The Ethereum Network Just Experienced a Monumental Development

poster with the merge written in creepy letter. Doesn't make it look like an old horror movie kind of thing. But yeah, the merge is happening in ethereum. Yeah, right, and so people have been telling us, Oh, you gotta

have a merge episode. You know, there's so much going on we can't always get around to every topic, but this is like ethereum is switching its consensus mechanism from proof of work, which is like kind of like bitcoin mining, very energy intensive mining operation the most pop associate with Crypto, to proof of steak, and so it will be a different approach to creating and validating blocks and they've been working on it for years and years and years and

it's finally happening. So I'm going to caveat this discussion with the fact that I haven't been following this very intently. However, I do find it interesting because it gets to something that you wrote, I guess it was a year ago or so now, about, you know, the crypto world kind of splitting into these two different camps and on the one side you have people who are very into the

technology and technology. You know, one aspect of technology is that it evolves, it changes, and so in that respect this is a theory um evolving and changing in a very big way. But the other camp and crypto are the sort of Bitcoin maximalists, the fundamentalists who don't want to see anything change about bitcoin and the technology at all. I'm really glad you brought this up. I think that is spot on, because there's this question of like well,

what is is it software or isn't money? And I think there's like these two camps and if it's software, right, or if it's if software is a really big component, that a part of software is upgrades, right, upgrade cycles, and you know, it's like Microsoft might update it's browser or something every year or something, and then at some point there, like the old browser will not be supported, you can't use it anymore, right, whereas this sort of

like money stands. There was sort of like hardcore bitcoin view is, you know, if you're gonna have money, you don't ever want to be told this money isn't good anymore or there's been a hard fork or there's been some sort of change to the network and you have to do something, you have to change something, you have to update your software to use it, and I think these are like fundamentally very big things and I think this, this merge, this huge switch from sort of traditional mining

to proof of steak is really important, sort of culturally, setting etherium apart from bitcoin and its willingness to change the rules from time to time of the network a touchstone moment for crypto. But it also gets to the idea of pros and cons of different types of blockchains. Right. So ethereum is trying to solve one problem here, which you know might, for instance, be energy use, which a lot of people have focused on, a lot of crypto critics have focused on saying that mining wastes a ton

of energy. So why don't we try to fix that? But on the other hand, does the new design come with its own set of problems? And we've already seen some noises around the idea of well, maybe you're making

it less censorship resistant, and we're going to get into that. Yes, and so one of the developments over the last several weeks is the treasuries sanctioning of Tornado cash, which is a way for people to obfuscate their ethereum transactions through a mixer, and it's the first time that the Treasury has ever sanctioned a piece of software, which is pretty interesting. But then it also raised the question will if they can sanction a piece of software, why can't they sanction

ethereum itself? Or can they tell ethereum holders or ethereum acres in this new proof of steak mechanisms? Like you, you're going to get in trouble if you process blocks from entities that are trying to launder money, etcetera. A whole new can of worms. It's always evolving. We're always trying to keep up here on the podcast. So let's try to learn some more about it. Let's do it. I don't even know what a validator is versus a mind. Let's get a steaker, a validator, a minor or relayer,

a whole Er. I don't know any of these words, so we're gonna be talking to someone who does. I'm very excited to welcome to odd lots Christine Kim. She has a research associate at galaxy digital and she's been writing about these topics for galaxy clients for a long time. So, Christine, thank you so much for coming on. How did we do there in the introgue? This is like foreign territory.

Was that? How do we do there? That was excellent. Um, I think we've already done you guys have condensed this entire podcast and everything I wanted to talk we can stop now. A minute. Yes, and we can stop now. Tracy and I like we still we we had a

busy day. We started prepping about the fifteen minutes ago and I said Tracy, like we're gonna we talked about proof of steak and Tracy turns to be like three minutes later it's like, I think this is going to like create some centralization them like it sounds like you got it, but no, I was really impressed from your perspective, Christine, like let's just start, like how significant like is this moment for a theorem? And like, what's the real goal?

We know reducing energy consumption as part of it, but why do you put this in context on the ethereum roadmap? For us, for sure, I think it's hard to understate just how big, or overstate, I should say, how big, this upgrade is. The transition to proof of steak has been part of Etherorum's original development row, back when the

blockchain first launched in two thousand and fifteen. Developers had thought that this upgrade would be ready earlier in but due to the technical challenges of actually swapping out the consensus mechanism of ethereum while it's live, um brought forth delays,

and so people have been asking for this upgrade. Developers have been working on this upgrade for around seven years now, and it's it's truly it was almost to the point where people had thought that etheroum would never transition, that this, that this transition to proof mistake was just a pipe dream Um. And so the fact that this is the week in which ethereum will finally fulfill one of the promises that it had made to its users its investors

back when it first launched. I think is is pretty monumental and it's really not just about the changes to its energy consumption. I think another big change that people are really looking forward to is ethereum's monetary policy switching from being an inflationary currency to potentially a deflationary currency. The annual network issuance of the network is expected to drop from around five to less than zero point five percent.

