the builders they package transactions into blocks, they passed them onto relays, and the relays delivered the blocks to validators who ordered the blocks into the block chain. So this is the new world order, if you will, in this new world order, David, what are some of

the things that folks are criticizing right now? Yeah, one of the major things is UM the higher level of concentration compared to pre merge era UM, because before the merge there literally like hundreds of thousands of miners who are UM, you know, validating the transaction data on the

Etherum network. But after the emerge, we're seeing essentially centralized the entities like KIM and other like uh staking services providers UM just a handful of them who are kind of like UNI responsible for providing the staking of services and performing the same tasks that were you know, they

used to be performed by the miners. So if I were to phrase that a different way, the big criticism, if I'm hearing what you're saying correctly, is that we went from this ecosystem in which lots of people or lots of computers were equally important and kind of performing

these key tasks. But in this transition, it's a smaller number of important entities that are performing these key tasks, and as a result, folks are concerned about the risks of concentration and centralization, which are two words the people

who are fans of crypto are allergic to. This is in contrast to like mining bitcoin, because I feel like on our own stories, whenever we do a story about bitcoin miners, is always like these gigantic data centers litt and green, and there's lots of computers in them and humming and noise. And then you know, you had the story about Etherea miners, and I was like, here are some people in their apartments and they have laptops, and so it seemed like it was possible for people who

weren't large corporations to be Ethereal miners. Pre merge is not correct exactly, and now post merge not only are those folks like out of a job, as it were, but they've been replaced by much bigger, spendier, centralized entity. One clear example that shows that there will be a higher level of centralization often emerged is that it required the protocol requires at least thirty two ether two you

know to participate in inter state process. Hello. That my name's Moses and I'm one of the producers on the bloom Book Crypto podcast. Before we carry on, I'm going to quickly break down some of the terms that we

use on today's episode. Firstly, we have steaking. Now you can think of staking like a kind of crypto collateral where you agree to lock up your crypto for specific amount of time, allowing others to make transactions with your digital assets, and in return you earn a reward or get paid a yield thirty two ether thirty two okay either yep. And if I just made jump in, so it's possible for people to contribute less ether and join a pool UH and become part of a validator pool.

But but so so there are issues with concentration and ethereum. Now in all three of this UH kind of new parts that have been created and emerged. So with validators, the problem is that you know, all these people who did not have thirty two ether they a lot of them joined lido, which is a staking pool, which now controls about of all staking power and ethereum. Other people UH started staking through coin Base, which now controls about

another thirteen percent of validator power and ethereum. So together they the two entities add up to forty three of validator power and ethereum. But experts that I talked to said that, you know, it's enough to have for somebody to have thirty about thirty three of validator power to actually start messing with the network, so allowing double spend and so forth. And of course you know, most people say, well, we don't expect something like this to happen with coin Base,

We don't expect this to happen with lido um. But you know, looking at ledo for instance, it um it is a network of a lot of different validators, but it's controlled by by light O through software and light or somebody at light it could potentially make, you know, decisions that maybe it's community would not want made. Coming up more from Bloomberg reports, Olga Careife and David Pan

on how builders could shake up Ethereum's landscape. There are people who believe that the only way forward in constructing a blockchain is something that looks and sounds like bitcoin and it's built on proof of work, And there are folks who are like, absolutely not, proof of steak is the way of the future. Where do you all think the like the reality of the ecosystem is going, like, are we going to see more people really looking at this proof of state movement saying like, yeah, I want

to move forward here? Are we going to see people like really doubling down on proof of work because they're like, we're worried about these concentration risks. Yes, there's other risk associated with bitcoin, but this seems like a better trade off to us. Well, it seems like in in blockchain there has always been people a trade off between like do you get more centralization or do you get more security?

