It's good to have you on. That's great to be here. Thanks for having me, quit. So, Danny Ryan is with us for the theorem and Asian and we all talk about etherium to in a bit. And we also have a special guest co-host today. Martin compliment from gnosis. Yeah, good to be here. I'm looking forward to learn more. Quit before we Dive Right In, let me tell you about our
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It's been way over you and just before the podcast we kind of talked about the outline and it was definitely enough stuff to actually fill at least two episodes then before we fall we dive into the protocol. Can you tell us a little bit about yourself? What brought you to the theorem Foundation? What did you do before? What piqued your interest in blockchain? I honestly it's an honor to be here. I early on in my blockchain journey. I remember listening to epicenter and kind of gobbling
up all of the content. So it's cool to be on the other side of that right. Now. How did I get here? It's a similar story to most. I think, honestly, I used to be a freelance software developer for many years. I graduated college and was like, I really didn't want to work a normal job. I didn't want to work in an office. I didn't want to live in San Francisco all that. So I moved to New Orleans. And was just kind of like helping small businesses with weird software, software
solutions. That was fun. Did that for many years? And then I think I started paying attention to etherium around the Dow pre Dow hack, someone sent me an article. I think it was the New York Times. It was like, all this money is being raised for this weird thing and that, that piqued, my interest. I had heard about a theorem before and I hadn't realized that it actually launched, and I started paying attention and the Dow in particular.
I know it was a The Fantastic disaster, but the fact that that could exist and was happening. Really? I think allow me to see and start to process what these Tech this technology could do. So, I guess that was about 2016. I became more and more obsessed at the beginning of 2017. I realized that it's all I wanted to think about and all I wanted to do. So I got rid of all of my freelance clients and I said, I'm going to figure out and make
this my job. On the Journey of, how do I actually make this my livelihood? I heard this proof of stake thing and I thought to myself. Okay. Well this doesn't make any sense. This is ever gonna work a couple weeks later, my okay. This makes sense. This is interesting. But how can I, how can I make this a business? And I do something with this to make this my livelihood and like, okay, I could probably
make like a staking pool. So I started reading all about steak and all about how it was going to work and all that kind of stuff in 2017. Thinking that I could, I can make a staking pool. Then I realized there was still work to do. So I started helping out with some of the work here and there like contributing to research where I could and like, helping out with testing and various things online. So come come and of 2017. I had been collaborating on the internet, with various
contributors. I had been working on some like testing infrastructure for Casper FFG different things. And the EF was like, hey, do you want to join? We have plenty of work to do. So I joined the EF at the beginning of 2018 and at that point I thought we'd probably launch Rufus take and about, like, six, seven months. Little did. I know that? I would still be working on that very problem today. And as we will discuss, we proof of stake for theorem is live, but it's certainly not completed.
And so, today I am still working on that very problem. Super quick. Yeah, it's been a long time coming. So what, what exactly do you do at the theorem Foundation? So I work on the research team and I do a mix of research specification writing and then a lot of like communication and coordination around those two things. So the E2 project is consists of people, many teams at the EF, many external teams to clients,
whatever. That may mean eith one clients, and the intersect is no ball bat. So I spent a lot of time communicating with engineers and helping People understand things and helping kind of coordinate and make sure the project keeps moving forward. Yeah, super quiet. How many people are are? They're working on East, Who currently do you have any idea? Definitely over a hundred but it there's there's five active E2
client, teams of varying size. There are probably 20 people at the F that work on the stuff full-time. There's people plenty of people that work on it, part-time increasingly. So as we approach the merge, we'll talk about later. What we call it with one clients are increasingly working on. Merge, and working on E2. And so it's quite quite a number of people. It must be difficult to coordinate because I mean it's kind of there's so much of research anger.
So to it and I think research is something that is not infinitely parallelizable. Right? Right. And you know, I'm one of probably many people that coordinate various things and it's it's a very organic open-source effort. And so the amount of coordination isn't incredibly High, although as a certain at the end of the day, we all need to talk to each other and I need to like coalesce on on single
path and decisions. And so I try to help facilitate that then maybe let's talk about the things that have been decided and cannot visit our life and kind of. Yeah, basically tell us about the state of your fascia or what is life. And what is already working? So first I'm going to answer what is what is easy to very broadly and E2 is definitely a bit of a misnomer, but we can go
along with that term. It is a series of major consensus upgrades for theorem aimed to make the protocol more secure, more sustainable, and more scalable. And at the core of that is the move from a proof-of-work consensus to a proof of stake consensus. So instead of securing the network with mining, We're energy consumption securing the network with tokens itself The Ether. And so at the core of that is the bootstrapping in the creation of this new consensus
mechanism. And what as you mentioned is live today is what we call phase zero and that went live in December of 2020 and that was really the bootstrapping of this new proof of stake consensus mechanism. That is called the beacon chain. So in December tons of Theorem community members and different institutions, put a bunch of ether as capital and collateral. And to what we call the deposit contract and kick-started this new consensus mechanism called
The Beacon shame. The beacon chain exists in parallel to the current, a theorem Network. So in parallel to the proof of work Network, which is still securing, all of the assets and applications and contracts accounts today. So we have on the one hand, the proof of work Network chugging along. And the other hand, this new consensus mechanism called The Beacon chain existing in parallel to this building and
securing itself. I think today there's something like 4.5 million ether locked and secured in this chain. I don't know what that's worth today. Depends on the the minute and the hour, but this thing exists, this thing finalizes itself, this thing builds itself. But ultimately what it does, is it just builds and secures it Self and this is by Design. This is an iterative path to get rid of the proof of work and to move, if they remain net to this
new consensus mechanism. Obviously if there are many net is used by tons of people, secures tons of value and there's a lot at stake in this, in this operation. And so what we've done is built it in parallel, kind of vetted it in production, tons, tons of tests live, and now, Working on is actually the deprecation of the proof-of-work, consensus mechanism in favor for this live proof of stake consensus mechanism. So that's where we're at today.
There is a proof of stake in this is mechanism, bootstrapped live, securing, tons of value, but really just kind of securing itself in isolation. Then let's Deep dive into what it exactly does. So right now it comes to consensus on what? It comes to consensus on itself. And it's by itself. What I mean is is the purpose statement says is mechanism and all of the the little gadgets and things in it. So it has a validator set each validators worth approximately 32 eith.
