Tuur Demeester’s Bearish Case for Ethereum

Audio interview transcription — WBD061 Note: the following is a transcription of my interview with Tuur Demeester. I use Rev.com from translations and they remove ums, errs and half sentences. I have reviewed the transcription but if you find any mistakes, please feel free to email me . You can listen to the original recording here . You can subscribe to the podcast and listen to all episodes here . In this episode, I talk with long-term Bitcoiner, economist and investor, Tuur Demeester. We talk about his recent Tweetstorm breaking down why he is so against Ethereum, discussing everything from proof of stake to reckless security. Connect with What Bitcoin Did:Listen: | | | | | Follow: | | | | | | iTunes Spotify Stitcher SoundCloud YouTube TuneIn Website Email Blog Twitter Medium Instagram YouTube Interview Transcription Sunday 30th Dec, 2018 Interview Date: “With Ethereum there is a culture of recklessness and not keeping to promises.” — Tuur Demeester Hi there, Arthur. How are you? Peter McCormack : Hey, Peter, how’s it going? Tuur Demeester : I’m good, thank you. Did you have a good Christmas? Peter McCormack : Yeah, yeah. I had so much fun this year. Yeah, it was great. Tuur Demeester : Excellent. Okay, I didn’t think I would get to interview again so quickly after our last one, but obviously, you’ve put out a tweet storm this week that’s raised some awareness of yourself and put out some thoughts with regards to Ethereum, so obviously, I approached you. I said, “I think it might be good to record discuss around this” because I think sometimes people might take something too aggressively. So I thought it would be good to get you on, have a talk about it, and also, some of the things are quite complex. Peter McCormack : You know I’m not the most technical, and I always want to learn, so I think it’d be good to go through some of this for you. but I think it might be helpful just as a way to set up if you could just give a background to why you did this tweet storm and how much work went into it? Yeah, yesterday, I went a few times like, “Oh, my God. What did I do?” Because I thought people would read it, but it was a lot more pro and con debate than I expected, which is nice, but it was bigger than I thought it was gonna be. Yeah, where it came from. It was really this tweet that I put out about comparing Ethereum with this utopian ideology of Marxism and not everything about that ideology, but a particular three aspects, and I just briefly highlighted that where I saw, potentially, some parallels. It wasn’t a serious tweet. Tuur Demeester : It just really grinds me, rubs me the wrong way, when people try to monetize ideas that are viable and that present them as viable, and so that’s utopianism, and we’ve seen a lot of that in the crypto space, and so Vitalik’s response to that. I was really annoyed by it, and it also fits in a pattern where he will quip back as if … He basically said, “Oh, I can play that game, too,” and then proceeded with three semi-identical criticisms to Bitcoin which were factually wrong, logically didn’t make sense, but on the surface, it was like, “Oh, he got back at me.” It just really got to me. I was just very annoyed and I didn’t want to … Because the traditional way that people respond is like, oh, they’ll get back to him and they’ll have a longer response to why he’s wrong, but by then, all of his followers have mostly … They kind of lost interest and they moved on and the memory remains, though, like, “Oh, he won this debate,” even though the only thing he did was dodge the question, and so that was really the … I don’t know. It doesn’t sound inspiring, but it was the emotion that was like, “All right, I want to put out something to put this into context. It’s like, “Why am I annoyed about this?” I think that went into the tweet storm, and I wonder maybe that’s why it got so much response because I think a lot of people have felt this way about … I don’t want to single out Vitalik, but like … About the people that are carrying the torch for Ethereum that there’s a fair amount of what I would I call opportunism or sloppiness and just a lack of dedication to really getting to the bottom and being intellectually honest and then also having business ethics, as well. You’re not just some self-labelled Bitcoin Maximalist read in Twitter, Twitter read all day, drafting tweetstorms, attacking non-Bitcoin people just to defend your Bitcoin. Peter McCormack : It’s ironic because, pretty much, Vitalik called me a Bitcoin Maximalist, so it’s like, “Well, I guess you can just repeat that word,” but no, I could’ve invested in Ethereum. I could’ve invested with Mastercoin was the original inspiration for Ethereum. It was going to be a way to issue tokens on top of Bitcoin like a coloured coin experiment. There have been so many things that have been available for me and anyone to invest in. Tuur Demeester : It’s also why I feel some self-attack if I read back the tweetstorm. There are some tweets that I’m like, “This word should’ve been a bit different,” or, “I should’ve used a different source to illustrate this point,” but it’s also like I don’t have anything going on this. It’s not like I have a big Ethereum short that … I’m flat versus Ethereum. I don’t have any, except for … I tried to explain this, the stake that I have. It’s just that right now, people don’t talk about the Bitcoin space. They talk about the crypto space, and so in the eyes of new investors or people who are looking at this space or institutions, even, they look at the top five assets. Ethereum is in there and a number of other ones, too, and so the reputation or the technology of those tokens are gonna influence how people’s perception of Bitcoin is because it’s all part of the same basket in their minds. Ethereum is often described as a blue chip like it’s … All these ICOs were launched on top of it, and so it must be exemplary in the crypto space as a project that really shows what blockchain can do. In my mind, it doesn’t live up to original expectations. It doesn’t live up to its current expectations, and a lot of investors don’t know this. They don’t know why, and I think it’s tainting Bitcoin to some extent. Yeah. That’s my stake in this game. It’s just like I don’t like that Bitcoin’s reputation is being tainted. Interestingly, I noticed on Stephan Livera’s podcast recently, he’s been pushing the Bitcoin, not crypto, a narrative which is a quite interesting follow up from Bitcoin, not blockchain. And I guess some of the damage has been done where people start to think about index of crypto assets. Coinbase has an index and other people have an index. They’re almost aligning these different currencies together and they should all be considered together, but you see such fundamental differences. It’s very important there for you to separate what is Bitcoin from everything else. Peter McCormack : Yeah, it’s like in the ’90s if you had an index of search engine companies. And say that you and I, we live in Silicon Valley and we know the Google guys and we know the other guys, and of course, people are working hard. I could’ve acknowledged that in my tweetstorm. There are people out there who are putting their heart and soul into their Ethereum project, and I admire entrepreneurship, I really do. Tuur Demeester : And so I feel bad that I didn’t highlight some of that, but at the same time, it’s like I don’t want people to … I can only share what I think is true, and so I don’t want