And if you add in Coin Burns, which is like a new mechanism that that was introduced back in October, or I should say August, with the I nine, there is this. There is a lot of excitement around ethereum's issuance of the issuance of Eth and the supply of actually contracting over time. With more activity on the network. You're going to see more eth being burned and that impacting total supply. So I think that's another big part of it. It's like the economics around eat. That's going

to be changing after the merge. So I just want to ask one short question make one point. We are recording this on September, the merge. The event is expected to happen in about a day by the time you're hearing this. It should have happened if it totally blows up or something, we might have to re record the entire episode, or maybe we'll like put this out as an artifact of a history that might have been. But just a real quick technical question. This is called the merge.

Does that imply that the proof of steak, does the proof of steak ethereum already exist and now the two networks are merging together? Like, is this this other chain that has a different consensus mechanism that's already operating? Yeah, that's exactly right. So the proof of stake blockchain of

ethereum has existed since I think it was December. Um It's called the beacon chain and right now a very small portion of eight is issued on that parallel chain and there's individuals and stakeholders that have already invested their money into that chain, the beacon chain, and for the merge, what's going to happen is that chain is going to

become fused together with ethereum main net today. But in the process of that change, all of the issuance that happens on ethereum currently, which goes to miners, will disappear, will go to zero, and so the only issuance of that you have left is to the validators that are on the beacon chain now, and that's really just a fraction of the total issuance that's that's being generated today.

So I have a ton of questions already. I'm also kind of hoping that our producer is able to put in like sound effects every time we say the merge,

so it was like merged and I love them. Okay, on a serious note, can we back up for a second and can you maybe describe the difference between proof of work versus proof of steak, and also how ethereum got into a position where they have two different types of chains, so beacon versus the normal ethereum chain, and then also, on top of that, maybe to describe the

difference between proof of work and proof of steak. Could you walk us through, like how will a new ethereum be created under this new regime, and what happens to the miners in this case? I started by asking two questions of a rose. That questions you're gonna have to you're gonna have to remind me if that get to answer one of those Um, but let me start with just giving a broad overview of the difference between proof of work and proof of steak and then, okay, yes,

and then, and then we can go from there. Wow, I love the enthusiasm around this, though. I totally agree with you guys that, like the merge is a really big event, and like educating people around how this is actually happening and even the technicals beneath it, which sometimes can sound boring, is like really, what's what's exciting. So

I'm glad we're talking about this. But anyways, so I think it's it's useful to start off with what is a consensus mechanism or a consensus protocol, because that is that is what a proof of work and a proof of stake blockchain is. It's basically this is the mechanism that defines how nodes in a blockchain come to agreement about the state of the network. So what are the account balances, the transactions, the updated transaction history of the blockchain?

There needs to be a way for all the computers that are connecting to the network, also called nodes, to be aligned about what the canonical history is. And so it's really about how do you process blocks on a blockchain? How do you finalize those transactions? And with proof of work, you do that in a very energy intensive way. You have these actors that are called miners, are solving a

very computationally intensive math problem. These are called Hash functions, and every miner is competing to be the first person to find the correct solution because that means that they get to build a block, include transactions in it get

the reward from the block. But for proof of steak, these actors, these miners, are replaced by validators and instead of solving that very computationally intensive puzzle, validators are voting on blocks and they're attesting to blocks and they just get randomly selected by the network according to an algorithm of who gets to be a block proposer. So on ethereum. It's not that. When when's the theory and transition to

proof of steak, I should caveat. These validators are not competing, they're just randomly selected to to propose a block and they'll get rewards from that. They'll also get rewards from voting on blocks and attesting to the validity of those blocks. But the question is, why are these validators on ethereum? How how do we keep them honest? Because with miners you've already expended so much computational energy you've kind of

input in a very high cost. You're not going to lose the chance to earn those rewards after you've sunk in a particular amount of cost. With validators, you haven't really sunk in anything. You haven't expended any energy to vote or a test, to blocks or to propose blocks. If you did, it's it's very negligible compared to what miners do. So what validators need is we need a different way to keep these validators honest, and that way

is through steak. So sometimes people call validators steakers. They try and use that term interchangeably. But at the core of that is validators, at least on Ethereum, are staking a large amount of ether. They're staking thirty two eight, which I haven't checked the prices as of late, but

it's a significant amount. And if they do try and cheat the network, if they do propose a block that goes against the rules of the network, that they're trying to confuse the network, trying to attack the network or change the validity of the chain, there is a potential that that amount of steak that they've put into the network gets slashed. So it's a very different way of keeping actors honest. For minors, you are you are expending a lot of cost upfront and that cost kind of

keeps you honest. But for validators, what you're doing is you're you're locking up your capital and you're letting the network kind of hold onto it, and the fear of having that steak slashed is what keeps you honest. It's so you mentioned you have to put up right now at around if you're putting up a minimum to be a validate, or U S dollars, and I guess it's

kind of like a security deposit. The risk is if you do something untowards to the network, if you vote bad if you try to approve in valid blocks, you lose part of your security deposit. Exactly exactly. And so this, this mechanism for proof of steak is seeing one of the benefits of it is that it is more ecologically friendly. It has better for the E S G narrative, because you're not putting in so much energy just to build

a block. You're being randomly selected by the network to build a block, and the reason why you can be trusted to make sure that that block is is correct and is valid is because you've already invested, you know, a certain amount of state to the network and for ethereum. I think the original idea was, okay, we have this mining consensus protocol that is already finalizing transactions, progressing blocks.

