As we mentioned, Ethereum, which powers most smart contracts and other complex structures and products in the Crypto world, is undergoing a groundbreaking transformation. In a process called "The Merge," which is planned to be completed in two weeks, Ethereum is transitioning its method of validating transactions from proof-of-work to proof-of-stake. This will significantly reduce energy consumption and carbon emissions.
In the following interview, I discussed topics such as proof-of-work versus proof-of-stake, the recent crash in the Crypto market, the security of cryptocurrencies, decentralized governance, "startup societies," and more with Vitalik.
N.S.: So, I think we should start with some current events. In recent months, almost all coins have crashed significantly. Why do you think this happened? Will it have an impact on the long-term future of the crypto/blockchain ecosystem?
V.B.: In fact, I was surprised that this crash didn't happen sooner. Typically, crypto market bubbles last about 6-9 months after surpassing the previous peak, followed by a rapid decline. This time, the bull market lasted nearly a year and a half. People seemed to have adapted to the mindset that higher prices were a new normal. I always knew the bull market would eventually end and we would decline, but I just didn't know when. Today, people seem to have over-interpreted the ultimate cyclical dynamics of cryptocurrencies, which have always existed and may continue to exist for a long time. When prices rise, many say it's a new paradigm and the future, while when prices fall, people say it's doomed to fail and fundamentally flawed. The reality is always a more complex picture that lies between the two extremes.
I do believe that price declines help reveal problems that have existed from the beginning. Unsustainable business models often succeed during economic booms because everything is rising, so disposable income is also rising, and things can be temporarily supported by the constant influx of new funds. But during a crash, as we saw with Terra, this model no longer works. This is most true in extreme cases like high leverage and Ponzi schemes (those who remember 2017 will recall "BIT-CONNE-E-E-ECT!!!"), but it is also true in more subtle ways, such as protocol development being easier to maintain during a bull market, but when prices crash, newly expanded teams often struggle to sustain themselves financially. For these dynamics, I can't think of any good solutions other than my usual advice that people should remember the history of this field and look at the long term.
N.S.: Well said. Now, I want to talk about some interesting technical issues... but first, let's discuss financial matters a bit more. For Bitcoin—the most widely held and traded cryptocurrency—we've seen this cycle, with repeated and fairly regular bubbles and busts, but each time the percentage return during a boom is lower than the previous one. To me, this looks like a diminishing returns curve— as more people hold some cryptocurrency, the financial gains from new users become smaller and smaller. Will we reach a stage where Bitcoin adoption saturates, and returns drop to levels similar to gold?
V.B.: I definitely think that in the medium-term future, cryptocurrencies will stabilize and will only fluctuate like gold or the stock market. The main question is at what level the price will stabilize. In my view, much of the early volatility was related to the uncertainty that existed: in 2011, when Bitcoin dropped from $31 to $2 in six months, people really didn't know if Bitcoin was just a one-time fad that would crash forever. By 2014, that uncertainty was less than before, but it still existed. Then after 2017, the uncertainty shifted to whether it would gain the level of mainstream legitimacy needed to support higher price levels, which is still roughly the situation we face in 2022, although we have come a long way. Over time, these existing issues will gradually be resolved. If by 2040, cryptocurrencies have robustly entered several niche markets: replacing gold as a store of value, becoming a "financial Linux," a consistently available alternative financial layer, ultimately becoming the backend for truly important things without completely replacing the mainstream, then by 2042, it will either disappear or the chances of it completely taking over the world will be much smaller, and individual events will have less impact on that possibility.
Mathematically speaking, this means that the price of cryptocurrencies is stuck within a bounded range (between 0 and the price of all wealth in the world), and cryptocurrencies can only remain highly volatile within that range until repeatedly buying high and selling low becomes a mathematically almost certain winning arbitrage strategy.
N.S.: Additionally, estimates of Bitcoin's energy use suggest that the network's energy consumption is closely linked to Bitcoin's price. This is not the case for stocks, houses, or gold—these other assets do not require increased energy consumption to support higher prices. Will this suppress Bitcoin's price in the long term?
