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Digital States: Consensus or war
0xA01f
December 25th, 2021

Cyberpunks begat Cryptophunks and there’s a war in the metaverse.

Blockchains are many things, but ultimately they are virtual digital computers that operate on consensus. There is a digital state, rules to transition that state, and a consensus mechanism to agree that the state transition rules are being followed correctly. In the ruleset, public-key cryptography is used to enforce an accounting system, namely: only the holder of a secret private-key can spend the funds associated with a public-key by digitally signing a transaction message with said private-key. (Here, “key” means a randomly generated, arbitrary 256-bit binary number, where the public number and private number are inextricably linked through an agreed-upon algorithm.) When signing a transaction and broadcasting it to the network of miners, a network fee and miner tip are typically included to (1) disincentivize spamming the network with unnecessary transactions and (2) prioritize one’s transaction among the pool of miners. The miners are responsible for batching these transactions into a file of some size specified by the ruleset (a “block” or “blockfile”), enforcing the rules that govern the transition of the digital state, performing the consensus algorithm, and finally pointing each block to the signature of the block that came before it, forming a chain. Hence: blockchain. As a reward for all this labor, the miners are incentivized with a reward of funds native to the chain.

Simple enough? It might take a few more encounters for these concepts to jell in one’s mind, but the main point is that all the details beyond the above formulation are up-for-grabs. Engineering decisions, such as: What size should the blocks be? What should be the consensus mechanism? Should the ruleset allow for arbitrary “Turing-complete” computation, or is that too costly and onerous? And economic ones: What fee mechanism do we impose for users and what reward do we give to miners? Shall the total supply of funds be unlimited or not?

Enter the blockchain wars.

There have been many wars over the years. The first, and most notable was the fight in the Bitcoin community over how many transactions should be included in a block in order to accommodate more transactions and users. Ultimately in August of 2017, the chain split into what is now known as Bitcoin and Bitcoin Cash. One side of the debate started mining new blocks with a new ruleset and the other did not. Each pool of miners mutually did not recognize the other. Like a cell splitting in two: a new chain was born. Also like a cell splitting in two, it is ambiguous which one came first. Users prior to the fork now had spendable funds on both chains. The Internal Revenue Service of the United States later clarified that the funds on the newly created chain qualified as income. Today, there are now several forks of both Bitcoin and Bitcoin Cash. The technical details in each of these squabbles are not important, but the lesson is clear: united, you have consensus, divided you’ve forked.

Digital State

Blockchains have digital states, in both senses of the word. They have a binary, digital, state encoded by the blockfiles sitting on hard drives around the world. They also are a state in the political sense. There are rules, a mechanism to enforce those rules, and a currency that is collected & distributed for the general welfare of the state and as payment for goods and services. You already know these as laws, the judiciary, and taxation. But, of course, it doesn’t stop there: contracts become smart contracts. Property rights, including real estate in the metaverse and intellectual property, become NFTs (non-fungible tokens). Corporations become DAOs. They also have politics in the Lasswellian sense, of “Who Gets What, When, and How.” The software engineering & cryptography was the easy part. Now, we have to deal with politics, economics, and sociology. Will the digital state be a Living Constitution, or should Textualism prevail? Does the original intent of Satoshi matter? (The Bitcoin SV “Satoshi Vision” blockchain seems to think so!)

The California Ideology & Silicon Valley’s Final Exit

In 1995, Richard Barbrook and Andy Cameron of the University of Westminster wrote the now-famous essay critiquing Dot-Com Neoliberalism, “The California Ideology”:

This new faith has emerged from a bizarre fusion of the cultural bohemianism of San Francisco with the hi-tech industries of Silicon Valley. Promoted in magazines, books, TV programmes, websites, newsgroups and Net conferences, the Californian Ideology promiscuously combines the free-wheeling spirit of the hippies and the entrepreneurial zeal of the yuppies. This amalgamation of opposites has been achieved through a profound faith in the emancipatory potential of the new information technologies. […]

The widespread appeal of these West Coast ideologues isn’t simply the result of their infectious optimism. Above all, they are passionate advocates of what appears to be an impeccably libertarian form of politics – they want information technologies to be used to create a new ‘Jeffersonian democracy’ where all individuals will be able to express themselves freely within cyberspace. However, by championing this seemingly admirable ideal, these techno-boosters are at the same time reproducing some of the most atavistic features of American society, especially those derived from the bitter legacy of slavery. Their utopian vision of California depends upon a wilful blindness towards the other – much less positive – features of life on the West Coast: racism, poverty and environmental degradation. Ironically, in the not too distant past, the intellectuals and artists of the Bay Area were passionately concerned about these issues.