We should move all the applications and the users to a new consensus protocol, to a proof of steak network and blockchain. But the concern, there's a significant amount of complexity around that, because what is that moving process going to look like? Ethereum over the past couple of years has just skyrocketed in terms of active addresses, total value locked.

I think the the amount of value that has grown on ethereum, the amount of activity that has grown on Ethereum, has made the vision to just simply move users and applications and value to another new chain infeasible, very difficult

to do so. Instead of moving users on the current ethereum chain to a new proof of stake block chain, developers have thought of this, this alternative idea where you launch the proof of steak version of ethereum and you simply fuse that version of ethereum to the existing ethereum. So one of the cool things about the merge is that it doesn't impact the application layer of ethereum. It

really only impacts how blocks are finalized. So as the current ethereum block chain is progressing blocks, it will communicate those blocks to back to the consensus layer of Ethereum, which is the beacon chain, and the beacon chain will start to take over the response of the of finalization.

So that question of you know, why is it that ethereum has a parallel proof of state blockchain and why is it that we're going down this roadmap of of merging together the block chains rather than simply upgrading the

existing proof of work chain? I think it really comes down to simplicity and it comes down to how do we do this upgrade in a way that doesn't result in downtime and doesn't result in disruptions to a network that has just grown so much quicker than I think core developers had anticipated when they first launched ethereum, and I think that's also why we've seen a lot of delays to this upgrade, because the value of this chain and the amount of user activity on it has made

it so that, you know, this upgrade, when it happens, has to be done in a way that's that's very air tight, that's very poses the least minimal amount of damage and of risk to the users and to the applications. So I think I missed some questions. Actually, any questions on that? I think you did. I think you did

all three. Actually, Um, that was really good. So one thing that I find odd about crypto in general is that, like the problem that they're trying to solve is the problem of like how do you do trust less transactions? Like two parties don't trust each other. How can technology, you know, get in there and make it so that people can transact with one another in a, you know,

in a way, that in a protected way? But at the same time it feels like so much of it is like or at least especially in the ethereum case, so much of it is built on consensus. It's like two parties can't trust each other, but we trust the system as a whole to reach a consensus, and that's basically how you know proof of stake is working. How, how do they actually get to that consensus and what happens if, like one validator in a transaction rejects a block?

Consensus really is at the core of of these technologies. It's a really question because these systems are meant to

be trust less. It's meant to uh cut out the middlemen Um, like you said, and for proof of work consensus protocols, that trust less uh interaction between miners validating and earning rewards from block production is actually much simpler than proof of state consensus protocols, because proof of state consensus protocols don't rely on an external good, it doesn't rely on energy, it just relies on an internally created asset like like. You have to assume that E is

a worthwhile asset for proof of stake to work. So that question of you know when a validator rejects a transaction or when a validator creates a block that all the other validators think is false or or goes against the rules of the network, that's something that the protocol level of Ethereum, as a proof of stake blockchain, is automatically checking for. So there are certain rules around how

you can propose blocks. So one of the ways that you prevent against double spends, basically like somebody saying that I spent five dollars and I can spend another ten dollars from the same address and and not change, like the account balance. That is prevented by the network. Basically checking for double block proposals, like if a validator to were to propose two blocks at the same time, that's like a slash double event. That's something where the state

that they've put into the network gets reduced. And there's also other ways in which validators can keep each other honest, even if those automatic rules aren't able to catch all the activities. So this kind of goes into the censorship question of like, let's just say we've noticed that a certain validator continues to reject transactions from an address that's

on the o FAC sanctions list. validators can coordinate to the sally like blacklist those malicious validators, because when you've put your stake into the network, you've also told the entire network that hey, this is my validator, I d this is my address. You are no longer like an anonymous uh stakeholder, whereas for, I think, miners, when you're dedicating hash rate or hash power, to basically computational energy to the network, that kind of labeling system is is

harder to do. But for validators, once you've put locked in your thirty two to the to the network. It's held by the network and it's also identified by the network. So another way in which validators keep each other on, it's outside of these like automatic rules, is this ability to kind of put bad behaving validators out of the network. Now this requires social consensus, this would require some sort of an upgrade, some sort of a way for everybody

to coordinate against those those validators. But that's kind of like another final resort where I think it helps to to understand like how is how is this network coming to consensus? Like initially it's like these rules, these pre programmed rules that are part of the protocol, but sometimes, like rules can't always catch all of the malicious behavior. Um, and in the case where you're not able to catch the malicious behavior, there's also this additional step that you

can take. Um, sometimes it's called social slashing, Um, where validators can basically like remove certain bad acting validators from the network and slash their steak, even though they haven't necessarily drawn against the technicalities of the rules, that they

can just kind of like coordinate to do that. So I think this really gets to what was going to be my next question, and it's one of the criticisms of proof of steak is okay, most people, probably, I assume most people who own some don't have thirty two of them or don't have but doesn't mean they can't participate in steaking. And if my understanding is like, okay, take some random person, buys a few eth leaves it on coin based, coin base can then be itself a

huge validator of youth. But talk to us about the risk of a few mega validators, because I think when the essentially the undermining of decentralization such that, okay, there's I think there's something called Lido, there's coin based, probably

a few others. But the the risk of everyone just putting their money with a couple and then you just have a couple public, well known entities who are, in theory, like have you know, dealing with the laws of their land, the law enforcement of the countries they operate in, and the executives of these companies, a handful of entities with an incredible amount of steak deef and therefore network power