V.B.: I generally see the interaction of Bitcoin's demand and supply curves and the issues of how supply is generated as two separate problems. Difficulty adjustments ensure that the number of Bitcoins minted is fixed on a schedule. Today, it's 6.25 every 10 minutes, starting around 2024 it will be 3.125 every 10 minutes, and so on. This schedule remains unchanged regardless of total mining capacity or price. Therefore, from an economic perspective, it doesn't matter whether the protocol distributes these coins to miners or core developers. That's why I disagree with the view that mining somehow supports Bitcoin's value.
A consensus system that unnecessarily consumes a lot of electricity is not only harmful to the environment but also requires the issuance of hundreds of thousands of BTC or ETH each year. Of course, eventually, the issuance will decrease to near zero, at which point this will no longer be an issue, but then Bitcoin will start dealing with another problem: how to ensure it remains secure...
And these security motivations are also a truly important driving force behind Ethereum's transition to proof-of-stake.
N.S.: Let's talk about these security issues. Many people seem to think that if a token is called a "cryptocurrency," then the protocol governing the transfer and ownership of that token must be secure. But from your last answer, it seems you are more concerned about security issues, at least regarding Bitcoin. Can you explain?
V.B.: Efficiency and security are not independent issues. The question is always: how much security can you buy for a dollar each year? If a system's security is too low, you can increase security at the cost of minting more coins, at which point you regain security by sacrificing efficiency. I mentioned some profound economic reasons in this article as to why proof-of-stake can buy about 20 times the security at the same cost. Essentially, participating as a miner in proof-of-work has moderate ongoing costs and moderate entry costs, while participating as a validator in proof-of-stake has low ongoing costs and high entry costs. It turns out that your level of security depends solely on the entry cost, as that is the attack cost that attackers must pay. Therefore, you would want your consensus system to have low ongoing costs and high entry costs, and PoS excels in this regard. Additionally, the two also differ in their options for responding to attacks: in PoW, you can only respond by changing the PoW algorithm, which would burn all existing mining hardware, good or bad, but in PoS, you can make the protocol only burn the attacker's assets, so even if the attacker has invested a lot, the ecosystem can quickly recover.
In the case of Bitcoin, I have concerns for two reasons. First, in the long term, Bitcoin's security will come entirely from fees, and Bitcoin simply hasn't successfully attained the fee levels needed to secure what could be a multi-trillion-dollar system. Bitcoin's fees are about $300,000 per day, and they haven't really grown in the past five years. Ethereum has been much more successful in this regard because the design of the Ethereum blockchain is more conducive to supporting usage and applications. Second, the security provided by each dollar of transaction fees in proof-of-work is much less than in proof-of-stake, and migrating Bitcoin from proof-of-work seems unfeasible. What will the future look like when there are $5 trillion worth of Bitcoin, but only $5 billion is needed to attack the chain? Of course, if Bitcoin is really attacked, I hope there will soon be political will to shift to at least a hybrid proof-of-stake, but I expect this will be a painful transition.
N.S.: Regardless, your argument about the security provided by proof-of-stake for each dollar is entirely valid; Bitcoin's high energy costs are indeed high security costs. However, let's discuss the political issues that make Bitcoiners reluctant to accept any alternatives to proof-of-work systems. Does the idea of proof-of-stake allow large stakeholders to modify the network protocol to gain their own advantages at the expense of smaller network users? Proof-of-work creates a large class of miners who have the incentive to protect their ongoing income, even if that income represents ongoing costs for users—is that true?
V.B.: There are several arguments in favor of proof-of-work. In my view, the most compelling argument is the "no-cost simulation" problem. Essentially, the idea is that in a proof-of-stake chain, an attacker could reach out to token holders at some point in the past to buy their old keys at a very low price (since those coins would later be transferred to addresses controlled by different keys) and use those coins to create a different chain and fork from that point. A node that only knows the protocol rules and connects to the network from scratch would not be able to distinguish between the actual chain and the simulated chain provided by the attacker. On the other hand, in PoW, creating such a simulated alternative chain requires redoing an equivalent amount of proof-of-work.