to disparage people to be entrepreneurs, but at the same time, if I think a platform doesn’t have any long-term merit, I want to say it so that … Who knows? It just contributes to the general discussion. Yeah, those indices where you throw together 10 coins and then, of course, your results financially are, to some extent, gonna reflect how the space performs because you rebalance and if Bitcoin gains traction, you’re gonna have a bigger portion of that, but I don’t think that’s the best way necessarily to invest, or at least what I’ve been saying is that I think aside from your multi-coin basket, I think you should have a basket dedicated to Bitcoin. Just like, if you are gonna invest in search engines, I think it’s important to acknowledge … We’re talking maybe like the year 2003 or 2002. It’s important to acknowledge that there’s a qualitative difference between Google and Yahoo, for example. Right, okay. There would’ve been plenty of times that Bitcoin has been written off in its journey over the last 10 years and it still is being so. Especially in its early days, people would’ve had their doubts. Maybe even people, high profile people who’ve been involved in the project from the start, maybe even yourself, Arthur, that there were times where you perhaps had your doubts. Is it not fair that if Ethereum also had doubters and therefore it deserves the opportunity to be experiment upon, or is there something fundamentally different here that you think deserves analysis? Peter McCormack : Yeah, I’m a free market guy, so of course. If people want to build something and they want to rally investors around them, that’s great. To me, where I draw the line … Of course, the interpretation of that is difficult, but it’s dishonesty. Are you being straightforward about what you’re doing? Are you being transparent about the research that historically has been done in the field that you claim to innovate in? Are your business plans somewhat realistic? Do you have internal accountability? What are your financial interests left and right? Maybe you advise. Tuur Demeester : I’m talking as if I’m talking about an individual, but I think it can apply to communities and organizations, as well. There’s a lot of buzzwords that Ethereum uses like decentralization, censorship resistance, smart contracts, and the implication is we are the smart contract platform, for example, even though Bitcoin has had smart contracts from day one even though right now today, you can issue tokens on Bitcoin and it’s starting to happen, even though Bitcoin has generally censorship resistant and Ethereum totally has not. The decentralization, that in itself, you could talk for hours about how do you measure decentralization. To me, I’m looking for integrity. I’m looking for people that really dedicated to principles and that I want to see that shown in their actions. For example, from the Ethereum community, I don’t really research being done in how do we keep this thing decentralized, for example? How do we prevent this one company, Infura, from … How do we measure? How do we measure the level of centralization at this point? I can’t find the data. It’s a concern of mine. There’s a lot of indicators that it’s going the wrong way. I’ve actually asked someone at the FCC like do you think it’s possible that even though Ethereum started as a security, which was central … The ICO was centralized, and then it was deemed to be just an asset, no longer a security, because it became decentralized. Well, what if because of what we’re talking about, this blockchain bloat stuff, what if Ethereum becomes centralized again? Could it then be deemed a security again? He didn’t in-depth agree with me in terms of in a lot of words, but he definitely did not tell me, “No, that wouldn’t happen. You cannot go from a commodity to a security.” Anyway, so whenever I ever I err concerns there, it’s like what if there’s a judge who says, “This big Ethereum balance is the balance of a thief. It’s the result of a theft. We need to move these Ether back to where they came from, and so I’m gonna order Infura, who runs most of the Ethereum nodes, to just start deploying this new client, a hard fork client, that claws back all the funds to where they came from.” Wouldn’t that set a precedent? Wouldn’t that be a precedent that Ethereum is centralized because it can be court-ordered around? I’ve asked that question and people have literally mocked me for doing that, so it’s like those things. It’s been like this for years. It really makes me wonder how dedicated are you to these principles, or are they buzzwords that you use to excite investors? =What’s your view on securities laws? Because I’ve seen when people have an issue, say, with Ethereum or Ripple, they will often bring up, “Oh, it’s an unregistered security,” but they’re also the same kind of people who I expect find that securities law’s also discriminatory. So sometimes I find it’s a careful balance of using … it being a security as an attack vector when you might actually yourself not agree with securities laws because they are discriminatory. Where are you with that? Peter McCormack : Well I think cryptocurrencies are decentralized. If they’re not decentralized, they’re not cryptocurrencies. And decentralized means censorship resistant, and so it shouldn’t matter what the law says. But of course, if you are centralized and you’re running a startup, then you’re gonna have interference of judges and legal action and those kinds of things. Tuur Demeester : And so it’s relevant in that sense, from an investment point of view, you’ll want to take that into account as a risk vector. Or if a startup is especially compliant with the law, then that’s a plus and you take that into account. But at the same time, from an ethical point of view, the way common law has been grown over the years is there’s a lot of common sense in that. The Howie test is very commonsense. If somebody sells you an apple, that’s just a commodity and you buy the thing and then that’s it. From there on out, you are on your own. But if somebody sells you this magical thing which will produce income for you and it’s gonna grow. And that income and that growth is coming from the efforts of these people that are running that company, so they’re selling you security, then, of course, it makes sense commonly that these people who sell you that have a lot more responsibility even after the sale. If they’ve been lying about what this token can do, it makes sense that they should have some liability there, even in whatever society you like. So that’s why I don’t like to dismiss the spirit of securities laws, I think there’s a lot of common sense in there. Okay. So before we dissect the tweet storm, I think my final question to you would be … it’s a two-sided question. The first bit is, is there any value in Ethereum? Is there anything there you actually like, anything you think if we get away from the dishonest behaviour, is there anything you think actually that’s worthy for it to exist, that can do something that Bitcoin can’t or like that? Peter McCormack : And then, how do you fundamentally see Ethereum as different from Bitcoin? Not a full critique, but if you had to just very, in one sentence summarize the difference between the two, how would you do that? You might have to repeat that second question. But the first one, so the value I see in Ethereum has been, first of all, I was surprised that there was demand for a blockchain that could contain a very wide array