under their control. It's a bit concern. I definitely have to say that it's always been known this potential for a lot of state to become controlled by centralized entities like coin based like Lito. But I think the recent sanctions against Tornado cash we're just like a wake up call for the community and because of that there has been a lot of conversation around what would happen if,

you know, these entities started to sensor transactions. I think first it's not totally clear that these exchanges and the centralized staking providers will need to but in the event that they do, we shouldn't, I guess, like understate the role of independent validators in the system. So if, by chance, there's a transaction that coin based Lido starts to censor,

they're not going to include it in a block. Eventually the network will pick a independent validator to propose a block, and that independent validator will not be judging transactions by are they on the o fact sanctions list or are they not? They'll just be picking it from the public men pool. But let's just say, you know, for the sake of argument, that a hundred percent of validators, that not even five percent, not even you know or fifteen

percent of validators, are even in pendant. In that case there can be changes to the protocol made so that a certain amount of transactions are kind of enforced by validators to include into their block. This comes back down to another kind of area of discussion, which is around o fact compliant relays. I don't want to get too technical to this, but that's here. I don't I think we said at the beginning, I think relay was one of the words, that I don't know what it means.

Let's go for it. Okay, well, great. Um. So relays are basically a third party software that validators will connect to in order to earn additional rewards on the blocks that they create. So you get a certain amount of reward for just producing the block. You also get rewards through transaction fees. These are additional amounts of beef that

people can add to their transactions for greater priority. There sometimes called priority fees, and there's also MTV, maximal extractable value, which is what happens when transact s are ordered in a certain way that allows for arbitrage, allows for sandwiching, basically profits from positioning trades, usually decentralized finance trades, in a very specific way. So, if so, validators are not super savvy and identifying decentralized and identifying opportunities for MTB.

validators are really, you know, operators that we want to assume are just running a piece of software. They're they're just running the consensus protocol of Ethereum as is, and they're just sitting back like earning the interest on their thirty two e Um. But if they wanted to earn additional they can connect to a relay, which is this

third party software that connects block builders to validators. And block builders are the ones that are interacting with searchers, which are very highly specialized users that are able to look at the men pool and bundle transactions in a profitable way. And these block builders they construct a block, they construct a very profitable block that gives more our of rewards than just a regular block that validators would

create on their own. So some of these relays are operated by entities like flashbots, and flashbots has publicly and has been for a very long time compliant with regulatory laws and has said that, you know, we are an entity that will be censoring transactions that are on the o fact list or transactions from addresses that are on the o fact list, and they're kind of a major they're going to be one of the major relay operators, but there are other relay operators, like blocks route that

have said that, you know, will operate relays that validators can can connect to that won't be censored. And going back to the to the hypothetical that, like all these relays are suddenly censored, like, let's just say there's not even one, then validators can enforce something called the CR list,

like censorship resistant list. This is a technology that's still in the works, but it's something that developers could potentially roll out if they see that, you know, all the validators are all relays and MTV extraction is just kind of going to a specific relay like flashbots. That's, you know, censoring transactions and it's very difficult for validators to include, even independent validators, to to stay competitive, to earn MTV UM and to do so in a way that's censorship resistant.

What developers can release and what they're considering as a as a potential solution is implementing CR lists, which are a portion of the block that validators stuff with transactions directly from the public men pool. So instead of receiving from a relay an entirely pre built block that's already sensored, that validators themselves can only accept or reject. They're able to enforce, you know, a portion of that block you

must include these transactions. So it takes away the power of block building and of censoring transactions away from the block builder Um, because there is this assumption that, because the validators, the value a database of ethereum Um won't

be completely completely controlled by these like centralized entities. We want to keep the power and keep the the ability to like include transactions more in the hands of validators than in the hands of these other, potentially more centralized entities.

By the way, Tracy, you know, in addition to the merge itself, I know like for at least like a couple of years or year, I've been getting tweets about how we had to do an episode on MTV and like, which I kind of think is like might be like the crypto version of payment for order flow or things like that. Christine's answer there was reminded that that's probably gonna have to be a whole separate episode at some point. Maybe we should just do an all thoughts series where

we go through like every term one by one. Some of these terms are kind of like weird like I'm going to ask you. I have to be careful how I pronounced this at some point, but Christine, I'm going to ask you about chardon Um later in the conversation.

But okay, before we move on, just on the censorship centralization issue, I'm curious what the ethereum people have said about this, because one of the unusual things about ethereum versus a network like Bitcoin, is that you actually have a figurehead in the form of metallic Peuterin, and I'm curious what he's what he said on this issue, because I think most crypto people are ideologically opposed to centralization and middlemen and aligning themselves with government requirements like sanctions

and things like that. But at the same time, the more we talk about this, more you can kind of argue that ethereum is sort of going mainstream and maybe refining itself so that it better fits into the existing financial and legal system, and that could also be a strength. So I'm wondering what they've said on this issue. That's a great question. I think that the community, especially in in the aftermath of what happened of the sanctions and

it's tornado cash we've seen a lot more. I've seen a lot more like segmentation, a lot more disagreement, I think, in the ethereum community about what is the best way forward. There are people in the ethereum community that are a lot more cipherpunk, a lot more to the vision of what the Bitcoin community is that even the slightest amount