In PoS, this problem is addressed by adding a weak subjectivity period: nodes need to connect to the mainnet for a period (e.g., once a month), and the first syncing node may need to ask some trusted sources (which don't need to be centralized; they could be a friend) what the valid chain is. Stakers are required to keep their tokens locked during this period, and if someone sees a staker supporting two conflicting chains, they can send a transaction to "slash" them, burning most or all of their funds. In this model, this is entirely reasonable. However, PoW supporters are not satisfied with the weak subjectivity period; they prefer a purist approach where you shouldn't need anything other than the protocol rules.
My view on their argument is that I don't think the purist approach really works in practice. You need trusted sources to give you the protocol rules, especially considering that you occasionally get software updates to improve efficiency or fix bugs. And I think the attacks that purists fear are unrealistic: you have to convince a large number of people that everyone who says they saw a recent block hash is wrong, and that other hashes that no one but the attacker has seen are correct. Once you start digging into these details, it seems less feasible.
Some also try to claim that PoS allows large stakeholders to control the protocol, but I think those arguments are completely wrong. They are based on a misunderstanding that PoW and PoS are governance mechanisms, whereas in reality, they are consensus mechanisms. What they do is help the network reach consensus on the correct chain. Blocks that violate protocol rules (for example, if they try to mint more coins than allowed by the protocol rules) will not be accepted by the network, regardless of how many miners or administrators support it. Governance is a completely separate process that involves users freely choosing to download software, as well as BIPs and EIPs and all core developers talking and other bureaucracies to coordinate which changes are proposed. Interestingly, Bitcoiners (who tend to be the most supportive of PoW) should understand this well, as the Bitcoin civil war of 2017 demonstrated how powerless miners are in the governance process. In PoS, the situation is exactly the same; coiners do not choose the rules; they merely execute the rules and help order transactions.
One possible argument is that PoS has stronger centralization pressures than PoW because the digital nature of stakes makes it easier to concentrate, or because optimal PoW mining involves taking advantage of local limited-scale opportunities to obtain cheap electricity. These are definitely concerns I have, although I think people exaggerate them. In particular, today's Ethereum proof-of-stake does not yet have the ability to withdraw your ETH. This creates pressure to join liquidity pools because if you stake in a pool, whenever you want to get your money back, you can simply sell your share to someone else, so liquidity pools have a significant competitive advantage in obtaining liquidity. But this will no longer be the case once withdrawals are enabled next year. Another issue with staking today is that due to the same lack of withdrawal capability, liquidity pool stakers cannot easily switch pools (or convert to solo staking), but they will be able to next year. As for the decentralization of mining, I just want to say that I am skeptical about whether these highly decentralized small-scale mining opportunities are that significant. Mining is a highly industrialized activity, and large mining farms outside the U.S. (which account for about 35% of global hash power) seem to have close ties to various governments, so the future of PoW's censorship resistance is quite contingent. The highly democratized early proof-of-work era was great; it helped make cryptocurrency ownership more equitable, but it is unsustainable, and it won't come back.
N.S.: Let's talk about governance issues. To me, governance seems to be one of the most promising and interesting aspects of blockchain technology—it's a potential way to bypass cumbersome corporate formation processes and create fluid, temporary economic cooperation, especially across international borders. I am a big fan of the sci-fi novel "Rainbows End," where much of the economy is based on such cooperation. But in practice, the ways people have tried to achieve this so far seem to have many problems—in fact, you have a series of blog posts criticizing rigid blockchain governance systems that try to eliminate all human judgment and trust from the equation. Can you briefly share your views on how blockchain governance should work?
V.B.: One reason blockchains are interesting is that they share many attributes with things we are already familiar with, but they are not exactly like any of them. Like companies, blockchains have a token that you can buy, hoping it will increase in value. But unlike companies, blockchains are more like nations, not relying on external institutions to resolve internal disputes. Instead, a blockchain is its own adjudicative "root"; you could even say it tries to become a "sovereign state" (of course, blockchains are not truly independent of existing nation-state infrastructures, but to be honest, most nation-states aren't truly independent either). Like democratic nations aspire to be, blockchains are highly open and transparent, allowing anyone to verify whether the rules are being followed. Blockchains often generate something that looks religious, inspiring a kind of lasting and fervent zeal among their followers, but they usually have more complex economic components than religions. A blockchain is like an open-source software project, reflected in its egalitarian ideals, and more importantly, in the freedom to fork: if the "official" version of the protocol goes astray and violates what some in the community believe to be their core values, they can coordinate around their own chain, fork off from there, and continue, competing for legitimacy with the original version in the court of public opinion. But blockchains are different from open-source software projects: in blockchains, billions of dollars of capital are at stake, and the costs of forking incorrectly are much higher. If the costs of forking become too high, as some believe, its role in governance will become more like nuclear deterrence rather than a conventional part of the intended process.