So there's something like a hundred and forty thousand validator entities in this consensus. Each. One of them has like its own little state. It has its balance. It has duties. It has like a job at any given time. It has randomness. Action, it has information about finality. So which portions of the chain are finalized and whenever be reverted and it has a lot of just various accounting between finality and kind of the head of the chain.
So there's a number of operations related to the functionality of this chain and those operations are kind of what we call validator level transactions. So system-level transactions and really what it does is there's a core operation called at two stations. We're validators are constantly signaling what they see as the head of the chain and what they see as their local state of the world, and they use these messages to come to consensus
with each other. And ultimately drive this, this core like system layer of the chain. There's some other operations related to validate or activity, like deposits onboarding, new validators exits leaving the validator set and a couple of things. So really, really it's like this. This it's a proof of stake system and there's a lot. Of different accounting, different little operations going on and it builds and comes to consensus on itself. Let's get to our sponsor Solana. Now.
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There's this nice real tool called launch pad, which has a nice like user interface. You can do this in a number of ways, but you can go to launch pad. You do a key generation step, where you generate an active key. So, the key that's going to sign out to stations and build blocks and different things. And then what we call withdraw, All credential which is can be a cold key. It doesn't have to be on on the machine that ultimately owns the funds when the validators done
with with validation. And so what that validator to become a validator, what you do is you take that 32 eith generate some keys sign a deposit message and send that ether to the deposit contract, which is a special contract on the current. If they remain etan eith one, you send it with this data and then the beacon chain. Which operates in parallel to that proof-of-work, network is listening to the deposit contract. Coming to consensus on the state of the deposit contract, and
inducting new deposits. So, right now, it's kind of like a one-way Bridge from the proof-of-work, etherium into this new Beacon Chang. Once you have your validated deposit inducted into the beacon chain, there's a little bit of like process overhead a little bit of time that it takes in terms of come to consensus on this, then you get a new validator record in the state of the beacon chain. The beacon state is like This kind of system layer state of
this thing. And after a number of epochs something like for epochs each Epoch see, 6.4 minutes you then become activated and at that point your validator. Now, each Epoch will have at least one. If not a number of Duties, with respect to the the beacon chain and they get little assignments and they listen to the network and signed messages and talk to each other and come to consensus
on things. I went to directly ask about the, the deposit contract because the premise of our was that the two things are living in parallel, but that is already obviously a connection. So, apparently you need, or the, he's to chain needs to read from the East one chain, and kind of needs to understand these one chain. So does it mean that to run a each to validator? You also need to run east one client or otherwise, how would you know? That this deposit happened.
So yes, there is a one-way and very restricted Bridge from the eighth one chain into the beacon chain. And as a validator, you are running the beacon chain, which is actually relatively lightweight and running the etherium. One proof of work Network. This is to be able to listen, primarily to that deposit contract, and be able to build and connect that bridge to bootstrap this consensus. Mechanism, which is a crypto
economic. This is mechanism based off of ether, you do need Aether and so that link is critical for the bootstrapping and functioning of the system as a validator. You do have these two pieces of software that you're running in parallel and communicate with each other. And this actually is kind of Representative of what the system would look like after the merge. So once these systems are unified you, similarly would have to run the beacon chain, which is kind of the system
lovable statement. As well as a piece of software that will give you access into the execution layer into the things that we know and love essentially like death - proof-of-work plus Beacon chain. I assume it's incentivized to be a validator. So what do I get? If I get to build a block and how is it determine if and when
I get to build one? So there's two primary actions that are rewarded for the validator and one is this action called testing, which you are assigned to a test exactly once per Epoch. So exactly once per six point, four minutes and this accounts for actually 7/8 of your validation reward. So it's the majority of the issuance goes to this rarey regular intervals activity, which is nice. There's a reason for this because it helps with Kind of hardening the for choice and
keeping things. Very stable because many validators get to even though only one validator at any, given slot is producing a block, many validators, get to throw in their weight and say what the head is. So it makes it very difficult for these like this, monopolistic activity of producing a block to be able to reorganize and and do different attacks. And it's also nice because it really Smooths out rewards where
is in, in proof-of-work. You're rolling the dice over and over and over again and every once in awhile, you randomly generated. A chance to produce a block and get a big payout. Whereas in this proof of stake system, the rewards and payouts are very much more regular eyes. Even if you have just say one validator, so at the stations are this like, very critical message type for securing the head of the chain and finalizing things.
But then, as you said this other very critical role is actually producing a block. And So based off your validator assignments, which is based off of Randomness General. Generation on chain which we can talk a little bit about every single slot. There is exactly one validator assigned to produce a block. A slot is every 12 seconds. It's kind of like the heartbeat of the system.
So instead of this stochastic process of mining, which randomly there's a target for Block time and randomly blocks, get produced kind of around that Target. Instead. There's this click of every 12 seconds blocks can be produced if the proposer shows up and every single 12 Seconds, a producer, a validator is assigned. And so, if it's your say it's slot 10001, you had a little bit of look ahead, say you had 32 slots in advance. You knew that you were going to
produce a block. So you're listening to the chain and you listen for valuable things to include in your block and you build off of the parent and produce a block and broadcast the network valuable things. Today are primarily just these validator operations. So at two stations Posits and things like that, but post-merge you would also be including user land. Application layer transactions and seeking to maximize transaction Revenue, like, like, miners do today.
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longer block time. For example, sometimes we have like just based on the stochastic process and proof of work. Like, sometimes you have blocks that happen in 10 seconds. Sometimes you have blocks that happened in 30 seconds. So in the event that a slot was skipped, you would have 24 seconds in between the slot time. And that would look like a slight reduction in capacity of the chain for that given time.
Interestingly with like 1559. The mechanics and variable block sizes that can kind of like be self-balancing and the average. But what we've seen in the live system is something like a 99.5 percent participation rate with respect to blocks and out to stations. So in the normal operation of the chain, so not crazy, Global Layton sees or not some attack scenario or major failure in a client. We expect to see almost all the time a block. WE 12 seconds. So you said 99.5% for both the
stations and the Box? Yeah. Alright. Okay, and do I get slashed, if I don't show up, or if I don't detest. So we reserve the word slashing for very explicitly malicious activities and what can be more, severe penalties. So, in normal operation, we have rewards and we have penalties
penalties. And so you have this dirty to eat steak and if you do Job, well, you can be rewarded and if you don't do your job or you like our fail, you're trying to do your job and you can't quite find the head of the chain, you might, instead lose a small amount of either.