So it's it's uh, and I think a lot of decentralization that people think exists in blockchain is actually a myth because for instance, uh, you know, people love this idea that you know, everything in blockchain is run by smart contracts. A smart contract now a smart contractor is code which lives on the blockchain that operates automatically when certain conditions are met. There's no human involvement, you know, it's all fair and square, nobody can interfere, etcetera, etcetera.

But actually it turns out that, for instance, a ethereum, most smart contracts actually have a back door. It's called an admin key, and you know, certain people can go in and change sometimes everything about the smart contract depending on how the keys have been set up. And I think this is true to a lot of other um

parts of the blockchain ecosystem, if you will. Uh. You know, what people are finding out is that very often, you know, to manage something well, you need a little bit more centralization. You know, for instance, one problem with the dows uh, the centralized autonomous organizations is that you know, they're very hard to manage. You know, a group of people, random people from around the world has a very hard time sometimes coming to consensus and making decisions and proposing things.

And so I think some amount of um a move to more centralization sort of is probably a normal part of making things more manageable and making them more better. Yeah, and you also hear this opposite argument from Bitcoin purists and maxis um. You know, they are fully I mean, Bitcoin network is arguably the most essentialized the network, and it's really hard to control because it's literally you know, validated by miners, by computers, and it's hard that mutability

is really high for bitcoins, for the Bitcoin network. But we also see the very um serious issues in terms of scalability and also the network efficiency. Uh So that's one of the reasons why it has been really hard and time consuming to develop any kind of commercially viable UM projects on Bitcoin in terms of like payment or even aims or other things that that could be developed. All your theory, I think the challenges that you know, this is like arguing over whether cake is better than pie.

It's pie, just for the record. But the UM because you know, folks who are on the Bitcoin side of the house will say like, well, actually, we don't want to be a layer for gaming, right like we're bitcoin, we don't, we don't. You can you can take your n f T s and whatever it is that you're

trying to do, Like that's not interesting to us. UM. So it's almost as if the incentives or another way of thinking about this is it seems like as we get more and more specialized approaches to blockchains, what you're gonna find is that there are going to be very few one size fits all applications, and that you know, this seems to be kind of forcing a lot more if not necessarily sophistication, at least more nuance in terms of I am trying to solve this specific kind of

problem for the kind of problem I'm trying to solve, Yes, Bitcoin is gonna work fine for me, or actually I'm going to need to do this ethereum, or I'm going to need to do this on some other blockain. Absolutely, I think that's exactly sort of why I completely agree

with this. Uh. There are so many different block chains with such different structures, uh that, and some are supposed to be better for for gaming, others are supposed to better to be better for m decentralized financial applications, and they each have vastly different designs in a lot of cases. And so that's a chance for people to pick kind of what they believe and and and what they feel

comfortable with. Yeah, and I would say like as we go into a more sophisticated stage of the blockchain, industry. We're also seeing more niche pitches from from individual different blockchain projects. You know, some some of them maybe they

may be targeting people who are whole prioritized privacy. You know, they're also prov like zero knowledge mechanism for certain blockchains, and when we when we talk about zero knowledge, it's basically making it really hard for somebody to know who you are um, which is of course an arms race between the FEDS and everyone else. Olga, David, always a pleasure to have you on the show. Thank you so much for being here. Thank you, it's great to be here.

Thank you, Thank you, Olga, and thank you David. You can find more of Olga and David's reporting on the Bloomberg Terminal, on Bloomberg dot com or on Twitter. Olga is at Olga Karif that's O l G A K H A r I F and David is at David Pan Underscore one that's d A v I D P A N Underscore and then the number one on the next episode of Bloomberg Crypto. It used to be that if you were a crypto start up, you could raise money with pretty much nothing more than a website and

a smile. Really, but as the crypto winter comes for basically everyone, fundraising is getting more challenging. So who's still in the game and when is a down round not a down round. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heeart Radio, visit the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot

net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy Marie Schmal. We'll be back tomorrow. End of an appetisbo that an instant and imp