All of this means that blockchains are not only a powerful foundational layer for carrying the governance logic of other applications but are also complex entities that require a new and different form of governance in themselves. We have seen various forms of "constitutional crises" emerge in both Bitcoin and Ethereum, most notably the Ethereum DAO fork and the Bitcoin block size debate. In both cases, both sides had some groups with strong differing beliefs about what values the project should embody, and both situations ultimately resolved in a chain split. Interestingly, both Bitcoin and Ethereum have avoided formal governance; there is no specific person or council or voting mechanism with established legitimacy to decide which protocol changes become formal. There is an All Core Devs call in the blockchain, but even there, what constitutes sufficient opposition is not clearly defined, and for anything truly controversial, core developers often step back and listen to community input.
Of course, it is often said that this quasi-anarchistic design looks ugly and needs to be replaced by a more "appropriate" formal system. But they have almost never succeeded. In my view, there is a lot of wisdom in our current "unstructured tyranny." In particular, it captures the idea well that a relatively small core developer group should be able to independently decide detailed technical decisions that do not really affect the core vision, but for some philosophically significant events, such as a hard fork to save tokens or switching to proof-of-stake, you need a deeper understanding.
Managing applications on the blockchain is a different challenge. Here, there is also a divergence regarding the "forkability" of an application: is it like ENS, where if governance collapses, you can fork with different rules and persuade all the infrastructure to move to that fork, or is it like the DAI stablecoin, which cannot safely fork DAI without forking everything else due to its reliance on reserves of other assets like ETH? If an application is forkable, that's great; it gives you extra support that you can leverage (like Hive). If an application is not forkable, then you do need some completely formal and trustworthy governance.
For a long time, my main view on this topic has been that the currently popular token-driven governance technology, which governs through voting by token holders, is broken, and we need to move to something better, especially something less "financialized." Token-driven governance naturally favors the wealthy, and there are various long-term ways to easily undermine this governance. In an article I wrote last year, I described an example of a smart contract that would automatically allow token holders to accept bribes in a very friendly way to vote in a specific way from the highest bidder:
Ethereum
This would turn every governance decision into an auction, resulting in only the wealthiest participants having a voice. At best, this would lead to ruthless profit maximization, and at worst, it would lead to rapid exploitation, followed by the project's swift collapse.
Aside from token holder governance, my preferred alternative is some form of multi-stakeholder governance that tries to formally represent people, not just tokens. Optimism is doing this through the concept of "citizenship," which is intended to be allocated to contributors and participants in the ecosystem and is deliberately non-transferable. But we are still in a very early stage of figuring out how these things work.
N.S.: Let's talk more about alternative forms of human organization that blockchain might enable. I really liked your insightful comments on Balaji Srinivasan's "The Network State." So far, have there been any promising attempts to create "startup societies" that incorporate crypto?
V.B.: I think one reason this hasn't really happened yet is that there is a fundamental difference between the blockchain ecosystem and a fully entrepreneurial society. A blockchain ecosystem survives by persuading many people to participate, or at most indirectly participate, economically. You only need a few core developers, and even they don't need to make significant personal sacrifices. They can continue to live in a "normal" city, usually looking like any other job. On the other hand, a startup society is deeper. You need people to take the risk of moving to a specific place, potentially an unconventional one, which comes with significant downsides that can only be overcome by the advantages created by the community itself. Balaji is right that getting people to do such things requires a profound moral narrative.