of censorship on ethereum should be condemned. If if, even if it's only coin base, even if it's only Lido, those entities should be punished and should be removed from

the network. I think that's a very extreme view and most ethereum core developers, and I think I mean I don't speak for Vitalic, but I would assume that him to most have landed in this middle ground of even if there is centralization, even if there is censorship happening by these these exchanges, so long as there's even a small amount of independent validators that are processing transactions, these non compliant transactions will get into the ethereum blockchain eventually

and that means that ethereum is kosher, that ethereum can

still be considered like a censorship resistant network. And then I think you can go to the other extreme where, you know, very big entities, major entities in the sense of like they're huge figureheads, I guess, in the in the in the ethereum community, and that's entities like flashbots that are very open about the way that they are compliant and about the way in which they don't see a future in which they're operating, you know, in like North Korea or like places in which U s sanctions

don't matter. So it's just very pragmatic and realistic, I think, but not but like not trying to fight the powers, like not trying to to really rock the boat by choosing a different path. And so I think there's this tension, this tension between even the middle ground of developers and of individuals that want to preserve the censorship resistance of

the network. But I have to face the reality is of like these big players that our core to the infrastructure of etherium, like core too, what ethereum is today. Like you can't necessarily just cut off all the exchanges. You can't necessarily just like cut off flashbots, because they literally built the software for how validators are going to

earn MTV. So in that future, you know you have to negotiate, you have to think about other third ways, and there's actually a really great talk by vitallic, who recently went to the Stanford blockchain conference, about how he foresees different ways to decentralize the block building community. And so really I think developers have landed on like how do we improve the situation, how do we decentralize ethereum further?

But just recognizing that in the short term and in the medium term there's a high potential that transactions will be censored and that ethereum as a staking community, as like a validator community, will be controlled majority by these bright late identities, which is a pretty, I think, alarming fact.

So I'm looking back to something you said earlier about this idea of like social slashing, such that a theoretical validator, even if they didn't technically break consensus mechanism rules, could potentially lose some of their coins if the other validators voted in such a way. And you know, going back again, you know it's like Vitella himself can say anything he wants, but vitellic doesn't have to deal with like Gary Gensler, and vtellic doesn't have to deal with Treasury, Brian Armstrong

on the other hand, does right. And so, Brian Armstrong, an your shareholders. Are there any attacks? And I use attack liberally, I don't listen, I mean a hack, but I mean are there any like attacks that essentially worked through the social slashing mechanism, such that the government, some government somewhere, or the U S government or the Treasury specifically, can do something damaging to the ethereum network through these entities?

And you know, is there a form of social slashing that Brian Armstrong might have to do or might have to push for, potentially in some theoretical future where it's not about penalizing a entity that broke consensus mechanism rules, but something that they have to do like sort of like at behest of a government? Like would the government potentially hey, like could you senors transactions technically possible? Yeah, because right, like attacks on any block chain are difficult,

like it's difficult. It would be difficult for a government to attack the BITCOIN blockchain, in part just because it would be hard for a government to acquire the hash power, potentially to acquire enough chips such that it could take control of the network or exectent attack or something like that.

But again, if, like, coin base ends up as the dominant thinker or the dominant validator and coin base has to uh go by all these rules, is there something that they, the government in the future scenario, could pressure coin base to do from a sort of like social consensus standpoint, that other members of the community might view

as being damaging to the integrity of the chain? Yeah, I think in that case, like where coin base does enforce like these regulations from a government authority that the entire community doesn't also agree with, it would cause a split. It would cause a split in the chain of Ethereum, versions of Ethereum that are compliant and non compliant. But I think that would also undermine like the very value

of ethereum. So it's almost like thinking through, like doing this thought process of what a social slashing event could look like and the split that it would cause should deter any proponent or, like anybody who's thinking of doing this, because it it might like irreparably damage like the value of the change. So good. An example perhaps I'm thinking of is like what if the government said unit swap and other defy exchanges are illegal stock markets that are

unregulated by the SEC? Coin based can you make sure that you don't validate any transactions that interact with these defy exchanges, which would be like a massive rupture, because defy, of course, it's huge for in crucial to how the theorym works. But one could imagine say like you can't be processing transaction for a rogue stock exchange or something like that, which would be a kind of attempted imposing

in very severe kinds of censorship. What happens then, and how would how does the network heal or find a way to route around such a big entity being told by the government that it can no longer process defy transactions? I think ideally, I mean this is very like an

ideal sentiment. I don't know if this is would actually happened, but ideally, use ar is of Ethereum, recognize that this is not appropriate or like is not behavior that they should support, and they take away their steak from coin base,

like they don't stake through coin base. Like as a staking provider, coin base falls and you know, other decentralized staking providers like rocket pool and potentially lie do down the road if they do fully decentralize, that these are the staking providers that step up but of course this requires a great deal of like cohesion among the community and like a shared belief and a shared value of hey, like we, ethereum only makes sense if it's censorship resistant.

Ethereum only makes sense if staking providers can't Um, can't actually sense for transactions, and I think there's technologies that are being looked at, like zero knowledge proofs, to try and obfuscate even the contents of a transaction so that the power of validators to even know what kind of

transactions they're validating is completely out of their control. But of course I recognize that that's not the reality today and that coin base does have the ability to to build their own blocks and include whatever transactions they want as validators, validator note operators, and in this case I think it really is up to the ethereum community too to choose staking through providers that they are confident Um uphold like the values and the ethos of the community.