of information. That is something that they’ve shown that there’s demand for. I don’t know if it’s viable long-term, but that’s been really interesting. Tuur Demeester : I think that the value economically speaking, has been that they’ve demonstrated there’s a lot of demand for token issuance in whatever form. If it’s for securities or asset-backed things or even just loyalty points and those kinds of things. And I think it shows that the system that we had was very bureaucratic and expensive, and so people really want to be able to have bottom-up access to things like that. And then you could say smart contracts, to some extent I think we’ve seen because of Ethereum that there’s demand for that too. You could say to some extent they’ve attracted young people that want to develop on top of this platform. But that’s where I have more concerns because if you attract people to “crypto” and then they get disillusioned because your platform doesn’t live up to its promises, is that a plus or is it actually a negative? Would you rather that they would’ve discovered you later on and then they had a solid platform to build upon? So that’s where I feel mixed, but definitely, the big merit has been that there’s showing that there’s significant demand for asset issuance on blockchains. Right, there’s a demand for asset issuance, there’s still to be proven whether there’s a demand for people to actually own those assets long-term. But yeah, still interesting. Peter McCormack : So the second part of the question was, not a critique of why Bitcoin is better than Ethereum, if you had to summarize the main difference between Bitcoin and Ethereum to somebody who doesn’t understand much about either, how would you separate the two? Well I would say that the main difference is that the vision behind Bitcoin is to create a ledger that is the most secure ledger in the world for storing value. And the vision behind it is too, to create a financial system on top of that. Tuur Demeester : And the way that Bitcoin does that is by not compromising the secure blockchain. It builds layers on top of that. Whereas from day one, the approach in Ethereum was to put a lot of things in the same layer and say, basically compromise on the security side and say we want a lot of functionality from day one and so we’re gonna have all these contracts run on the main blockchain. And I think that’s … it doesn’t create anything that Bitcoin could not do, it just gives you results faster. It’s like Yahoo, who used manpower to index the internet. They had interns and young people who were just going over the internet and making these index pages, portal pages for everyone to browse. That allowed them to startup fast and to show some results fast, but it ultimately was not scalable. So that’s where I see the difference is that Bitcoin is scalable, I’m afraid Ethereum is not. Okay great. So we’ll work through the tweetstorm. I’m not gonna go through every single tweet, I’m gonna go through the main ones, the real standout points for me. Peter McCormack : Obviously, you started by explaining why it’s important for you to point out the flaws. And I think I wanted a summary of what that was, but I think you’ve already covered that. Essentially, it just comes down to honesty and ensuring that any investor whether retail institution, is fully aware of what they’re buying into which I think is fair. Is that a fair summary? Yeah. Tuur Demeester : And by the way, as I go through this, if I don’t agree with you I will say. So let’s start with … you pointed out that the architecture and culture are different between Bitcoin and Ethereum, yet claiming the same solutions. Can you expand on that? Peter McCormack : Yeah. And this is contested, people say, “Oh, that’s not true. Bitcoin doesn’t do smart contracts.” Well, first of all, the most backlash that I’ve had is that Ethereum has a different culture than Bitcoin. But I stand by that, I’m trying to think. Like for example, the culture of embracing hard forks as a way to “upgrade” the protocol, the culture of I would say poor peer review. Ethereum has had several attacks and has a long, and in response to that, there were upgrades launched which were basically hard forks in very short order that were not peer-reviewed, that didn’t go through a thorough process. Tuur Demeester : And so I would call that recklessness. I think there is a culture of recklessness and a culture as well of promises that are just not held up. And then a lack of internal debating culture. It’s like there’s their leadership or perceived leadership, and people follow that and they will wait for the leadership to tell them what to do. And then also there’s this perceived idea of democracy, but then when you really look at how decisions are made, it’s actually a lot more top-down than what you might suspect. And then at Bitcoin, it’s pretty clear if you look on social media or anything else, there’s a lot more above board debating happening. There are fears, you could call it in-fighting, but it’s really the war of ideas, it’s much more clear. And I would say that overall, that’s more healthy. That’s a healthier intellectual culture where people are really passionate about certain principles. Luke Junior I think is a good example. He thinks the current block size is too big. He thinks that the blockchain of Bitcoin is growing too fast and he has arguments for that and he’s a very well-respected developer and he’s made major contributions. But he has a lot of viewpoints that a lot of people don’t agree with, and there’s always a debate going on, but he’s not being silenced or anything. His voice doesn’t get lost in the crowd. So cultural differences and then architectural difference … it’s interesting because more and more, Ethereum is actually going towards Bitcoin’s architecture which is a bit ironic, ’cause originally it was like we put everything in the main chain and we do on chain scaling. But now, payment channels are being put forward as the way to scale Ethereum. For a while, it was side chains or a combination of those. And it’s more clear to them that you can’t do everything. You can’t do a drop box on Ethereum or you can do a Twitter on Ethereum on the main chain I mean. And so, the irony of that is that because you opened it up to put all this functionality in the main chain, you made it less secure. And now you’re gonna follow Bitcoin’s lead in modular scaling, but in a way, the cat is already out of the bag because you have an insecure culture. You have a culture that doesn’t know how to create this really solid infrastructure. And so how are you going to put the genie back in the bottle? Yeah, it’s interesting you should say that. I was about to bring up Luke’s name as well myself as an example because I saw a recent presentation of his from his Patreon where he was talking about protecting people’s Bitcoin, everything should be to ensure that people’s Bitcoin are protected. Peter McCormack : And one of the things I’ve come to appreciate over the two years I’ve been involved myself, is I’ve come to appreciate the slowness and the time people take to make decisions and the time people take to develop things. You come to understand that it does come down to security and protecting people’s Bitcoins. Whereas I have noticed with Ethereum, there just seems to be more hacks, more smart contracts going wrong, more funds being locked up. And then subsequent to that, more discussions and debates around should there be a fork to recover funds? And