Sounds familiar? Today, there is much controversy over blockchains that require a high degree of computation (known as Proof-of-Work), which translates into a massive use of electricity and ensuing carbon emissions.

In 2013 at Y-Combinator’s Startup School, Balaji Srinivasan gave his speech, “Silicon Valley’s Final Exit”:

To summarize Balaji’s key points: the choices for any nation, digital or physical is to amend the constitution & code or a schism where there is a fork of no return. Building consensus in the real world may require some level of violence, while thankfully, the digital world may be more peaceful, albeit no less aggressive in tone.

Jeffersonian Maximalism

“The Constitution that I interpret and apply is not living, but dead, or as I prefer to call it, enduring. It means, today, not what current society, much less the court, thinks it ought to mean, but what it meant when it was adopted.”
-Antonin Scalia

“Tradition is not the worship of ashes, but the preservation of fire.”
-Gustav Mahler

“If a book has been in print for forty years, I can expect it to be in print for another forty years. But, and that is the main difference, if it survives another decade, then it will be expected to be in print another fifty years. This, simply, as a rule, tells you why things that have been around for a long time are not "aging" like persons, but "aging" in reverse. Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness. The robustness of an item is proportional to its life!”
-Nassim Nicholas Taleb

As alluded to earlier, the politics of the metaverse map onto our culture war. Bitcoin maximalists, sometimes pejoratively or endearingly referred to as ‘maxis’, are the originalists of the cryptoverse. To steelman their position: bitcoin is the oldest, most battle-tested, most enduring blockchain. Bitcoin is lindy. Bitcoin is money. Our reputation and mindshare as the most valuable chain was earned through Proof-of-Work, not through Vulture Capitalist insiders who own the lion’s share and rely on unwitting newcomers as exit liquidity for their Ponzi schemes. Our founder remains anonymous, and to the best of our knowledge, he is dead yet immortal. There is no face to a name that we worship: no idols. The Genesis block was conceived without sin or greed in the greatest recession since the Great Depression, when all other institutions had failed us, we created our own community and invited anyone in the world with an internet connection to join. We’ve been laughed at by the institutions for over a decade, but look who’s laughing now? Sticking to one’s guns pays off. There are false prophets and hucksters around every corner shilling their “shitcoins”, but of course there are! Imitation is the best form of flattery, but ultimately we know the rug pull is coming for the sophists. We have a continuous chain of history going back to the genesis block to prove our mettle, never once wavering because of outside concerns like the hack of popular exchange or a smart contract bug. Our code is law: we said what we are going to do and we did it. We deliberately chose a cap of 21 million, not because it would be easy, but because it would be hard and money as a deflationary store of value is just that important. Our energy consumption is justified because money is just that important (and we don’t think the petrodollar is that “green” anyway). We will not be rug-pulled because there is no one to rug pull us. We have been here before you, we are here now, and we will be here long after your altcoin schemes turn into dust. We are not intimidated by the latest fad or fashion like NFTs or Proof-of-Stake: it’s simple, and we like it that way, that’s a feature not a bug, because we do one thing and we unapologetically do it the best. We are the digital gold standard.

Because we are digital gold, we celebrate those who HODL or “Hold on for Dear Life.” We grin at the cautionary tale celebrated on Bitcoin Pizza Day, a reminder that good things come to those who wait. Everything else we want to accomplish, be it low-cost payment channels or smart contracts, can be built over the top. But these are not high priorities compared to keeping our eye on the ball. Once we ensure sound money: the sky is the limit.

The Infinite Machine

Ada saw something that Babbage in some sense failed to see. In Babbage’s world his engines were bound by number. He saw that the machines could do algebra in the narrow sense that they could manipulate plus and minus signs. But all his calculating engines, his Difference Engine and his Analytical Engine, which is the programmable general-purpose machine, were all bound by number: They manipulated number as a manifestation of quantity, as a measure of quantity. What Lovelace saw—what Ada Byron saw—was that number could represent entities other than quantity. So once you had a machine for manipulating numbers, if those numbers represented other things, letters, musical notes, then the machine could manipulate symbols of which number was one instance, according to rules. It is this fundamental transition from a machine which is a number cruncher to a machine for manipulating symbols according to rules that is the fundamental transition from calculation to computation—to general-purpose computation—and looking back from the present high ground of modern computing, if we are looking and sifting history for that transition, then that transition was made explicitly by Ada in that 1843 paper.
-Doron Swade

It from bit. Otherwise put, every it — every particle, every field of force, even the space-time continuum itself — derives its function, its meaning, its very existence entirely — even if in some contexts indirectly — from the apparatus-elicited answers to yes-or-no questions, binary choices, bits. It from bit symbolizes the idea that every item of the physical world has at bottom — a very deep bottom, in most instances — an immaterial source and explanation; that which we call reality arises in the last analysis from the posing of yes-no questions and the registering of equipment-evoked responses; in short, that all things physical are information-theoretic in origin and that this is a participatory universe.
-John Archibald Wheeler

