Recently the merge was successfully finalized, further validating ETH’s standard-setting role in crypto. But what exactly is ETH’s role in crypto; and how will it change over time? How do the ideals of BTC maxis vs. ETH maxis differ?
In this space hosted by The Block, crypto twitter personalities sassal.eth and CMS Intern discuss these broad, important topics.
Read our notes to learn what they think about ETH and crypto’s future.
Missionaries vs Mercenaries
sassal.eth
● 8 months ago most of the ecosystem consisted of mercenaries.
● At the moment, given we’re deep in the bear market and all the on-chain metrics have collapsed from all-time highs, we’re more inclined towards the missionary side.
● Most BTC maxis are missionaries as well and have certain core principles that they believe in.
● We saw a lot of mercenary behavior in the NFT ecosystem, but that too has collapsed for the most part.
● During the bull market, there was a lot of fresh capital coming in to make a quick buck.
● Need a balance of missionaries and mercenaries in a community.
CMS intern
● There’s a fine balance between speculation and understanding tech.
● Speculation and adoption go hand in hand in crypto.
● NFTs are speculative, but they will also play a crucial role in a metaverse economy.
● Missionaries have created the idea and built everything. However, the mercenaries play an increasingly important role with their adoption of the tech.
Difference Between Bitcoin Maxis and Web3 Believers
sassal.eth
● There are multiple groups in crypto and people change their stances often.
● Some people leave a community based on reason, while others in the community double down on their core beliefs.
● The Bitcoin community has rejected people who’re open to more ideas and consequently, those people have left.
● Cannot compare Bitcoin and Ethereum maxis. Ethereum maxis are technologically driven, unlike Bitcoin maxis.
● The hardcore beliefs and ideals of Bitcoin maxis have made it lose market share to the entire crypto market and mind share.
CMS intern
● Crypto is about evolution and experimentation.
● Bitcoin maxis are stuck in the past. There are a lot of interesting things going on in Web3 and crypto.
The Nation State & The Social Layer of Ethereum
sassal.eth
● The social layer is a descriptive term for the people and the community.
● The idea of a 100% autonomous code with no human intervention or social layer is false.
● Humans are running the full nodes and developing the software, not AI.
● If the people agree to change the rules of the protocol, the protocol will change.
● The final hurdle is a nation-state like the US, which has an unlimited budget and wants to protect its interests.
● They can print money and buy ETH or buy asset miners to go and attack the network. Also, they could infiltrate the core social layer and try to influence the network.
● For the nation-state, their motivation isn’t profit, they have an unlimited budget to take down the network.
● The last layer of defense is the social layer because if they’re able to overcome the technical defenses, it is the people who’re left to fight back.
● This means coming together as a community and refusing to accept a chain that is controlled by a nation-state.
● Social slashing is like a nuclear option in such a circumstance.
How Do You Quantify the Social Layer?
CMS intern
● Intrinsically the social layer is a qualitative thing related to how people form narratives and what they hang onto.
● From a trading POV, analyzing the social layer quantitatively becomes important.
● There isn’t a formal way of breaking it down and quantifying the social layer.
● The social layer is arguably one of the most important parts of crypto.
● Need to understand how an idea propagates through a community and what makes it strong.
● A lot of valuations are relative to similar projects when accessing investments at CMS.
The Idea of Social Slashing
sassal.eth
● In Ethereum PoS, slashing is a normal part of the protocol, wherein if you as a validator try to harm the protocol, you will lose a part of your ETH stake. You also get kicked out of the network. (Read our Notes on Social Slashing)
● In social slashing, the community comes together and tries to eradicate a bad actor, without having a technical on-chain consensus.
● With PoW, if there’s a 51% attack, the entire hashing algorithm will need to be changed which will hurt the good actors as well. However, with PoS and slashing, we can specifically punish the bad actors alone.
Risks Around Concentration of Staked ETH With Liquid Staking Derivatives
sassal.eth
● In due time, people will be able to redelegate their stake to different validators, to ensure one doesn’t become too big.
● Technology is being developed that will allow people to control their stake while delegating the validation duties to a liquid staking provider.
● More competition in the liquid staking derivatives space will help innovation.
● Lido, the biggest liquid staking derivative platform distributes the ETH to around 28 different entities. Rocket Pool is a decentralized liquid staking platform as well.
● There are ways of punishing centralized entities (slashing).
Is the Future Multichain?
CMS intern
● Believes in a multichain future.
● Purpose-built chains that are optimized for certain things will likely work. However, they could become roll-ups to Ethereum.
● If zk roll-ups work well and everything can be built on them, a multi-chain future may be less likely.
Q&A
Q. What is the future of derivatives? People will use stETH to borrow more ETH, and then get more stETH. Will there be other derivative tokens to denote that, eventually when most of the ETH gets locked up?
A. Sassal.eth:
● A lot of recursive leverage has already been taken out of the system.
● Doesn’t matter how many derivates get built, there’s only ETH at the base layer.
● In a liquidation cascade, you will still have that ETH on the beacon chain and post withdrawals there’ll be massive arbitrage opportunities to bring the market back in sync.
Q. If a user deposits ETH for stETH on Coinbase, then has their stETH liquidated, does the original ETH being on Coinbase add to centralization risk?
A. sassal.eth:
● In a pre-withdrawal world, the ETH is locked up even with normal staking.
● If you get liquidated, that stETH doesn’t disappear. Someone can act as the liquidator and withdraw that ETH.
● If you lose your keys to the crypto, then Coinbase would own the original ETH.
Q. Is client diversity a risk heading into the merge?
A. sassal.eth:
● We have amazing client diversity in the consensus layer. Can be viewed at clientdiversity.org.
● On the execution side, GETH is still extremely dominant, having about 80% of the market share. Will be handled after the merge.
● The other execution clients aren’t up to GETH’s standards.
● There are soft incentives to using other clients, one of them being a correlation penalty.
Q. Right now we have high fees, but low transaction volume, in the future we’ll probably have low fees and a high number of transactions, how will this impact the staking yields?
A. sassal.eth:
● Fee revenue has been volatile historically.
● L2s are taking activity away from the main chain.
● If there is more fee revenue, the yield for stakers will increase.
● As a validator, you can boost your yields by capitalizing on MEV.