And so in normal operation, if you and this is variable depending on the validators, the size of a later set, but in normal operation, in a year, you might make anywhere from like six to twelve percent return on that third to eighth deposit. Whereas, if you were off, Line the entire time you your penalties would equal approximately what you could have made. So you actually instead of making six percent that year you would have lost six percent that year and it's not just opportunity cost.
You would actually being penalized a little bit and seen a linear decrease in your state. And so that's rewards and penalties for all the basic activities. You can either receive Rewards or you can be slightly penalized if you aren't able to perform your job, there's individual ones and there's also group. So like if the amount of You're at the station reward would actually scale with this like
group mechanic. So if like a hundred percent of the validators online, you can receive maximal validate a reward but if only 80% of validators were online, you would actually only get point eight of your total a sensation reward. And this is so that there's this like incentive one to not like - your neighbors and take them down so you can get their reward instead. And also in the event of Crisis, there's this group this group. XO that you want to figure out what the hell is going on and
try to fix the network? So those are rewards and penalties. You did bring up slashing. Slashing is actually, it is a penalty, but it's a much more severe penalty and it's in relation to these explicitly, cryptographically provable, nefarious activities. So for example, you're assigned to a test. Every Epoch. This is very important for the operation of the chain. This helps finalize things. This helps secure. Head of the chain in the fork choice and you're only supposed to do it.
Once for Epoch. If instead, you do it twice for Epoch. You can be slashed because this is an activity that could lead to lead to a network fault. Essentially. The idea is in proof-of-work. You have a physical real-world piece of Hardware that you can only point to one chain or another.
So one fork or another and or you could split it, you can do 50% on that for of in Energy on that for fifty percent on the on the other Fork, but you cannot put a hundred percent on to 4K and a hundred percent on a fork be whereas in, in proof of stake, that economic asset is actually just related to you signing messages. Signing messages is really
cheap. And so the idea here is that messages that can lead to you attempting to apply your stake in multiple places and could lead to network faults and confusion. As to what the head of the chain is where to make those messages expensive. Similarly, to how allocating your physical. Sources, the mining Hardware was expensive.
And so thus, if you do some of these activities where you're essentially signaling two different versions of a history, you can be penalized severely because they're provably nefarious messages and that's what is called slashing by severe. I mean that if enough validators were doing that type of like double signaling Within A recent window of time to create a network fault and that minimum threshold is 1/3 of the validators. Then you'll be punished maximally.
So if one third of the validator said is doing / Abel, things within a recent time window, then those Alders actually lose a hundred percent of their state.
And that's because we want to have, like provable security bounds based off of, you know, if and when attacks happen, whereas if you're, if this is just like an isolated event say I'm just running a The validator I do something ill-advised with my staking setup and I'm signing double messages by accident then and but no one else has really been doing in recent time. When do I get a slap on the wrist? I get kicked out of valid your set.
But since the fraction of alligators that have been slashed recently is very low, my penalties like still relatively. Well, I might lose like 1/8 and get kicked out of valladares up. So that's so we have rewards, we have penalties for normal operation and we have slashing which is for these like very explicit. At nefarious activities like double signing out to stations or producing two blocks in the same slot, that kind of stuff. You're talking about slashing.
Is there a chance to do to do something? That's so fundamental to the level that you get slashed by accident? So concretely, well, we have multiple client implementations. So. Well, there might be the situation that one client says, well, that is a valid block and another client says that's not a valid block. And therefore is kind of ignoring that and proposing. Another one.
We have seen some number of slashings on may not since December and almost all of these have been due to individuals and institutions creating sophisticated and attempted to be sophisticated redundancy setups. So essentially it's very if you have your keys in one place and you're tracking the messages that you've signed. It's very simple. It's very the logic is, can be,
you know, in six lines of code. It's very simple to like Not double sign, essentially, a couple of conditionals and a very, very small database and I can prevent myself from doing this. But if I have my keys in two locations, say, I'm trying to run client a and client B, and I'm trying to run them on two machines to make sure that I don't have any downtime. Then I'm going to be signing, double messages, almost every Epoch, and I'm going to almost
certainly be slashed. And so this is actually what we've seen is. We've seen some hobbyists that That didn't didn't get the memo and are trying to make sure they
don't have any down time. They've been a couple of them have been slashed but actually what we've seen more so is these institutions who want to advertise, you know, the best up time ever and what they do is they have like way too sophisticated of deploys and and don't manage the keys properly and have the keys in two different locations. That's the key is you have your keys in two different locations and they both think they're in charge and there, you know,
there's no communication there. You're going to be / because you're going to Like eventually have a slightly different worldview. Like one block, one client might see the block the other client, might not say the block, and they both will sign something different. So, basically, your advice is not, don't do it too, complicated setup. Will give a simple example, because if you're offline, even for a day, like you're gonna
lose very, very little money. Because again, we have rewards and penalties for normal operation. You if you're offline for a whole year you might lose like eight percent. Whereas if you if you like due to complex of a setup, you're going to You will lose much, you can lose much more than that. So there's many client teams and a number of them have implemented. This new feature called doppelganger detection. Super Fizz came up with it and super foods from the East, a
community. And he the idea is right when you turn on your client and it knows that there's some balladeer keys associated with it. It actually won't start its job immediately. It'll wait like an Epoch or two and just listen to the network and it Those that it's not signing anything in stop broadcasting anything. So, if it sees any messages come in from itself, it's detected a doppelganger. And it says, Oh No, abort, abort don't sign any messages.
And this is actually a new feature that's rolled out a number of clients. And I think it's protecting especially especially the hobbyist with the simple setups. Obviously, then you have like an Epoch or two of extra downtime. But like I said, downtimes not the issue. It's really like double signing is like the severely worse activity. And so I think You can like manually override you can do like a flag. That's like - - capital letters. Unsafe disabled, doppelganger
detection. But for most users this, you just run with the round with the default and and have those protections. So when you're looking for a flight, you go to a flight aggregator to see all the different places where you can buy the fly to get all the options and make sure you get the best price for your travel plans. And when you're making a defy swap, just do the same and use para swap.
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Periscope dot IO / epicenter. If you prefer to epochs repeatedly now, so maybe let's talk about that because that's something we don't have on each one. So what is an Epoch and how does it relate to finality? So an Epoch is a collection of 32 slots. Like I said, slots are every 12 seconds. So an Epoch is every six point, four minutes, slots are this unit of time at which blocks and very granular.