therefore an impact upon immutability and things like that. But it’s taken me nearly two years to come to appreciate that. Do you think Ethereum has more of a startup culture in terms of move fast, break things, move on? Yeah. That’s another example of the culture. That’s been a slogan that they’ve embraced from day one, and it leads you to this problem where if it’s a financial asset, what even is Ethereum? ’Cause Ethereum 2.0 is gonna be very different, the Serenity if that even ever happens. Tuur Demeester : But at least the plan is to make it really different. And so if you’re talking about financialization, that’s a huge problem. I think it was on [inaudible 00:27:40] podcast, Trace Mayer talked about this. And it’s obvious that it’s happening at Bitcoin. Bitcoin is being financialized. ETF is coming and futures and options and all those things. But Ethereum has none of that. I guess internally, they’re trying to do some, there’s some experiments with that but nothing from the established financial world. And the reason is that it’s even hard to define what Ethereum is, and so if you’re gonna create a product that pertains, that is going to offer Ether, what do you do if there’s this big fork and the split or if there are these hacks that happen? I think it’s like the futures and commodities, the entity that approves … CTFC. Peter McCormack : Yeah, the CFTC, sorry yeah, yeah. Tuur Demeester : CFTC, yeah. Peter McCormack : They recently put out a questionnaire about Ethereum which has some very relevant questions. And roughly speaking, they’re asking what is this thing really and what are the risks of all these hard forks and how it’s upgraded? Tuur Demeester : So that’s another thing that is gonna hold Ethereum back. ’Cause I think Bitcoin and cryptocurrencies and especially Bitcoin is going to show everyone in the next 10 years … the adoption is mostly gonna happen by means of just it being part of people’s investment portfolio. And that means that large financial institutions are gonna own it, and of course, there need to be wrappers that they can understand and contracts that they understand. And that means that you need financialization. And so that’s I think where Ethereum is really underestimating the value of stability, predictability, being conservative. And they call it pejoratively ossification. Maybe we’ll talk about this, but the ice age that they put in, it was to prevent Ethereum from ossifying. Well listen, as you know I met with Hester Peirce at the SEC to talk about Bitcoin ETF. And we’ve seen the difficulty that the likes of VanEck and the VENCORE, Voss brothers have had in getting the ETF approved for Bitcoin, but my belief it’s going to happen at some point. It’s just a matter of ticking the right boxes. Peter McCormack : I can’t see a world where an Ethereum ETF would exist or be approved in its current state with all the added complexities that Ethereum brings over Bitcoin. Therefore, as an asset cost, I can’t see why anyone would invest in Ethereum over Bitcoin now, over the next maybe at least two to three years. Unless some government likes it and Infura becomes nationalized and the miners become more or less nationalized. The fee up money system is already proof of stake. The stakeholders are the central bank and the government and to some extent, the larger business banks. They are the stakeholders, and they decide on the money supply. In a way, they can decide on all the forks if you wanna put it that way. Tuur Demeester : So it’s not that alien for them to have a stake-based currency. So that might be a future, I did the exercise once looking at the money supply of Russia. And I think it’s about 200 billion dollars, if you put all the Rubles together. So maybe that’s the high-end possibility for Ethereum is that they could have a 200 billion market cap if some fairly substantial country decides to adopt it and iron out the problems that they have and make it a centralized system. Okay, I think if that happens, we’re a long way from that. Another thing you put in your tweet storm, you put that Ethereum is a science experiment. Could you not argue the same about Bitcoin? Peter McCormack : So the reason why I say science experiment is that there’s a difference between an engineering challenge and trying to create something that the world has never seen before. It’s like alchemy, like trying to create gold out of whatever, aluminium. That has never been done before, and so if you launch a startup that’s like, “Hey, we are an alchemy startup, buy shares. We’re gonna create gold.” Tuur Demeester : I would call that, I would say, “Dude, that’s great that you wanna try that, but find a grant, go into a lab for three or four years and try and show some results and then do a startup.” You don’t ask funding for scientific experiments. And so it’s the same thing. Ethereum, they’re gonna build this … I remember somebody early on in 2013 comparing Ethereum, that idea with NASA. It was like, “Sure, exploring the stars, it’s great, but I wouldn’t invest in it.” Maybe now, slowly with the commercialization of space travel, but at least back in the 60s, would you invest in NASA if it was a startup? No, I don’t think, I mean maybe some people would but it would be more like a philanthropic type idea. And I think that really, the challenge was really, really downplayed in 2014 and 2015. All along, the challenge of scaling Ethereum onchain, I think that’s been massively downplayed. And I think that a lot of investors have been hurt directly or indirectly by that or will be. So the contrast with Bitcoin in terms of a science experiment or not, I would say is that, in Bitcoin, the components were proven to work, and then they were put together. And logically speaking, that should work as well, and there was never a promise that Bitcoin is going to switch to some femoral system that would work completely different. The main blockchain is always gonna be there, it’s the bedrock of the system. Whereas in Ethereum, it’s like, “Oh, we’re doing proof of work now, but the promised land is coming. We’re moving to proof of stake.” That’s a really big question mark if that’s gonna work out, ’cause proof of stake has never been proven to work in a decentralized way. And that’s one of my criticisms in the thread is that, it’s actually been proven that you can’t do proof of stake without a trusted third party. Well interestingly, because of the market dynamics of trading crypto, it’s almost unlikely that any early investor who invested in the ICO will have lost money. Most of them will have made decent money, it’s the people who’ve come later on. Whereas, you don’t tend to find that with traditional venture investing, because you don’t have such liquidity early on for your projects before you’ve even released something. So it’s more likely the later retail, or not just retail actually, institutional venture funds that have come in in the last year, year and a half that are the real ones that have been burned by this. Peter McCormack : Yeah. It’s true that in cryptocurrencies, if you were an early investor in the top 10 coins, in any of the top 10 coins; you’ve done very well. And it’s mostly the later ones who get hurt. There are a lot of projects who flared up and died. If you were a Mastercoin investor, you’ve lost money. That is dead, even though at some point I think it did a 25x in Bitcoin back in 2013. Tuur Demeester : And that’s the problem is that later investors, they don’t know the history of some of these