Issue #68: Should Ethereum Stay POW?
Today’s issue was authored by @anonalyx. He’s been a guest writer for 30,000 Feet before, and the one person I am comfortable giving cart blanche.
Earlier this year, we were discussing contrarian ideas and he said Ethereum would be better off abandoning the transition to proof of stake, and staying proof-of-work.
I was so used to the idea of Ethereum migrating to POS that the thought of abandoning those plans seemed crazy, especially in an ecosystem with increased competition from higher performing chains with cheaper fees.
It was like hearing a senior in high school tell you they don’t want to go to college. The lack of a college degree puts you at a disadvantage relative to your peers that have one. But…it’s only a disadvantage if your plan is to get a job that requires a college degree. If you want to be a standup comic, college isn’t necessary. It may even be detrimental. You’re better off spending those hours writing and in comedy clubs, honing your craft.
Maybe Ethereum doesn’t need to compete on performance.
Let’s play devil’s advocate…
Ethereum, against all odds, and after almost 5 years of building, has found product-market-fit with DeFi, DAOs, and NFTs. This was far from a guaranteed outcome, and certainly other Ethereum predecessors (and potential successors) have come and gone. Everything suggests that the incredible innovation we’ve seen over the last 3 years, will continue to accelerate into the future, and certainly development at this time is further innovation will continue.
As someone who is an unabashed multi-chain enthusiast, I have a unique perspective on what is great, and largely unreplicable about the Ethereum ecosystem, and why that unique position is at risk post-merge.
Here are the three reasons why I think Ethereum should remain a proof-of-work chain.
#1: Proof-of-Work is valuable, and I’m tired of people pretending it’s not.
There is only one Bitcoin, and, in case you haven’t noticed, there is also only one Ethereum (sorry Barry - “Hackers launch third 51% attack on ethereum classic this month”).
This is proof-of-work as Godtoshi intended.
Proof-of-Work is rooted in physical scarcity. There is a limited supply of computation and energy in the world, and because of these practical constraints, miners must be incredibly strategic about where and how they invest their capital. Deploying capex to support PoW mining is highly frictious. Maybe you’re buying ASICs, investing deeply in warehouse/data center rack space, and negotiating long-term energy contracts with foreign governments, but the ultimate effect is that it makes the security infrastructure sticky and aligns long-term incentives between both miners and users of the network.
This may not matter to you, and this may not matter to people like me that love to bitch about Ethereum’s fees, but it absolutely matters to nation-states, large corporations, and sovereign individuals - anyone that has the capital and profile to care deeply about censorship resistance.
If I have $200M and live in a prohibited jurisdiction, but I want to avail myself of the basic financial services the rest of the world enjoys… my only option today is Ethereum. Changing the security profile of the network threatens the value proposition for users that desperately need the network in its current form.
#2: Proof-of-Work is a black hole.
As the only mature Proof-of-Work smart contract chain, Ethereum has built a center of gravity that no other project in the ecosystem enjoys.
Rational actors are incentivized to come to consensus on the canonical state of the chain, and other illegitimate chains (illegitimate as determined by the majority of validators and users) are less valuable and less secure as a result. As far as PoW game theory is concerned, there’s little difference between say a temporary Ethereum consensus split and a true fork like Ethereum Classic. Proof-of-Work doesn’t just force consensus within a chain, but also between chains. Less valuable chains cannot afford the security budget and fold/wither away.
Ethereum is the only Proof-of-Work smart contract chain, and a transition to Proof-of-Stake robs it of that unique feature and moat, and puts it in a position to compete with all the other PoS smart contract chains. At a high-level, compare ETH 2.0 to Cosmos or Polkadot, and the differences are more marginal than substantive.
#3: There’s no such thing as a “cheap” transaction.
If there’s anything we’ve learned from the dramatic increases in supply of both computational processing power and capacity for data storage over the last 40 years, it's that even as supply approaches infinity, demand expands to fill whatever surplus exists.
This demand is not distributed equally however. Sophisticated actors and middlemen absorb the majority of the increased supply, and are able to enter the market more cheaply and to arbitrage the delta between the equilibrium price and the cost to consumers. Consider the market for diamonds or concert tickets.
Right now, the Solana network, a blockchain that is able to process several orders of magnitude more transactions on a daily basis than Ethereum and does so without a transaction fee market, goes down just about every other day. This is a predictable outcome. Sophisticated actors absorb the delta between what transactions cost and what they are worth by spamming the network with thousands of transaction requests, and the network becomes unusable for everyone except bots.
Optimizing for transaction throughput is likely a trap, and one that will disproportionally reward MEV bots and high frequency traders.
Ethereum has achieved product-market fit through the sheer strength and determination of a world-class community of users and developers. It’s the same, iterative, experimentation-friendly approach to Ethereum’s growth and development that makes a transition to proof-of-stake a palatable idea to this community. But, in reality, they are diluting the value proposition of their product, ceding their unimpeachable advantage, and choosing to compete on a playing field where they are unproven and disadvantaged by - given the amount of legacy infrastructure that they must contend with.
It’s like Michael Jordan, ten years into a hall of fame basketball career, announcing he’s going to play baseball. Sure, he’s a freak athlete and even more freakishly competitive, so with enough hard work he’s got a chance at being an above average baseball player. But he’s going up against people that have focused on nothing but baseball since they were little kids. It’s a different beast.
A naive take would be that I’m just painting one side of the innovator’s dilemma, and that progress comes from risk-taking, but I think that misses where finance and technology are fundamentally different. In tech, people pay for new. In finance, people pay for trust.
Maybe it works, maybe it doesn’t, but when you’re already #1, why bet the farm?
Thanks for reading,
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