Actions can happen. Whereas epochs is like a collection of slots and there's like a, an aggregate of Duty. He's and different accounting that happen at each Epoch. And so every pocket search you slots. Every validator is assigned to a test to exactly one slot per Epoch. And so an Epoch in advance. My validator client gets notified that, okay. At the six slot into the next Epoch, you're going to have to
attest to the head. So at that point, you'll brought you'll sign a message and broadcasts and out to station and similarly like with an Epoch, you'll be, you can potentially be assigned to a Blog. And All the valid, the entire validator set, has this one out to station / Epoch and thus, at the end of an Epoch is kind of the when accounting is done. So, in the previous Epoch, we go. And look. Okay. How many at the stations were there? Was their agreement was their
disagreement. What are the rewards and penalties based off of, like the individual and the aggregate activity? And is there enough consensus on the state of things to update? The finality calculations and Epoch can first be justified. And then be finalized justification is kind of like this first round of signaling for validators to the say. I think that this block will remain in the chain forever. And then once something is Justified, they can signal a deeper thought which is.
Okay. Let's now say this, this block will remain in the chain forever. And so what we have is this like to Epoch finality cycle where the end of epoch at the end of Puck and you might justify it. And at the end of epoch n, plus 1, you might finalized optimally, finalizing POC. And, and, and in Maine, that I think we see like pretty much every single Epoch just kind of goes through that cycle of justification, that Valley
justification of finality. And that's also at these Epoch boundaries is where a lot of like rewards accounting happens and various other things. Like you might also at that point update what the view of the the eith one chain is so that you can induct do deposits and different things. So it's really Really like it's these accounting boundaries. It's really these larger than block groupings of logical activity and and from from a finality standpoint.
You can really think about you have all these little blocks. You can think about easy, foxes more of like larger packages. It's kind of like the meta chain on top of the little, the little mini chain. Does it mean the maximum kind of reorganize that could happen is like one Epoch, or to epochs or is that the one way to think about it? So there's like, increasing depth and probability of re Orcs in the East to begin chain, and at every slot, a validator,
first creates a block. And then 1/32 of the validator set is during that slot, because they're assigned to that slot, will then send it out to station, bad station immediately. Gives weight to people's for choice and recursively gives weight to the the chain prior. And so actually, because of the way that the validator set much of the validator set, participates each slot, you end up with probabilistic guarantees at the depth of slots that the
chain will be reordered. So, it's something if feels a little bit like proof of work at the chain tip, where there's, you can make probabilistic claims, that there won't be a reorg and less XYZ happens. And Under normal operation. Those probabilistic claims are actually very, very strong because most of the validator says participating and sending signal at each slot. Then at the depth of one, Epoch you can have Justified. So something 32 slots ago can be
justified. And this is really this is like the cassette of the first step in finality justification. You can make a much stronger claim that something just fiber. Never be reworked because it would require a very large amount of validators. Call it Least one-third likely more in the 1/2. Even two-thirds realm to not run the protocol. So it essentially to run an altered version of the protocol where they stop listening to
justifications. Because once something is Justified locally, you say, that's what I want to build on and something won't be elsewise justified. Unless people like change their local protocol, granted that wouldn't necessarily do a slashing but it's the becomes very, very unlikely then. The depth of to epochs. So there are 64 slots or twelve point eight minutes, then you
can finalize. And this is, this means that locally in my software, you ever seen that show, that, that is finalized would never revert, and you can make claims that no one will see a different version of finality and less a minimum threshold, validators for / that minimum thresholds. 1/3 1/3 is actually Theoretical attack could happen at one-third. It's extremely improbable that you could even conducted at one third and probably be much much higher.
And so you can make crypto economic claims that this is finalized. This will remain finalized and nobody else will see a different version of finality unless a large amount of capital is Bern. And so we have, again, we have like the head of the chain we get to make probabilistic claims based off of all these applications, that things won't be reordered. Then 32 slots to get justification, which You know, for almost any operation is much is enough depth and enough confirmation.
And then at 64 slots, we get that that finality, which is like that ultimate claim of crypto economic, like it's not going to revert. Yeah, thatthat sounds to me like just very high level on proof-of-work. It's kind of totally normal and totally expected that happens multiple times a day that the single block or even two blocks, get to get reverted here. It sounds like even a single block or slot revert. Would be highly unlikely in normal operations. Yeah, in normal operation.
Absolutely. So if I saw like 99% of the slot at the station's, come in, I can make like I can be pretty well assured that this is not going to revert, unless there's actually something malicious going on. If instead, I saw ten percent of those that slots at decisions.
Come in, then I wouldn't, I wouldn't start locally making decisions necessarily because the I don't have like a high probability guarantee, but in normal operation, we do see almost all validators assign to each thought a testing each slot. And thus, we do get that like, probabilistic increase in probabilistic guarantee that things won't be reverted. Yeah, so, it's In normal operation as good as proof of work, confirmations, and then
increasing depth. Increasing kind of crypto economic guarantees of non reversion. But on a very fundamental level, this is still very different from Earth one, right? Because on each one, one of the general design decisions is of availability over consistency. So, basically, the the chain can never hard, but this comes at the cost that there might be re aux, right? So and then you have like the the converse with a with B. Ft side consensus algorithms that we try a bit.
Basically, they have finality, but in principle, The Chain can heart. Very much like on tender moment. It seems like he's to does something weird hybrid. Yeah, this has this weird hybrid or this this middle ground that I didn't even know existed before. And so what are the trade-offs of having like this, this hybrid model? Right, so like proof-of-work, consensus. The E2 protocol is fundamentally aliveness favoring, meaning that the chain can be built.
Even if you don't have these like, B of T thresholds of validators and this is to provide kind of the uptime and availability of the network that blockchain users and what I think Global decentralized Network expects at that point. It's ultimately up to local node. Raiders to make decisions about what is accepted. Like if if I'm an exchange. I might always only operate
under finality. But if I'm like sending an ft's to my buddy and like we don't have finality, I know that this this operation will clear and it's not a big deal. So what we get here is really like we get a live chain and we get a bft consensus kind of like following.
And so from the perspective of the designers to be to, that's It's kind of, at least for the expectations of guarantees of blockchain systems, a really nice compromise and the idea ultimately is a safety favoring chain cannot simulate aliveness.