projects. And I think they’re very vulnerable. That’s where I feel a responsibility. This is a lemon market, there’s lots of information, but it’s unevenly distributed. How do you decide who to trust? There are no rating agencies, for all their flaws, you can have critiques on that as well. But there is no infrastructure to evaluate these assets, and so I think that’s why if you’re gonna issue an asset you should be extra cautious. Okay. So you also moved on and talked a lot about scaling. And you talk about the times taken with sharding, it’s taken so long. Is it not fair though to say that Bitcoin has also faced long-term scaling issues. Scaling was discussed very early on, lightning has taken a long time. Do you not think that Ethereum deserves a similar amount of patience? Peter McCormack : Yeah, I think Eric Voorhees has said on Twitter, he’s like, “Oh, Ethereum is less than half the age of Bitcoin, give it a break.” My response to that is that Bitcoin has never had the pretence to scale in previously unproven ways. Modular scaling is literally how the internet scales to this day. From the 70s to today, that’s how the internet has scaled. Tuur Demeester : But sharding, experts in sharding … sharding is a way to store, basically what you do is you have a big file that you wanna store, and because you don’t want to lose it, you need redundancy and so you’re gonna store copies of it in different places. The way sharding works is that you split up the file and then you put it in many different places. You put little parts in many different places. And that works today, a lot of data centres use that as far as I know. But it’s always with a central point of control. It’s like somebody has to know how the pieces fit together. And what Ethereum claims is that, “Well, we’re gonna do sharding in a way that’s decentralized where there’s no trust needed to put the pieces back together.” Somehow the pieces are gonna know where they belong, and they can reconstruct themselves, and that is totally, totally unproven that you can do that. And so to claim, “Oh, we are gonna transition to sharding and it’s happening. I think that there’s a huge caveat that was never mentioned. And so it’s kind of like they put the plane up in the air and they’re like, “We’re gonna land without landing gear and it’s gonna go great, and it’s never been done before but trust us.” Vitalik claims they’re making good progress. Peter McCormack : How do you measure that? There are even projects in crypto that are saying, “Oh, our models are verified. They’re verified.” It’s like yeah, but by which standards? You choose what you’re gonna measure, but Adam Beck likes to refer back to this. I forget the name of the law, but it’s basically if you have not proven to be able to break other people’s systems yourself and you build a system and you claim it’s secure, that’s not a very credible claim. Tuur Demeester : If you’re not a hacker, there’s not a lot of credibility in you saying, “Oh, this is proven to be secure.” It’s kind of like you or I, if we were to design a vault, and we were like, “This is secure. I’ve tried breaking into it and I can’t.” It’s like, “Alright, well now give it to a professional burglar.” So yeah, you need huge grains of salt when people make these claims like, “Oh, it’s happening and it’s,” ’cause that’s where, in the thread, I also point at the failed projects that they’ve just moved on from. It’s always been this smorgasbord of we’ll do plasma or side chains, and all of them were presented as equally valid, and that makes me suspicious. Whereas in Bitcoin, it’s always been the consensus has gravitated towards …. like lightning for example, that there’s so much enthusiasm about that, and I don’t see that in Ether because I think they still don’t know. So there’s multiple different scaling ideas that Ethereum are working on, all unproven, all with unknown time scales. Do you see a potential scenario therefore with Ethereum that we could be 2020 and still nothing is delivered and it’s back to the drawing board for them? Peter McCormack : Yeah. It’s kind of we’ll see, ’cause I think they are trying to … the word is or the plan is to gradually ease into proof of stake. There is gonna be some staking but still proof of work and of checkpointing. I don’t think they’ll ever, I could be wrong, but I don’t think they’ll ever make the complete transition to proof of stake. Tuur Demeester : And it’s basically gonna be like you get a dividend paid out. It’s a bit ironic, they’re gonna get an Ether dividend, but they’re gonna create Ether inflation to pay out the dividends, so it’s kind of like zero-sum. But at least … I think that was the appeal for a lot of investors as like, “We’re going to proof of stake, it’s free money. It’s perpetual income and we don’t have to work for it and we’ll have a secure chain.” I think that’s the free lunch fallacy. I think it’s not gonna happen. So is proof of stake tied to scaling? They can’t scale with proof of work, is that one of the issues? Remember, I’m not too technical. Peter McCormack : It’s not really. At least not that I’ve seen. It’s not really, it’s just a different way to validate transactions. And I guess you could say, actually no, it’s just a different way to mine. And they say that you would waste a lot less electricity by doing proof of stake, and that you have even superior security over proof of work is the claim. Tuur Demeester : But no, it’s not related to scaling in essence. I think it’s mostly part of the sales pitch. You’re trying to have a really sexy product and so you say, “We’re doing away with this wasteful mining.” How long has proof of stake been discussed for Ethereum, because it’s only something I’ve been aware of maybe predominantly over the last six months? I might have heard about it before. Is it something that’s always been on the roadmap? What it feels like to me now is that the arguments that proof of work was a tool for bootstrapping Ethereum, and now that Vitalik doesn’t believe in proof of work. Is there a certain amount of post-rationalization going on there? Peter McCormack : What I remember is, and I saw Vitalik in 2013 on a panel in Amsterdam. And they were talking about mining. And I remember him talking about thinking that proof of work is wasteful and I think he liked Primecoining because at least the algorithm was doing something useful. I think it was calculating, trying to calculate the largest prime number, and so this idea that miners should do something useful has always been there. Tuur Demeester : I know that, and that’s part of why I’ve never … I thought that was flawed. For example, the pro-inflation point of view, I’ve never really bought into that. There was a coin who had perpetual inflation in the crypto sphere in 2013, but it never went anywhere ’cause investors are like, “Why would I buy into something that’s gonna be diluted forever?” So there are these notions that have always been part of Ethereum, and then staking … as soon as the discussions came up about that, I would say yes from the beginning it was there, just planned to do proof of stake. Okay. I didn’t realize that. And what would you say is the main issue with proof of stake versus proof of work? Peter McCormack : The way that you decide on finality, the final version of the ledger. How do you decide that? Well, you’ve gotta vote somehow. And at Bitcoin, it’s like, whoever does more work, gets more voting. And so there’s no way to cheat that, you have to do the work, it doesn’t matter where