But what complicates even this is that right now you're not able to withdraw steak from staking providers. Um. It's that functionality is not enabled yet on ethereum. It will probably be enabled, you know, at minimum, but like six to twelve months after the merge happens, and so that interim where, you know, we've already seen a lot of state go to coin base and a lot of state

go to Lido. I think the question remains of how users can coordinate, and one of the ways is, you know, again like like we talked about social slashing, but I I definitely I think that kind of possibility is more deterrent. Like I don't think that it ever really comes down

to it. I think it comes down to coin based censoring and users not being able to withdraw their steak and basically more independent validators being spun up to try and ensure that other trends, that all these transactions that are that are non compliance still get included in the blockchain.

And arguing too regulators that hey, even if I sensor transactions, it doesn't mean that ethereum as a blockchain is anymore like regulatory, like compliant, that these transactions are still going to get included one way or the other and that, you know, from like a profit point of view, like it doesn't make sense for us to even continue as

a staking provider. So that kind of argue that as a staking provider, it it doesn't make sense for us to continue to sensor transactions because they're going to get included into the chain one way or another. And I think a very similar issue we saw with with certain bitcoin mining pools back in the day censoring transactions and those mining pools quickly being condemned by the bitcoin community and kind of like social of social pressure changing how

their policies work. But I think, hopefully, you know, a similar thing could happen in ethereum. But again, as I mentioned, there's like those degrees and those schisms that are being created where certain big players in ethereum don't actually, like fully subscribe to the Cipherpunk Vision, and I think in that case it's it's not a dent clear how cohesively the ethereum community will act. Tracy, by the way, zero knowledge cryptography. Well, before I forget, another whole episode talk about.

I feel like every answer you give, Christine, and they're very good answers, but like they just throw up a billion more questions. So I'm wondering, you know what happens like if a bunch of validators decide to kick out coin base for Censoring Trans Actions, like the CFTC is asking for, then are they immediately in violation of the CFTC or u s law or something like that. But okay, maybe a slightly less thorny topic. How do you judge

the success of the merge? Is it like price of ethereum goes up, number of transactions go up, gas fees go down? I don't even know if this has any impact on gas fees. That would be interesting to hear from you about, but like it doesn't. Okay. So what are you looking at when, when we're deciding whether or not this was a successful exercise, I actually take the very minimalistic point of view. I only want the chain to finalize. That's it. I don't care about the price,

I know. I'm not looking at ethereum Um, I'm not looking at theoreum addresses, I'm not looking at transaction activity. Really, for me, like what I deem as a successful merge is that after that the proof of steak blockchain fuses together with ethereum main neet and that version of ethereum finalizes and that it is able to progress through epochs, like be able to verifiably create new blocks, come to consensus.

There's a really this is a shameless plug, but there's this report that I've written on how to watch the merge Um that you can find on galaxy dot com. But it illustrates that what you're looking for is basically the progression of two epochs, which are Um that their intervals of time, and in order for an epoch to finalize, you need at minimum like two thirds of active validators attesting to that epoch, saying that the transactions and the blocks that were completed in that epoch are all kosher

and are all good. Once you have have had two epochs of that, you consider the network finalized, because after that finalization point it's very hard to revert the transactions or the blocks that had been created before that finalization point. So really what I'm looking for is just to see the chain finalized because it means, and the reason why is because it means that the merge and the technical shift from just swapping out your consensus protocol has worked.

It doesn't say anything about how, you know popular that upgrade was, how traders and the users view this change of proof of steake. It just it just says that, hey, this swapping of this transition from proof of work to proof of steake worked this very risky upgrade that requires two different hard forks worked that transactions and blocks are continuing to be processed and that, like if you were to send a transaction on unit swab, if you were to send it to another person, you now don't have

miners like processing those transactions. You actually have validators doing it behind the scenes and that functionality is good to go and that functionality we don't have to worry about it breaking anytime soon. So I just have one more short question and it's a question that I'm thinking about a particular twitter user. So Dan, who's under Dan Metaschewski at at CMS Holdings, always dms me and he says I love odd lods, but you guys are so negative

all the time. It's always gloom and we've spent a lot of time talking about like risks of the merge and, you know, centralization and censorship, other than the decrease in electricity consumption. Talk to us like, what's the exciting thing here? What's the good thing besides that that this is going to open up in your view and the long term of Theorem Red Matt, what's the what's the positive here? This is going to sound very barish, but there's not

actually too much. Tried to tried. Sorry, if you're listening, you better be, because I asked a question just for you. I'm sorry. I think one thing is, you know, the validators that have been, you know, so faithfully on the beacon chain earning this issuance. It's a very small issuance in comparison to what miners get, but then again, validators aren't expending a lot of energy, so of course you're

not going to get that much validators. One thing they can look forward to is they're going to start earning transaction fees, priority fees, and they're also going to start earning MTV. So that kind of reward which, you know, compared to their the network issuance they yet which is locked. They can't actually move that around, they can start moving around and and realizing the fees from transaction, from transactions in MTV. They can start, you know, sending that over