Favoring chain, whereas aliveness from favoring chain can simulate a safety favoring chain, and thus, the latter is ultimately like a more powerful construction because it gives more optionality to users on how to interpret the world view at any In time there's much debate on this point and as to like what the quality of service can or should be and whether it's really worth having these like live chains without finality.
But again that point ultimately is like the the clicking point for me is really like sure, if there's not finality. I don't have to finalize anything but I do provide optionality. So users and systems based off of like probabilistic guarantees and different things and aliveness favoring. System. Super interesting. So maybe let's talk about the merge for a little bit. There would be the merge and the merge with merge with one into the beacon chain.
So how exactly does that happen. When is it going to happen? I imagine he's won and East to have separate states. How is that handled? How do you, how do you kind of make them congruent? So let's think about what each one is. Each one is, and this is a construction for each one's a lot of things. And there's a lot of Is think about it, but for the purposes of marriage, we can think about it in two layers. We have this application layer or this execution layer, where
all of the users hang out. It's where all the applications are. It's where the user layer state is its where transactions are being processed and all that. It's really like what eyes and end-user care about. I care about you know, my you know swap trades and that kind of stuff. And then you have this thin purple work consensus module. That's driving it. It's really like providing the Services. Providing the quality of the writing, the service of this
execution layer. It's the Cradle four blocks. It's providing. Guarantees about re orgs and different things like that. And what we have is really these two layers. We have the proof or consensus layer, providing the application layer to services and to users. And then what we've bootstrapped in production today is the speaking chain, which is a proof of State can Us.
And the idea really here is for at one point in time, the proof-of-work module, to be driving that application layer and at the next point in time post-merge that proof of stake module, that Beacon chain to be driving the same execution layer the same application layer. And so the the transactions that essentially the Cradle of ethereum right now is these like proof-of-work blocks and that proof-of-work consensus and post-merge the Cradle of ethereum.
Um, the thing holding it all together. So ultimately, the beacon chain and the proof State consensus, and you can imagine the essentially that payload for the execution layer is essentially, moving locations, upon some condition. And so, people are running software that knows prior to this time or prior to this block height. I'm listening to the miners. And after this time I'm listening to the proof State
validators. And there's there's like a number of little details to work through on the actual point of Merge and how you may be handle attacks in this boundary and reorg Zone this boundary, but the simple case is essentially of a chain being built by proof of work at one point in time. And that same chain that same like payload of execution layer that validated that end users care about is then being built
by these by these validators. And the nice thing is conceptually these layers are important from like a mechanism design standpoint, but they actually translate into Really nice like software reuse and so, we have what we call E2 clients, which are these Beacon chain clients. They've built a highly sophisticated proof of stake consensus mechanism. And then we have like, what is a nice one client? And he's one client, really is a highly sophisticated execution layer.
It's highly, sophisticated evm, transaction processing mempool management, and all that kind of stuff. Plus, this thin, proof-of-work module that like, literally hasn't been touched since day 0. It's a relatively simple mechanism from a software perspective and it hasn't been,
it hasn't been touched. And so, what the software after the merge looks like, it's really taking a nice one client, which is primarily a highly sophisticated XU Xin layer cutting out that proof-of-work module, which is was the driver of that execution layer and instead of listening to that proof-of-work, module listening to Annie to client.
And so the the the software post-merge actually looks like you take these two clients which are highly Lisa skated proof of stake consensus mechanisms, you take an eighth one client, which is a highly sophisticated execution layer and you smash them together and you have the perfect steak client driving that execution layer asking questions about the extinction
layer. So for example, instead of the proof-of-work module saying hey, give me a. Give me a valuable transaction bundle to include this block. The beacon chain client is instead saying, hey, guess. Hey, never mind. Hey opened a theory. Mm. My local adjunct execution engine. Give me the give me the valuable pale. Hey process. This payload in that kind of stuff. You mentioned. So there's a state before in the
state after really that state. There's there's a beacon state which is like the system layer state of this proof, estate consensus mechanism. And then there's the application layer state that exists in these in these like proof-of-work blocks today. And really this consensus mechanism is really good at doing that. It's really good at company consensus on things. And so it's really just like slotting in its state transition
and in its in, It stayed. It's embedding the execution layer state of ethereum into that. And so, if you think about it, as like a tree of all the things embedded in, the The Beacon chain, outer, layer, state that is built and finalized, you're essentially having, like, the application layer of a theorem is embedded into it as like a
subcomponent of its state. And so, that application layer state right now, exist in like, the proof of work land, and it's really just taking that application layer say and subsuming it into the beacon state, which Which when you finalize the outer state route of the beacon State, you finalize everything within it. And so you, then just, if within it is the application layer State that's been consensus on, then you get, you know, these finality properties and those
are properties that proof of stake is giving to itself. So you're kind of spooning over the state, but I mean in principle, the miners can continue with the original chain, right? So, basically, this is kind of a natural break point for fork. Yeah, I mean it's if anybody wants to run proof-of-work, theorem, I think blockchain governments governance ultimately works, is that anyone can continue to run it. There's a couple of things that I think might make it not super viable.
The theorem Community has consistently since Genesis put this thing in called the difficulty bomb. The difficulty bomb was intended to ultimately at the beginning to, to allow for The inner shift to proof of stake, ultimately like the mining difficulty at these points of the difficulty bomb increases exponentially so that it becomes non-viable to mind that prefer work chain, unless you actually hard for.
So that might dissuade a proof-of-work fork here, but another, another interesting point is that when in the last contentious, theorem hard Fork, so which created a theorem classic? There wasn't a lot going on in the application layer. There really was this dowel thing and then a bunch of like little experiments. And so the application layers could kind of for can exist in parallel and it wouldn't, it didn't really. There wasn't really any of these like, big dependencies and
stuff. Whereas I would posit that if theorem forked today and you had a majority Community stake in one and then a minority communities taking the other that the application layer on the minority one is likely going to. Implode, there's a lot of Interdependencies and a lot of value and stuff here. For example, oracle's may or may not be run on the minority fork. And even if they are you have systems like maker.