you are in the world, you have to do the work. Tuur Demeester : And then there are all kinds of other variations possible in terms of how are you gonna vote? It could be if you have an IP address, whoever runs the clients, one IP address, one vote. But you can gain that very easily, create a botnet and just have billions of votes, or at least millions. So proof of stake, the idea here is that if you can prove that you own the tokens, you have skin in the game, why would you wanna cheat the system, you’re just gonna vote honestly. So you’re not gonna support double spending and those kinds of things. But it’s a political statistic. In essence, it’s a political-I’ve compared it to, there’s this theory that underneath the pyramids, and underneath the Sphinx in particular in Egypt there was a library. There was very important knowledge that they were trying to store, and so they just plunked huge amounts of rocks on top of it. Which in a way, the amount of rocks that you pile onto something that you’re trying to protect, is going to be directly correlated with the effort that you need to get to the secret. So in a way, it illustrates proof of work. So you can also imagine that the Egyptians, to protect that, they would’ve had a voting system and they would’ve given ownership to the guards. Like, “Oh hey, if you protect this treasure, you get a 10% stake in whatever there is.” And so it’s like, “You get to decide how we continue to protect this treasure.” That would’ve fallen apart probably in a few decades. Political systems are very unstable. And so that’s my main critique is that proof of stake is just a political system. And there are so many ways to game it, and the more rules that you try to embed in your system to game it, the more that you’re actually creating obfuscated proof of work. You have a lot of hoops that they need to jump through, well that just works that you build in. But in essence, there’s always gonna be an incentive for people to try and game it and steal things. And the big thing that frightens me about proof of stake is that once you do an attack, you can rewrite the whole system. It’s like you’ve done a coups d’etat, you’re in charge and you can just … it’s like, “Oh, we have this wonderful constitution.” The dictator is like, “I don’t care, I’ll rewrite it. It doesn’t matter how beautiful it looks.” And so that’s different in proof of work, where you really have to … you can’t with a 51% attack, you can’t … it’s more like holding a bank hostage and you control what’s going in and out. It’s not that easy to just rewrite the whole chain. And with proof of stake in Ethereum, am I right in thinking the more Ethereum you own, the more you can stake, is there a more even way of distributing the inflationary rewards? Peter McCormack : The more Ether you own, the more income you will have, that is the promise. Tuur Demeester : Right, so those who received a contribution from the pre-mine aspect of the Ethereum ICO, who have quite a bit of Ethereum locked up, for example, Vitalik, he would do very well personally out of this? Peter McCormack : I guess so, yeah. I think 70% of the Ether in circulation is still originated from the original ICO. Only 30% has been distributed to miners. And so those 70% original holders, they would do very well in a stake-based design. I think there’s a minimum amount of coins that you need to be able to stake, so you could say that’s going to benefit the early holders as well. Tuur Demeester : So the more coins you have, the more blocks that you can put to work. And then of course, they’ll be trying to pool as well. There’d be mining pools, but that’s a huge centralization risk, ’cause if you’re a mining pool and you’re staking in the name of other people, you could use that power to then just do a hostile takeover of the network if you’re big enough. But it also seems unfair and antithetical to the way Bitcoins monetary policy was designed in that it seems to appear to keep the rich, rich. And the inflation is it 20% inflation, I can’t remember, but that is essentially a hidden tax on everybody else. Peter McCormack : Yeah. Inflation, you could call that a tax. It makes sense to me to phase that out. It makes some sense because you wanna have some incentive for people to mine early on, but in the long run, you can just have transaction fees and that’s what’s gonna happen in Bitcoin. It’s gonna be the equivalent of a one or 2% annual tax spread out over everybody who is doing transactions. Tuur Demeester : But I think there’s always … people talk about the Gini coefficient, I think [Rabini 00:50:08] has levelled this critique against Bitcoin. There are more income and equality than there is in North Korea. It’s like yeah, but I think Vitalik had a pretty funny counterpoint. He was like, “Yeah, amongst the Gini coefficient of the cello owners of the world, it’s also massively skewed. So few people in the world own cellos, that’s so unfair.” It’s just a ridiculous argument. Anyway, so I guess my point is just that there’s always going to be disgruntlement with how the wealth is spread. So fundamentally, I’m not against rents. If I own a piece of real estate, I can rent that out. If I own money, I can rent it out and get an interest rate on it. To me, what grinds me or rubs me the wrong way is that you pretend that it’s going to create better security than proof of work. And also that staking is gonna be effortless, and nobody has done … I’ve never seen in Ethereum serious detailed descriptions of what that’s gonna look like and how, and I could be wrong. Maybe there’s research I don’t know about, but that’s just, I just think that it’s a way … that’s how Ponzi schemes work right? They promise perpetual income, so that’s where, or pyramid schemes. That’s not the same as a Ponzi scheme. I think a Ponzi scheme is a subset of pyramid schemes. So that’s where I just kind of like, “Huh, why are you promising perpetual income down the road?” So that’s the … and then you sell it as this eco-friendly thing. So it just, I don’t know, I don’t like that. Okay. Is there any risk in the process of migrating from proof of work to proof of stake? Are there any risks to the whole system, to people’s funds? Are there any known risks there? Peter McCormack : Of course not Peter. What are you talking about? No, it’s gonna be a breeze. You just hard fork and proof or work, no, it’s not. All joking aside, it’s still unproven. Proof of stake itself is unproven, so it’s like saying we have an aeroplane in the sky and it’s now flying on kerosene and we’re gonna switch to nuclear energy propellants mid-air, and it’s gonna be great. Tuur Demeester : It’s like, “Okay, I’ll believe you when I see it.” And of course, they can hard fork anything, so that’s the thing is the easier it is. The easier they make it look like, the more that they’re proving that it’s actually centralized. ’Cause if they say, “Oh, whatever goes wrong, we can just fix it right away.” It’s like, “Well how are you able to fix it so fast if you’re actually decentralized?” Yeah, I interviewed Brian Bishop recently, and we talked about hard forks. And there’s never really been a real hard fork in Bitcoin, right? Peter McCormack : No, not really. Tuur Demeester : Yeah. And it feels like every kind of idea that’s been developed, they’re looking at ways to soft fork. I think Luke Dash Junior found [inaudible 00:53:29] right. There’s a real aversion to hard forks within Bitcoin. It seems like with Ethereum and also other