The stakes are high because the government is riding into crypto town with the promise that it can do a better job than the existing informal disciplinary mechanisms.  We do have regulatory experience that we can bring to bear here, but we have to do so carefully.  As government agencies consider how to regulate, they ought to take their lead from Congress, work collaboratively with one another, and actively consult the public who will be subject to and protected by the rules.  I might approach this whole endeavor with a less strict hand than some of my fellow regulators, but the real question is not what I or any other regulator wants, but what you the people—the intended beneficiaries of this regulation—want.  I am eager to see what you accomplish on the crypto frontier once we set some sensible, clear regulatory parameters.

To paraphrase the standard closing words of a popular crypto podcast, which follow an appropriate warning about the riskiness of the space, “[You] are headed West.  This is the frontier.  It’s not for everyone. . .” Thank you for allowing me to drop in on your journey West.

-Hester M. Peirce

If reading the Bitcoin stump speech has lasers coming out of your eyes, who could blame you? It’s a cathartic middle finger raised to institutions that have failed us.

But step back: let’s assume the world transitions to Bitcoin, or at least a monetary & payment system backed by it. The companies you love to hate don’t necessarily have to go anywhere. There will be exchanges, banks, insurance agencies, payment processors, escrow agents: middlemen of every kind. Some of these will be outright frauds, or they may be hacked and lose customer funds in the process. But hey, that’s the free market, take it or leave it. Of course, the world is filled with liars and cheats. We said what we were going to do: we solved money, and we didn’t promise you anything more.

But step back again: what’s the point of money? Why exactly are we burning “91 terawatt-hours of electricity annually, more than is used by Finland, a nation of about 5.5 million”? Yes, we solved hard math puzzles to generate blocks wrapped in ‘mathematical amber’ that are hard to undo, but who did we serve? And have we “earned our keep”?

Yes, we all want money. But we want money because we want property rights! We want to trade in a marketplace with a common unit of account. Of course we become uneasy when shadowy bureaucrats manipulate the money supply by methods opaque to us, but we also don’t like shadowy brokers, banks, and social media platforms either! As creatives, we want ownership over our digital intellectual property, not to be abused by record labels. As citizens, we want freedom of association and decentralized, sovereign, portable identities to which we only have the keys. As consumers, we want applications, goods and services where contracts are as good as gold.

To put it bluntly: A world of Wells Fargos, Facebooks, Twitters, AWS outages, and Big Machine records [Big Machine? How on the nose can you get?] but with cryptocurrency is not exactly what we had in mind.

In the physical world, atoms of gold are money, but so are hydrocarbons. Black Gold. Ironically perhaps, we burn hydrocarbons to mine digital gold in Bitcoin, but is there digital equivalent of biodiesel? Enter Ethereum.

Computation is the link that unites the digital and physical worlds through the expenditure of energy. Computation, like energy, seems pervasive and all around us, but it is limited by the laws of thermodynamics. Just like as in a power outage, you’ll notice when it’s gone. Computation is a commodity onto itself. Computation is an asset. Computation is money.

Ready to go down the Web3 rabbithole? Ethereum is a triple-point asset. It is a store of value, a capital asset, and a consumable commodity for computation. As a commodity, ETH is the payment for “gas” fees, a.k.a. the cost of computation or storage on the network. As a capital asset, Ethereum earns interest when staked in the Proof-of-Stake consensus algorithm, or loaned out on DeFi protocols. As a store of value, Ethereum benefits from deflationary monetary policy: “burning” transaction fees paid to the network, even more so in times of high congestion pricing, and plans to reduce its issuance once upgrades to Proof-of-Stake are fully completed. Moving from Proof-of-Work to Proof-of-Stake will cut our energy consumption by over 99.5%.

Our founding was out in the open and we invited anyone to participate: no VCs took us up. Our main founder owns less than 60 basis points of the total supply and the Ethereum Foundation owns less than 0.3%, the vast majority being mined by the free market. No idols: we’ll always make in-group memes out of Vitalik because we love him, but we’re not afraid to reject his proposals if we disagree with them.