Which if they're, if the value of the eith on one side of the other drops significantly, you have like Masa quotations, then dies integrated all into D Phi and you have Rippling all the all the effect assets that you see tether and so on. So yeah, I am. Also think like the the the support for proof of stake in the your theorem Community is so overwhelming. That I really don't think there will be any debate or any question kind of what direction are. Definitely from a community
perspective. I'm like 99.99% are just like let's do this. We've been wanting to do this for years. Can we just do this? Come on, whereas you could theoretically run a proof-of-work fork, but I think that it will quickly become a wasteland. You said earlier that proof of stake has two main reasons behind it. So one is the Environmental sustainability and I think that's pretty straightforward why? That is the case and the other one is the security.
So let's talk about the security aspect. Why is proof of stake good for security purposes. So perf working for the sacred, fundamentally crypto, economic consensus mechanisms, meaning that they have certain properties if no entity has certain.
The value, securing the network. And so they're pretty similar in that sense and have some similar properties because of it, but I think the the Crux of the proof of stake having higher security is really because that asset securing, the network is actually in the protocol and so you can not only reward that asset, you can penalize that asset and this especially in the failure modes, leads. Too much more secure system. So let's think about what happens.
If a proof-of-work chain is 51% attacked if proof work chain is set to 1 percent attacked. That's kind of it. Like you have a you have a party that has 51 percent of the assets and they can reorg and do whatever they want. They're the only recourse here is forking the protocol so that you have a new mining algorithm at which point you bricked, all the good guys Hardware as well. You can think about it as
there's a budget for the attack. The budget for the attack was securing, 51 percent of the assets, but then they're ultimately really wasn't a cost. And so once I secured the budget, I'm now just God whereas in proof of stake because those assets are in the protocol. There's a budget, so secure 51 percent of its assets, but then there's also only a cost as well because if if you do connect a network fault, then those assets
are slashed. So I can do the attack once and I lost all my money and I have to accumulate all his assets again and do they attack again, you know, where is in proof-of-work? I just entered god mode and could reorg over and over again. And in the extreme where your some say, maybe hit like two-thirds threshold and you're some sort of like censoring majority or cartel. This can also be detected socially, so I can, I can identify this cartel. This censoring majority and the
extreme there. I can be social recovery. So these assets could be forked out of the protocol and burned, whereas, in proof of work. You don't have this nuance and you the only, the only recourse was ultimately forking. The good guys, and the bad guys out. That's definitely like something a failure mode. You don't want to run into but the fact that that recovery does exist. I think ultimately would dissuade even those extremes the types of attacks.
Yeah, I mean, this is a question about what is more secure. I think the debate. Well, was going on for years and I think I really think it's settled now. I really think through steak is, it's absolutely clear. One thing where it's way less clear to me, how it will play out, is the question of centralization because originally I used to bring up the argument that proves take would lead to less centralization than proof of work because improve Work. You have the economy of scale.
So you have if you spend, I don't know, 10 million on mining. You will get at the end better return for your last dollar, then someone who just spends, $1,000 and Mining. While was proof of stake arguably or well, maybe that that is less case and kind of
each validator. Even if you just have like, one validator you kind of probably will have the same rewards that being said there are Second arguments, I would say, also for centralization in proof of stake and that is likely the idea of taking derivatives and I mean it to some extent that's already what we are seeing is that, of course. Yeah, there are specifically now where you cannot get your easier. Well, immediately out. So it's quite quite a commitment to do it.
Manually or do-it-yourself kind of steak. You're 32. Sir, you could just go to an exchange and they will offer you a nice service. They will say, okay. Well if you want to go out while we find a seller for you, we we create a taking derivative or whatever. We call our Market. Yeah. Yeah, and we have a market for that and of course to someone to to an individual. I mean that's that's a big big plus.
But that comes at the cost of. Yeah, well or threatens the decentralization and I maybe, you know better than me. The current statistics. But exchanges play already a big role. Right? Right. I mean, between exchanges and staking pools. It's probably something like 50. 55 percent of staked assets that we can tell today.
There is a definitely a strong hobbyist community, and, but you're right like this, there's this like, before the merge, those, this, this unknown lockup and so liquidity is certainly a question and certainly a driving factor for people to move to these these other types. Institutions it there. Anything we can do about it, huh? So there are some things that are done today.
So one thing I mentioned earlier, this is, this is kind of a minor point, but the fact that you can participate with a very small percentage of the network and still have regular rewards and payouts, that's like a nice little thing and that
helps the hobbyist community. One thing that is designed into proof of stake systems, which is not in proof of work systems is there's these like dis correlation incentives and so If you are with a majority, if you're with a very large staking institution and they go offline, the amount that you lose is much higher than if you were going offline and isolation or in even
a smaller pool. Even worse is if you're with one of these large institutions and they have some sort of security breach or some sort of bug or issue. Then that causes them to be slashed. Then again, the amount that with the truth / scales with the percentage of the network that was recently / and If you're with like a 30% stake and pool or 30%, staking provider exchange that has major slashing event.
Say somebody internal just wants to watch the world burn or somebody hacks the system or they're running just buggy software or someone trying to be clever with their redundancy, you know, you would lose quite a bit of capital and so there are these disincentives to being with the large institutions. This might drive you to be a hobbyist and steak at home. But this also, I might drive you to be, you know, with a smaller
pool. And so I think, even if we end up with a highly pulled landscape, which we certainly are beginning to see, at least in the 50% range. There's still these incentives to not be with with the mega players. And so whereas in mining, I think we have like two or three pools that you have them
together in Europe. 51%, The only thing that keeps those pools from being larger than that is is because it's not socially tenable ultimately like it wouldn't, you know, people don't want to. The pool, that's too big. Whereas there's actually a disincentive of joining pools that are that, are that large and staking landscape. It is unfortunate that those disincentives are in the tail risk scenarios, which I think that humans are pretty bad at.
Really, assessing tail risk. And so I think we might we might see waves of centralization and decentralization as some of these events happen. So if something major happened to a major exchange, all of a sudden, we might see everyone like scatter their steak and and and read. Distribute, but we shall see. Second derivatives are certainly. Another interesting thing. I think we've seen, there's a, there's an entity that has something like seven percent of State assets right now.
And I think that number has increased quite a bit in the past few months. And that's primarily, because they offer, I won't use the word decentralized. They offer, they offer an on chains, taking derivative. And this, you know, they have interesting mechanism where they're kind of Distributing their kind of like this tokenized, middleware. Then like distributes to various pools. And so, all the represents 7% of the steak. It's actually distribute to like
10 pools underneath the hood. And then you have these taking derivatives that represent like kind of the the shared risk across these these pools. This is I see as a competitor to exchanges rather than a competitor to hobbyist. Like if I'm a hobbyist. I'll probably be a hobbyist. Whereas if you know, I was going to go to coinbase. I might instead go with this, like decentralised option.