cryptocurrencies, tokens, blockchains, there isn’t such an aversion to hard forks, yet hard forks are a security risk, right? Peter McCormack : Yeah absolutely, because you split the chain and all of a sudden you have two networks who use the same, potentially the same mining algorithm. And so then, miners that are mining one chain, they can just switch and attack the other chain. That’s one of the risks of hard forks. Tuur Demeester : And then also, you can spend the same coins on both chains. If you have a private key, it can be valid on both chains. And so there are all kinds of ways to defraud people that way. And then there’s also the community aspect, I did a few tweets last night about how in the early 90s when the internet was just in its infancy, there was the world wide web as a way to surf it, and then there was Gopher which was an alternative way to browse the internet, which was more popular than the world wide web for several years. And part of the reason why Gopher failed was that they had a lot of forks, and it just splintered the community, and they had fairly poor standards as well, development standards. The world wide web was a lot better, and that gave developers more trust that there is something solid to build upon. If you’re gonna build an application on top of the world wide web or HTML, that’s how it snowballed. I thought that was a really interesting potential parallel with the crypto space where Bitcoin, people can be fairly sure … it’s actually interesting that if you spin up a client, a Bitcoin software client from 2010, you can still connect with the network. You can still do transactions. And so, 10 years from now, if you spin up a 2018 client, you’ll still be able to … so that’s very clear. And hard forks make something no longer reverse compatible. Therefore, you have to trust a source that’s gonna tell you what the latest version is. Like Microsoft 10, you always need Microsoft to tell you what the latest version is to be in sync with everyone. Do you think therefore there’s a risk then when this hard fork happens that there will be a certain group of people who are miners, who will maintain a proof of work version of Ethereum? Peter McCormack : Yeah absolutely. And they knew that from early on, and that’s part of my critique in the tweet storm is that they built in the ice age, or they called it a difficulty bomb. In 2018, Ethereum difficulty automatically is going to exponentially increase, therefore making mining useless, and it’s gonna force miners to agree to switch to proof of stake. That was the plan. Tuur Demeester : And it was built in, and then they weakened it, and then they removed it. So it’s like political promises. It really shows that there’s a lot of politics there where, “Oh yeah, we’ll reduce taxes down the road. Look, we promise it. Here’s a piece of paper that promises it.” But you can always fork the laws. And so in the same sense, they just forked the code and took it out. And so, now there is no incentive for miners to do proof of stake. They’ll have all these machines that mine Ether, so somebody is gonna come up and say, I don’t know how they’re gonna call it, ’cause we already have Ether Classic. But yeah, they’re gonna call it something. Clashic, Ether Clashic or who knows? Ether Classic Cash. Peter McCormack : Oh exactly, yeah. That’ll be it. Maybe we can start printing the t-shirts already. Tuur Demeester : But you know what Arthur, the thing that really standouts to me here as somebody who does struggle a lot with the technical side of things, is that there seems to be a beauty in the simplicity therefore of what Bitcoin is. Peter McCormack : And this, whether you call it entrepreneurial spirit or greed, but people have wanted to replicate Bitcoin or the success of I say, the blockchain and therefore they’ve tried to build other things. And they’ve had to have some differentiators. They’ve had to do something different to stand out, but it comes back to the fact that most of them have created either something that’s highly complex, and therefore runs into all different kinds of new issues with monetary policy or scaling or it’s too similar to Bitcoin and therefore will have no use case. Therefore, this is where I start to sympathize with Bitcoin Maximalism in that the blockchain, I think it was in your tweet storm even, that Gregory Maxwell thing you said, the blockchain really is there just for securing information, monetary information not for large scale computation. Do you see where I’m going? Yeah, and I like the word. Maybe I should increasingly start using that, I like the word Bitcoin Minimalism. It’s like saying that you can do this stuff with Bitcoin. Bitcoin is very inclusive, it takes more work to do it in Bitcoin, and live up to that standard. But we’re seeing it with lightning now, you can do payments in Bitcoin, you don’t need to create a new blockchain, a payments friendly blockchain. You can do micro-payments in Bitcoin, it just takes a lot of more work to do it. Tuur Demeester : The same with smart contracts, the same with asset issuance, the same with privacy friendly applications. You don’t need your own privacy blockchain, but it takes more work to do it. So it’s this double-edged sword. It’s very inclusive, but there’s a meritocracy and you have to work your way up. But that’s the beauty of modularity as well, if you wanna build a site chain, just go ahead. Nobody’s gonna stop you. If you wanna build a lightening client, go ahead. Whereas in a lot of altcoins, it’s a lot more like, “Oh, we want this functionality and that.” And then you have to ask permission. Bitcoin is going to be ossified pretty much as a protocol in a few years. It’s not gonna change at all, so there will be nobody left to ask permission to at some point. But you can create modules that link into the main chain, and then the sky’s the limit. So it’s almost like … a lot of people like to compare this crypto era with the dot com era. Sometimes it works, sometimes it doesn’t but one thing that does stand out. It almost feels like therefore Bitcoin is the internet right? We don’t need people to create 15 different Internets. Peter McCormack : It’s almost like Bitcoin is the internet, we have Bitcoin and you can build all your monetary products and tools and smart contracts within that, but have one crypto financial system. And therefore, allow Bitcoin to focus on what the most important of things is, which is decentralization, censorship resistance. It doesn’t make sense to have lots of different Internets. Yeah exactly. I totally agree. And people forget, Bill Gates was very excited about the information superhighway, and that was not the internet that we have today. That was, the equivalent of that was private blockchains, permission blockchains. It was going to be corporate networks that were gonna link with each other, but it was all gonna be like walled gardens. Tuur Demeester : And he thought maybe one walled garden would win out or there would be a patchwork of them, that didn’t happen. And the idea of Gopher and TCP and the world wide web that they would all co-exist, that didn’t happen either. This network effect is brutal, it just snowballs and it makes sense. There are not 10 different types of containers that dominate world trade, it’s just one very particular format of containers. I think there’s actually a few, but that might not be the greatest metaphor. But yeah, I agree. I think it’s very powerful to think of Bitcoin as one of the core bottom layers of a financial