I believe crypto does have a profound moral narrative that was very important in the 2009-2014 ecosystem when people didn't even know if crypto would survive, and crypto enthusiasts had almost no offline crypto social circles, and even legal issues were uncertain. The concept of crypto is a continuation of the larger network libertarian movement, a spiritual successor to PGP, BitTorrent, Tor, Assange, Snowden, etc., which is very strong, with these strong ideals serving as ideological and moral glue that allows people to make tremendous sacrifices and take risks for this industry. Recently, the industry has matured, and with that maturity, there has been a degree of dilution. This dilution is favorable for mainstream adoption; in fact, newer blockchain projects often intentionally downplay their eccentricities to achieve mass adoption. NFTs are expanding the appeal of cryptocurrencies to groups further away from the original user base.
But at this point, this growth has also made existing blockchains too "thin" to become a good network state. Ethereum has so many different user communities, many of which have profound disagreements with each other (for example, there are certainly "woke" and "anti-woke" Ethereum communities, not to mention international divides). Just as we recently saw communities unite to prevent on-chain censorship, there is a strong, overriding consensus point around protecting the integrity and operation of the chain, but this unity is not enough to form a nation.
Moreover, so far, attempts to intentionally form native crypto communities have failed. The problem I see is that they all basically use some form of "low tax" as their main selling point; while low taxes are a benefit from an individual perspective, they are a poor filter if your goal is to attract truly interesting people. When low taxes are the main reason for coming to the community, then that community is really boring and weak. Network effects are about quality, not just quantity. I do think there is some space for startup societies now; many people need a community oriented around specific values that provides an outlet for constructively expressing those values, not just through zero-sum Twitter wars, combined with a pragmatic need to escape the high cost of living in the U.S. and the increasingly severe authoritarianism of many other major powers, not just theoretically. But so far, the projects I've seen have not done well.
A key point about this answer is that much of it is cultural; whether we have on-chain land registration, smart contract property rights, haberg tax, or anything else is secondary. I think startup societies should try ideas that are radically different from what we are used to. For example, I would try not to emphasize absolute ownership of specific land, houses, and apartments, but rather emphasize economic alliances with the community through things like city tokens. But I think the value of innovations like this lies more in the long term, and that in itself is not enough to attract people in the short term. Initially, the alliance with cryptocurrencies and blockchain technology was mainly symbolic, and over time it will evolve into something more practical.
N.S.: Another question: in that article, you disagreed with Balaji's emphasis on the importance of a single core leader for online startup societies. So, do you think your role as a founder and "spokesperson" of Ethereum has been overstated by the media and crypto enthusiasts?
V.B.: From the beginning, I hoped Ethereum would grow into something where my influence could gradually diminish, as so many other amazing voices begin to grow and express themselves. I think this has been happening over the past two years! In 2015, I basically did 80% of the "research" for Ethereum, and I even did a large chunk of Python coding. By 2017, I did much less coding, but my research work might have accounted for 70%. By 2020, I was probably only doing a third of the research, and coding was minimal. But I was still doing most of the "high-level theory." However, over the past two years, my work on high-level theory has also been slowly, precisely decreasing. We have many great new Ethereum influencers, like Polynya, who has been doing a lot of thought leadership around layer two scalability. The Flashbots team has been leading the entire field of MEV research. People like Barry Whitehat and Brian Gu have taken on the responsibility of zero-knowledge proof technology, while Justin and Dankrad, initially hired as researchers, are increasingly claiming to be thought leaders.
This is a wonderful thing! I don't think the public is aware of this yet, but I expect they will become aware of it over time.
N.S.: Okay, as always, the last question: which of the projects you are currently working on excites you the most?
V.B.: I would say what excites me the most is not any single project, but the entire ecosystem composed of many interesting ideas. This is tangible on a technical level; Ethereum is approaching its merge, and significant improvements in blockchain scalability, usability, and privacy are coming soon. On the social and political thought level, many ideas about decentralized organizations, radical economics and democratic mechanisms, internet communities, etc., are maturing simultaneously. In fields far from the cutting edge of crypto technology, advancements in biotechnology and artificial intelligence are astounding—some might say in the latter case, perhaps a bit too astounding. We are beginning to understand what the politics and technology of the 21st century will look like and how every part we are studying will fit into this picture. In 2022, Crypto finally feels useful; many mainstream organizations and even governments are using it as a way to send and receive payments, and I feel that other applications will emerge soon. The future is still uncertain, but we have more insight than ever into how all of this will develop.