I hope that we see a number of these, so we see a lot of Titian and I hope that we see a number of likes taking institutions, so see a lot of competition. I am more optimistic probably than you led in terms of the although we might see like a highly pulled and highly institutionalized space. I think we're going to see much better properties than we've seen with mining pools. I mean, one one, is that every exchange wants to get in on the action.
So, every exchange is probably going to create a product, whereas, mining pools. We saw. So very few entities that ultimately are these like Large pools. Yeah, one when I commend you brought the disease, definitely very strong is just this continuous payout. I mean, that was definitely a driving factor for mining pools in well, in proof of work. How is that affected after the merge? Because then well, I guess we are talking about transaction
fees. Do they go then to the block to the block producer or at least probably Mev will go to the block producer. So so, you know, that will affect the value of the payload of the application, their payload, so, Transactions. That we know and love goes to the lock producer. They're the sole entity responsible for bundling and finding that value. And so they're the ones that are paid out.
This actually is definitely like a especially in the like ever evolving landscape of Mev. This is definitely a huge point of research and huge point of discussion. And ultimately, I think it comes down to the democratization of Mev meaning who has access to To it. How much of an edge do institutional players have over hobbyists? And I ultimately, I think it's very important for one for application layer contracts to
design their systems. They don't have highly exploitable Mev, and to, for Tool, open tools and open access to Mu V to be created. So that hobbyists have don't have like a huge discount on institutions and 3 even investigation of layer 1. Call techniques to, for Meb minimization. For example, 1559 ultimately does put a bound or does reduce the amount of Mev available essentially, like the because of that in protocol burn.
So, there's potentially is very like, exciting area of research, but potentially, there are other types of techniques that may make its way into the protocol over time. There's also there's, there's a security component here the classic bit. Coin issuance model is not
sustainable hinges. Upon the fact that as the issuance goes towards zero and transaction fees become the dominant component of the block that it becomes the mine on the head, it component of the protocol becomes game, theoretically on stable, whereas I might, you know, 520 person the network. And I see these like huge transaction fees. It might actually behoove me to reorg. Try to re attempt to reorg the Head even though I only have a small probability of doing To
try to get those fees. And what we're seeing with with the rise of it, my TV and that ratio of like block value to block issuance go up. We definitely see some of those like similar weird incentives. Pop up on the layer 1 security. And so that's like definitely a huge component of research and I wouldn't say quite a huge worry, but there's a lot of people think about this. Yeah, you interesting Insight at least for me that reducing Mev might be a factor for
decentralization. Yeah, absolutely. And so it is certainly a concern, I think in a world in which you had, you know, hobbyist couldn't access Mev. And you had major institutions with pouring hundreds of millions of dollars into optimizing. Mev. That's definitely like not a good outcome for decentralization. And so there's a kind of a huge parallel track of research right now on democratization and and maybe minimization. I think is going to be critical to the security of the system in
the future. Yeah, I mean even if it's completely democratized and everyone would get the same, you would still have the variance issue. So you would still them. So you would have you would have certain you do have those consistent payouts, which maybe keep your machines, keep your lights on. But you would see these like larger payouts. But so it's definitely a definitely like the the optimal of like having these like very clean consistent. Revenue streams changes, it changes.
The the calculation certainly. So the other thing that if you're into is going to bring I'll be it not immediately is scalability with with sharding. So for some reason this is lumped together with the proof of stake transition, but it won't come live until next year. I'm guessing at the very earliest. Is that correct?
Later, for sure. So, yeah, the the East to I think I often say is to increase, security, sustainability, and scalability while retaining decentralization and this is so that we can theorem can can provide a secure and sustainable environment for the world's decentralized applications at the Crux of sharding, at the Crux of this consensus mechanism. Being able to provide more scale
is really like sophisticated. There's some design and it turns out that it's much simpler to design these mechanisms when you have a valid, when you have a participant set when you have a validator set when you have like the consensus entities at hand, to essentially, like orchestrate and dictate through mechanism design with proof of work. There's this notion of there's no notion of validator set at any given time. There's no notion of consensus set.
And so a sharding, which relies heavily on randomly sampling and validators and Since entities validating subsections of the system at any given time, really needs to know this the set, you can imagine. There are like, some proof of work charting designs, but they ultimately end up trying to mimic a proof of stake, sharding design and that there might be some sort of, like, election into a set.
Like, you have to mind or certain amount of time and do certain out of blocks and all of a sudden you're in the set and you can be sampled and it's much cleaner and much simpler to just have a validator set know. And with proof of stake, we get that out of a box and so really the foundation is get a proof of stake in. This is mechanism out there and then to come to consensus on valuable things valuable.
Things are the execution layer of a theorem today, the application layer and also more things. So so sharding Russo, take this consensus mechanism and utilize it for the value of there. And there's really the prioritization here between these two major upgrades, the merge. And sharding. The question was which to come first and the really nice thing is that there are tons of scaling efforts layer to scaling efforts going on in parallel to all this layer.
One development, and so coming online today and increasingly. So are these these Roll-Ups which scale with the amount of layer, 1 data and and aim to provide like ten to a hundred X scaling for theorem without changing, which I'm moving to the sharding designs. And so what we get to do is do the merge which gets rid of proof of work which makes the system more secure and more sustainable simultaneously. We get all these layer to scaling Solutions, which makes
the system more scalable. And then further down the line, bring on sharding which would complement these layer to scaling solutions by providing more more layer 1 data to, to get even more scale. So essentially all these all these Roll-Ups are there buying it's time. We get to work on the other two components through the merge and then Then and then prioritize sharding.
So essentially if we did we did starting today instead of the merge we might get, you know, we get all these layer layer twos and then we get all this all the scale from sharding and but we didn't get the, the increasing centralization, increase the stability. So instead we get to tackle them all at once at these different layers and then enhance it
further down the line. From your perspective, is it is an option on the table that it will stay proof of stake that basically saying kind of, well, we do the transition to proof of stake. But after that L tools will do just drop and that's it. I don't think so.