to exchanges. They they'll actually start earning that. So I think that's kind of a positive for validators and that it just becomes more profitable to run one. And then the other thing I think about ethereum price is that you've got a massive supply drop. You know, all of the supply that's going to ethereum is going to uh is going to drop from around five percent to zero point five percent. And in addition to that, you've still

got coin burns happening. So that zero point five percent, in times of high network activity, will very likely dropped to a negative number, where the total supply is actually contracting. And and so you've got, you know, a bunch of users that are walking up and then you've got, you know, issuance of the network dropping significantly. I think the the liquidity of of Eth. I'm not really a trader, but

like that. The supply, the supply going down. I think we'll we'll have a positive impact on eth price over time and I think that's something that people really look forward to and that youth will become, I don't like this term, but, quote unquote, ultrasound money. You know, instead of having it really is thought of Supply Limit. You know,

you've got the supply that's drinking over time. Obviously the Y S G narrative of ethereum will will continue to to thrive and in comparison to bit line, I think there's going to be a lot more um narrative around, you know, the way that you mint your n f t s, the way that you do all these things are no longer as energy intensive as they used to be.

But I think for one of the reasons why I say like all of this isn't all that positive, which it is, it is very positive, is that I've been really waiting for a long time around ethereum scalability and the merge really doesn't do very much for Ethereum scalability at all. So I'm really looking forward to the fact that after the merge, developers will really focus on on scalability, and I think that's one of the things. Like developers have just been so focused on pulling off this upgrade.

After this is done and and and out the door, I'm really looking forward to developers tackling some of the other big issues on Ethereum, like count abstraction and and scalability and Um steakty withdrawals, etcetera, etcetera. What is charting? We've come full circle. Yeah, well, no, I but okay, I honestly have zero idea. But I was a d yes podcast pitfalls Um charting. So I see people on Reddit talk about this a lot. They're like, Oh, who

cares about the merger? What I'm really excited about is charting, which, again sounds terrible, but could you just explain what that is? For sure? I'm going to give a high level overview and then I'm gonna give a shout out to a really great report around sharting. So shining originally, sorry, starting originally. I don't know why, but when you say I've never thought of the term charting as weird or as like strange, but now that you say strange term, yeah, why? It's

because everyone, everyone in Crypto. They're not talking to each other, they're just writing, and you write charred. It's fine, but as soon as you start saying it out loud everyone's gonna Laugh about language, how different it is, if it is such an insightful point. So charting. Originally, the idea

of it was, look ethereum. The ethereum blockchain is massively has this limited transaction throughput it the block space of Ethereum, which is, you know, there's a certain number of transactions that can fit into a block and these blocks are what get processed and built on top of one another, and you can't stuff a block more than its limits.

You can increase, like the size of a block so that it can include more transactions, but if you do that, then it becomes more computationally intensive for miners or validators to propagate that block throughout the network and so you have a higher chance of chain splits occurring. You basically increase like the load on validators and miners when they're running a node. You have to have very sophisticated software to be able to continue to propagate this very, very

heavy blocks throughout the network. So there's a good rationale for why you want to keep the size of blocks manageable for an ordinary node. It helps with the decentralization of the network. But Anyway, so you've got a limited amount of transactions that you can include a pool block and if there's very, very high amount of transactions waiting to get included, and you know you you have very

high fees, you've got long wait times. What if we were able to partition the blockchain so that, instead of blocks being confirmed by this single ethereum Blockchain, you have mini block chains, also called shards, that are all processing

the transaction load of ethereum in parallel together. So you've got like, let's just say, for hypothetically, like sixty four mini block chains that are all looking at the transaction men pool of Ethereum, which is this public space where everybody sends their unconfirmed transactions and these miners and these validators on these shards are picking out, you know, transactions from there and they're all working together to to progress

the ethereum blockchain as a whole. So that greatly, brightly improves the transaction through put of ethereum and the scalability of ethereum. How ever, it's an extremely complex design. Sixty four many blockchains or even and even like thinking about how like transaction automicity, automicity, I think I'm saying that wrong, but basically, like how would you be able to communicate, like, the finalization of one transaction on a specific chard to

another Chard, and is their latency between that communication? So

basically that was the original idea for charting. But again, like the complexities around charting, the many unanswered questions around how transaction execution would work atomically throughout the whole network, those questions started to change how etherium developers think about charting and so now that roadmap and that vision is is scrap them developers, as a side note, has gone through many, many, many different iterations of how they think

they're going to scale the blockchain and now they've landed on this other idea which is very much focused on modularity. So, instead of having transactions all execute and all finalize on the same chain, what if we abstracted away the burden of transaction execution to a layer too, and with a technology, technologies like zero knowledge, technology like optimism, which are, you know,

different types of roll ups. I know I'm using a lot of technical but basically we're writting them all down for these are these are good for for the good

for deep dives. But as at a high level, what if you abstracted away some of the responsibility of executing the transactions to a different network and that network can batch together and compress those transactions and then only verify, like, the proof of that batch transaction to ethereum, so that, like, greatly frees up the transaction and the block space of a theory, because now not all transactions are finalizing on

the theem. You've got batches of transactions that are finalizing on a layer two and you're just sending down the proofs of those compressed transactions to ethereum. And so dank charting is a new iteration of charting that really focuses on making the cost of roll ups, the cost of these bast transactions, cheaper and introducing a lot more modularity to the ethereum blockchain. And I yes, did you say

Dank charting? Yes, so that's actually the charting roadmap for etheroryum now and it doesn't really have anything to do with charting, the original idea for charting. And this is where I plug in on dram and Charbonneau's hitchhiker's guide to etherium, where he talks a lot about this. But yes, you're right, Dank charting. But that is that is the real version of sharuting that is more likely to be implemented today than the version of charting that I explained before.