internet. Very cool. One thing I often ask people, and it feels relevant here is why do so many seemingly smart people have this wrong, or could you be wrong? But why do so many smart people seemingly have this wrong? There seem to be so many people invested in different protocols, networks, coins, tokens, funds are doing it, different VCs. How can so many people, seemingly smart be wrong? Do you think some of them know they’re wrong or do you think they absolutely fundamentally believe in what they’re doing? Peter McCormack : I think it’s a combination. I think if you get paid to be wrong, it’s easier. That doesn’t mean that they don’t believe in what they’re doing, but it’s like people see financial remuneration often as validation that they’re right. And so if you launch an altcoin and it goes through the stratosphere because you believe in it and people invest in it, then it’s hard to look in the mirror and be like, “What if I’m totally wrong?” You have all these people around you who are cheering you on. Tuur Demeester : And I think eventually, it becomes part of your identity. You’re like, “Oh, this is who I am.” And then it’s up to the market to eventually punish you and be like, “Hey dude, I think you were actually wrong. This thing is now down 95, 98, 99%. You’re probably wrong.” But until that comes, if you get rewarded for being wrong, that is very hard to change your ways. And at the same time, I think there’s also … it makes sense to see if there’s a gap there. If Bitcoin is gonna be dominant, but only 90%, well what does that 10 other percent going to be? ’Cause if the Bitcoin space, if Bitcoin is going to 10 trillion, then that 10% is gonna be one trillion dollars worth of value. And if you find one startup that’s gonna be even a small part of that 10%, you could take it from five million to 20 billion, you could ride that up and you will massively outperform Bitcoin. So it does make sense that there’s a gold rush for people to try and find what is that one niche that Bitcoin does not cover? Can we do something there? Because Bitcoin is already there, so I think that’s actually a valid pursuit. Do you think it’s a shame that Vitalik isn’t involved in Bitcoin? Peter McCormack : It’s hard to tell, he never was. Bitcoin core developers will tell you Vitalik was never involved in Bitcoin development. Is it a shame? I don’t know if it’s a big loss because he doesn’t seem to be … I think he may be just too impatient. I think it’s not, I don’t know if his personality fits. So I don’t know, and I don’t even know how good a developer he is when it comes to building these robust systems. Tuur Demeester : I’m definitely glad that there’s competition out there. I love that people just put their money where their mouth is and go for it. I’m just trying to do what I can in terms of to try to keep the debate honest and to try and help people be informed. Okay, well I think this has been very useful to go a bit through it in detail and discuss it with you. I understand a lot more. Just a last couple of questions for us to close out. Peter McCormack : Do you have a conflict of interest here? Well, I’ve been known to short Ether every now and then I’ve shorted Ether against Bitcoin. I did that in, I think it was 2016, and then again in 2018. ’Cause I see it as a proxy for the whole altcoin space. It’s cool how it moves like that. But right now, I’m totally flat. I don’t have any skin in the game. Tuur Demeester : No. Obviously, I’m known to be a Bitcoiner so I have Bitcoin. So it’s like you’re damned if you do and damned if you don’t. You’re damned if you disclose, because people say, “Oh look, you have something riding on this.” Or if you put up a trade. But then if you don’t disclose, then people are also mad that you may have hidden interests, so you can’t please everyone. Alright man. Any closing thoughts you’d wanna add to this? Peter McCormack : No, I just wanna … I guess I would say that I want to cultivate being precise a little more in the wording that I use. I think sometimes when I reread things, it’s like, “Huh, that was a little bit snarky. I could’ve polished that out.” So I just wanna, that’s what I take away from this is that I’ve noticed that there are specific words that people have noted, seen and there may be angry or hurt about. So I wanna do better in that regard. Tuur Demeester : We could give that a name. We could call it Tuur complete. That’s my dad joke Christmas. Peter McCormack : As long as we don’t do an ICO, I’m totally fine with it. Tuur Demeester : Alright man. Well listen, so what are you looking forward to in 2019, and how can people get in touch, talk to you? Peter McCormack : Oh, 2019. Oh, I’m so excited. I think we’re in the accumulation phase of Bitcoin, and I think this is where the smart money is putting chips on the table. There’s an enormous amount of development happening in Bitcoin. There are really interesting startups as well. Tuur Demeester : We’re gonna see, one of the big things is institutional custody. That is really gonna happen in 2019. That’s so exciting. We’re gonna see a lot better insurance as well for deposits. So all these puzzle pieces are starting to come into place for Bitcoin to really start shining eventually as a reserve asset. First as a savings instrument, but long-term as a reserve asset. And in a way, the water retreating, that’s the Buffet metaphor is if the tide goes back in the ocean, you see who’s swimming naked. I think this is a very healthy process where the money is drying up, and we’re seeing who survives and who doesn’t. A similar thing happened in 2014, 2015 and it’s just very healthy. It’s part of the creative destruction and it helps people focus. This period, it’s so great to do business as well. People have time, they pick up the phone. Whereas in December of last year, there was nobody. Nobody was to be reached if you needed to get things done. So yeah, I’m just super stoked. I think Bitcoin could go sideways for a bunch longer, but in terms of value, I think Bitcoin is at fair value. So yeah, just exciting times. And it’s just such an amazing community to just be part of. It’s just so fun to talk to people and exchange ideas. And it’s bigger and stronger than ever. And I guess you’re happy to debate the Ethereum subject with people as long as it’s in a friendly, non-aggressive civil way right? Peter McCormack : Sure, yeah. And I’m not the most informed person in the world when it comes to Ethereum. It’s not my day job at all. So there’s definitely things that I can learn still, and things that I might’ve gotten really wrong. Tuur Demeester : Okay cool. So how can people stay in touch? Who do you wanna hear from? Peter McCormack : Yeah. I’m on Twitter pretty much every day, so you can find me there. Well, and on Medium as well, I have a Medium blog. Tuur Demeester : Yes you do. I remember, I’ve read a lot of that. I’ve read a lot of that for our first one. Well listen, I thank you and also, just personally thank you. We’ve spoken a few times offline since our first interview. I appreciate your support. Thank you for coming on. I wish you and your family a happy new year and I look forward to seeing you sometime in 2019. Peter McCormack : Thanks Peter. Likewise. Tuur Demeester : Connect with What Bitcoin Did:Listen: | | | | | Follow: | | | | | | iTunes Spotify Stitcher SoundCloud YouTube TuneIn Website Email Blog Twitter Medium Instagram YouTube

Tuur Demeester’s Bearish Case for Ethereum

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