But I mean I don't get to decide you could imagine some movement at the community being like this is enough, stop stop messing with it. And and you know, I think ultimately that would be it with with ten to a hundred X scaling with Roll-Ups. Like that would give us
something. I think the theorem would be very valuable and Powerful tool but I don't think that it would give us the the scale that much of the community has imagined throughout the years and so What we do have going on right now is there are shouting specs up in the spec repo. There are people working on our D and working on prototypes. I think even within the next few weeks, we might see like a very small, like sharding Dev net which builds upon the beacon
chain and the merge. And But ultimately like from an engineering perspective like one had to be prioritize the other or we just both with would take longer. And so yes, there's a lot of unknowns.
There's always a lot of unknowns and and the roadmap and the technical Specifications have often been been in flux and so like you could imagine in 12 months, something radically has changed but I do think that come the end of the year with the hardening of the sharding specs and with increasingly some like test nuts with some of the people that are spending on prototyping that will have like a good idea as to how the slots in in the next like 12 to 24 month roadmap.
Obviously, there's there's this thing we call E2 which is all the stuff we talked about. Far. But there's also like tons of other shit. People always want to do and prioritize. And so like it's a constant kind of debate and discussion, other other things, you might have heard of, or like, State Management and state sustainability through, like, statelessness and other techniques, which help reducing the load of running a full node. A child with, like clients, all
kind of stuff. So there's, there's a lot of different parallel Rd efforts. I think I can say very confidently. The next major thing to go to Maine. Net will be merge the merge. But then post that it's of a very active discussion debate. Yeah, I'd love to do another episode sometime about charting and the other efforts just because, you know, having them like on the sides like this. It doesn't do them justice, but I do actually have a couple more very tangible questions on proof
of stake. So who we got to determine the block gas limit after the merge. So the execution layer is like, at the beginning, the merge is untouched. So the essentially everything dictating that realm is ported and instead of the proof of work miners producing and sending signals on that. It's the, the proof of stake validators. And so, in the construction of a block that has this execution layer payload.
Similarly, the got the block gas limit could be dictated by by a validator than by proof-of-work minor. So that knob still exists the block producer, can still turn that knob? The block producer, just happens to be a validator now instead of a minor. Similarly, like the 1559 feet mechanics, which are expected to go live in the next couple of months that mechanic at its core is in relation to the block producer, right? And the by producer post-merge happens to be a validator rather
than a minor. On this topic. I really have a very high-level question on how we see where how you see etherium and specifically with this. Yeah. Question of what's the purpose of etherium and is there potentially even a conflict of interest? So what I'm talking about, one way to look at the theorem, very critically currently is look at, look at the high fees and see you. Is and applications paying currently enormous fees. So, one way to look at it, very negatively, would say well, they
got lurked into this chain. They kind of started their assuming. Well, everything would be cheap and it free and currently they are getting the maximum idli rent extracted from from, from, from those fees. And I mean, that the, The Narrative is getting stronger around ultrasound money or kind of making a lot of money in a way with it. Theorem so to what extent or maybe what's your comment on that? Or is there a chance to come to lower fees? Or maybe even the question? What is one?
Yeah, I mean I'm I don't claim to be an ultrasound money asked. I do think that these systems that the foundational asset is systems must be valuable because these are crypto economic systems and they rely on crude economic consensus models, which generally are more. Secure when that foundational asset, does have value and so I get the push their mean, there's probably two pushes their some people trying to make a lot of money, but ultimately a secure ether, highly valuable security.
Third does provide good properties to the system. So but but that aside the Crux here is ultimately capacity, which is Supply and there's a demand, you know, as outstripped Supply. Quite a bit and people really want to use the system because of the network effects because all the shit is there. Like you said, they've been roped into the system. That's where all the action is happening. And there's also like a an argument that and maybe against kind of the tail risk thing.
But this is seems much more secure than other systems by virtue of everything happening there and buy the network effects in the value of the foundational asset. Ultimately. We need to figure out how to
leverage this secure network. For more capacity and and there's a couple of techniques there and we talked about earlier but Roll-Ups kind of go into this realm of can we can we use this as like a settlement layer to like a parallel system and leverage and get the same security out of it. It turns out that you can and it has been quite a journey to the
to construct systems like that. I think plasma was like this promising thing and we kept running into this issue of like, ultimately like There's there's a date, availability problem. And there's all these like, kind of Ransom attacks and different issues, that arise, their Roll-Ups solve that, and are extremely promising. To use ethereum more as like settlement layer to leverage, its security to secure much more insecure, much more activity, which is great.
And then ultimately sharding, these techniques of random. Sampling of using consensus participants in a way that does not. Degrade security, but can come to consensus on more. Ultimately. Like what is L1. I mean no one's L1 security model on a certain amount of capacity and with other with with a spectrum of decentralization.
I think it's Theory. Mm thinks the theorem Community, the theorem ethos thinks that decentralization is like a very critical component to the value of these systems, into the value, to the world, and thus all of those design decisions, that sharding, the how It more capacity ultimately like is unwilling to really sacrifice on decentralization and thus it's taking time and it's difficult. And I think one of the reasons that a lot of applications and things are here is because of
that. Ethos, because of that philosophy because of the value that we think decentralization is going to bring the world. But we see a lot of other competing systems that I think make different designs decisions, especially on that decentralisation Spectrum, provide much more capacity and the systems may or may not have there. Place in the future, but I think if there is attempting to build a certain type of future and that's really The Guiding Light and I think really ultimately
the value proposition. Cool. Thank you that that was super fascinating and I'm afraid we kind of have to wrap because of because of time not because we've run out of things to talk about Danny. It's been an absolute pleasure. And where can we direct people to learn more about eat or even join the effort? So this is fantastic place called The eith R&D Discord. It originally was the kind of an easy to effort and then the all core devs, the theory one effort at all merged, and it's just
this, like fantastic. Fantastic place to get involved in anything L1, etherium Rd. So check that out. You can find links on, like, the spec repo you can, I think you can probably find it pretty easily. There's III search, which is a more asynchronous Forum to discuss. Research ideas. There's the E2 specs, repo or a lot of the magic happens on getting the specifications for this major upgrade in place.
And then there's the, you know, the dumpster fire of crypto Twitter, which you can at least like find access points into into all these different things. With a link to all of these in the show notes. So thank you so much Daddy. Yeah. Absolutely. I really appreciate you having me as a fun fascinating conversation. Thank you for joining us on this week's episode. We release new episodes every week. You can find And subscribe to the show on iTunes Spotify, YouTube SoundCloud or wherever
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