Web3 is a web without middlemen. Yes, we’ve rebuilt the entire financial infrastructure stack from the ground up: exchanges, options markets, bonds, insurance and all, but that was table stakes. Virtually all of the crypto projects users are actually paying to use are on our platform. We’ve created a stable digital dollar that has no central custodian or point of failure. But more importantly: No Citadel Securities & Robinhood to halt trading at their convenience. No Facebook Metaverse, rather Decentralands where property & real estate is controlled by the citizens, not the corporations. Online games where Filipinos unemployed due to COVID-19 are earning real money for playing, rather than flashy cash cow mobile games where users being upsold, nickeled and dimed at every turn. We’ve build DAOs, Decentralized Autonomous Organizations: digital corporations that are governed by code where anyone can join, contribute, learn, and earn. We changed the laws in Wyoming to recognize DAOs and interface with the real world. Now, we are building DAO infrastructure for real physical city in Wyoming on-chain. We are building the infrastructure for democracy: a Universal Basic Income that is streamed second-by-second into our citizen’s wallets along with an arbitration system for justice & dispute resolution that is now legally recognized in Mexico. We’ve single-handily changed the game for digital-native creators: we’ve broken the glass ceiling for digital art by setting a record with Beeple’s Everydays, we’ve introduced ETH as a new currency at Sotheby’s, and enabled artists, athletes, and authors to accrue ongoing royalties from the resale of their works. We created the first decentralized domain name service: Ethereum Name Service, where names cannot be repossessed or censored. And we then created a DAO to govern it: not only that, we airdropped over $1 Billion in tokens to our early adopters. We’re generous and have donated millions to fund open source software & decentralized public infrastructure. Together with the Interplanetary File System, we are going to take over the universe, get off Web 2.0 where our data & privacy is being auctioned away, and build a web that is owned by the users for the users.

Sometimes we don’t succeed in buying the constitution, but we are the founding mothers & fathers of a new digital state, and we’ll keep shooting for the moon.

The King of Kings is the Chain of Chains

Have you added .eth to your screenname and joined the Bored Ape Yacht Club?

The main hiccup: it’s growing too fast, the demand for blockspace is high and $100 trades are hard to justify when the old world is now offering commission-free trading.

To scale we will need Layer 2 solutions that roll-up batches of transactions and only commit occasional, succinct, snapshots back to Layer 1 Ethereum, amortizing the cost across many users. Users will get the full security of Ethereum with a delay instead of immediately.

On the other hand new Layer 1 competitors to Ethereum have garnered much interest (this time, also from VCs). Avalanche and Solana are two of the most popular alternative L1s gaining traction, but the jury is still out if they can scale while remaining decentralized and secure. Competition is good!

Finally, blockchains like Polkadot and Cosmos have built built bridges between disparate independent blockchains, allowing blockchains to talk to each other in a decentralized way. There are now decentralized exchanges that now allow a token swap to occur across different Level 1 chains. This “internet of blockchains” concept is a close cousin of Ethereum’s Layer 2 solutions, and potentially an alternate way to scale: instead of having cheaper, more efficient Layer 2 integrate into Ethereum, multiple sovereign blockchains of varying speed and cost could talk to each other using a common language provided by these bridging solutions. Again, jury is still out.

No one is crazy

No one is crazy.

People can be misinformed. They can have incomplete information. They can be bad at math. They can be persuaded by rotten marketing. They can have no idea what they’re doing. They can misjudge the consequences of their actions.

Oh, can they ever.

But the decision to buy a lottery ticket – or a stock, or a house, or whatever – makes sense to them in that moment and checks all the boxes they need to check. Every decision everyone makes is rationalized in their head when they make it.

The cornerstone of behavioral finance is that most people assume it’s a field whose documented flaws apply to other people, but not themselves. That’s because we judge others based solely on their actions, but when judging ourselves we have an internal dialogue that rationalizes what others identify as bad decisions. We rarely hear the internal justifications other people have for their mistakes, but we’re keenly aware of our own. Daniel Kahneman begins his book: “The premise of this book is that it is easier to recognize other people’s mistakes than our own.”

-Morgan Housel

Rational people don’t risk what they have and need for what they don’t have and don’t need.

-Warren Buffett

If you are walking away from this wondering who to believe, I don’t blame you. Everyone approaches their investments with different life experiences. Those who came of age during the hyperinflation of the 70s will forever think differently about the world than someone who entered the job market in ‘08. Is there any question why the Bitcoiners, Ethereans, and others are constantly infighting? This is a new frontier, battle lines have recently been drawn, and there is a massive amount of mindshare up for grabs. As with all forms of politics, we don’t discuss what we agree upon, and we drill down upon what we don’t: disagreements boil down to a hierarchy of values, and how one personally ranks his or her own priorities.

Stay diversified, don’t sacrifice what what you have and need for what you don’t have and don’t need, and hold on for dear life.

Arweave TX
iykW2OR4osvvoODXlO8g9lhuTpmV4DlPTUmPxyUDiFE
Ethereum Address
0xA01f6D0985389a8E106D3158A9441aC21EAC8D8c
Content Digest
51evPIzab6euWHSPal1MVHkFvaWzSRqUTedJYD-wG1I