Al Right, so we have charting, Dank charting, layer two's optimistic roll ups Verse Zero Knowledge Proofs, the ethereum narrative versus Bitcoin in MTV. You've given so many future episodes for us to now build on. Christine Kim, thank you so much. You're the perfect guest for coming on. We say that, but that was so clear and so good and I know people have told us we need to do merge margin and I'm glad we didn't. Just like Russia. We got a great guest. So thank you so much, Christine,

for coming on the PODCAST. Thank you so much for having me. You guys. This is lovely. Yeah, there's a lot of fun. Thank you so much. Yeah, thanks, Christine. That was really interesting and I don't say that about every Crypto podcast episode that we do. So thank you. Dank charting. The future of all of finance is going to be whether whether these voters can make Dank charting work.

It's like a real word. It's one word. No, I know, but this gets to a real point, which is like if you're if you're portraying yourself as the future finance or the future of money, like can't we get some different terms, like things that people could say allowed in a meeting? The one that has to go is ultrasound money. You can't be talking about that has to go. That

wasn't really bad. It also begs the question of like, if you're going to create ultra ultrasound money, could you just like evaporate it, just burn it into oblivion, like is that the sound of money? There is just yeah,

just the one, the one coin. Okay, on a serious note, I thought that conversation was really interesting and mostly because it gets to that fundamental tension which we kind of alluded to in the Intro, which is, if this is technology, if this is software, software is supposed to adapt to the needs of the people using it or the needs of the market using it, and so it throws up these questions of like how best to adapt? What are you sacrificing as you try to reduce energy usage and

all those kinds of thorny questions. Yeah, I think ethereum is an interesting position, straddling the sort of two worlds right, because it was sort of you know, it's one of the earlier chains and, as Christine mentioned, it has there is still a significant faction that has that sort of o g cipher punk, anti censorship impulse. On the other hand, it is a more corporate chain in vcs, you know, that's what they've put a lot of money and financial

institutions experiment. Then there is like the purer software and you know, some of these newer chains like Salana, etcetera. It's like that's just like a company launched that I mean technically the company maybe doesn't control it, but there's like they're faster, they can probably upgrade even quicker than ethereum.

They already like started on proof of steak, etcetera. So the question is Kenneththerium sort of like navigate this sort of like the two tensions, the sort of like community, decentralized cipher punk tension with the software world, and this is a big moment in terms of, I guess, navigating those two worlds. Yeah, it really seems like that's what they're trying to do, right. So it'll be fascinating to

see what happens. And then, of course, if you know, if someone like the CFTC, to use your example, were to come in and say something and you were to get a Validat or like coin base who has kicked off the network like it would just be fascinating to see how that consensus mechanism actually worked and then what

happened to all the other validator. It really is interesting that the merge is happening so soon after the tornado cash sanctioning, because that's like the first time, right, like governments like no, we're like going after a piece of software, and so you know, it does raise the stakes potentially for you know, the government has done all kinds of things with crypto, but it's usually like at the Fiat on ramp level. Right they're like, okay, you need to apply K Y C M L to the money you're

bringing onto the exchange. But then once you're on, once you have the coins, then the government has basically been pretty hands free and this is potentially a change right at a moment in which some of these big centralized entities are going to have a lot of power over the network. Yeah, I'm also just interested in the sort

of like the PR aspect of all of it. If, you know, if the government says like we don't want you to deal with North Korea or don't let a North Korean entity like mind blocks or make transactions on your blockchain, and then you have a bunch of people going like well, no, actually, we're censorship resistant and you know, this is about making, you know, censorship, free money and transactions and all of that. That seems like a difficult position take, or at least a difficult one when it

comes to broadcasting that message. Speaking of PR I suspect that the crypto industry is going to really turn on Bitcoin fast and they're going to say, look at this electricity guzzling blockchain, we have something that doesn't guzzle electricity anymore. Penalize those proof of work people. I think that that battle is coming. This sort of the E S G ification of Crypto and the vilification of change that don't move to proof of steak, I think will be a

big story. Oh, I totally agree. But it's also really interesting to see bitcoin kind of embrace that position in the system. And I think I wrote about this at one point, but bitcoin proponents are positioning themselves basically is the anti crypto. Now right, that's the foil off of which they are playing and I don't know, it's just been it's been fascinating to see that narrative be created. All right, well, okay, yeah, we can talk about this forever.

Shall we leave it there? Let's leave it there. Okay, this has been another episode of the all thoughts podcast. I'm Tracy alloway. You can follow me on twitter at Tracy Alloway, and I'm Joe Wisn'tal. You can follow me on twitter at the stalwart. Follow our guest Christine Kim she's at Christine Underscore D Kim, follow our producer, Carmen Rodriguez, at Carmen Armand and check out all of our podcasts, Bloomberg under the handle at podcasts. Thanks for listening to