Ethereum
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Should we do the new theme music, even though it's not season nine yet? I think we should. Yeah. Let's do it. All right. Let's do a special episode. Let's do it. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the air.

Welcome to Season 8, Episode 8 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal, and I am an angel investor based in San Francisco. But today, I am here with you in Seattle, in the flesh. In the flesh. In the flesh.

And we are your hosts. Well, first, we want to give a huge shout out to Young Spielberg and Mike Taylor for crafting this new intro music that we used to open this episode. We have been wanting for years to do something distinctive for the show, and it was a real treat to work with both of them on this. And we have links to both of their fine work on Spotify and just love both of these artists. They killed it. I am so pumped.

Me too. Well, we started this season with our first blockchain episode covering Bitcoin. It seems only appropriate to bookend it with the season finale on Ethereum.

So David and I are here together in person to tell this story. And as you all know from our Bitcoin episode, Bitcoin is some combination of currency, a store of value, a medium of exchange, which all frankly are up for debate if it's doing a good job at any or all of those things. And as many of you who have bought or sold cryptocurrencies over the last six years know, there has been a big second game in town with Bitcoin.

Ether, ETH, the token used as a currency in the Ethereum network. But this time, it's not just about currency. Ethereum is something completely different. You can think of it more as a gigantic distributed computer that exists all around the globe in a completely decentralized way. It's the world computer. It is. It is one single virtual machine that runs across millions of CPUs all at the same time.

albeit one very slow virtual machine. There is a strong argument to be made that this enormous tamper-proof, censorship-proof computer is maybe the most important invention of the last decade, laying the groundwork for technology companies to come for the next several decades.

And while there are kittens and rainbows everywhere you look in Ethereum land, there were some absolutely wild stories that transpired to bring us to where we are today. This thing has had a pretty wild last year, as most of you will know. Having a market cap 12 months ago at around $20 billion, earlier this year at $450 billion,

Sort of in the same 12-month stretch, it's been a heck of a year, Free Theorem. This has been a heck of a year for a lot of things. No kidding. Well, are you an acquired Slack member? If not, you should. And aside from all the normal reasons that we usually point out, I'm sure this episode will have quite a vibrant digital assets channel discussion. It's a great way for beginners and the sort of crypto-aware alike to have great conversations. And

And as always, you can join that at acquired.fm slash slack. Another thank you to listener Austin Fedra for curating that channel and for helping with several discussions as we prepared for this episode.

And

And just like them, ServiceNow has AI baked in everywhere in their platform. They're also a major partner of both Microsoft and NVIDIA. I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

So why is ServiceNow so important to both NVIDIA and Microsoft, companies we've explored deeply in the last year on the show? Well, AI in the real world is only as good as the bedrock platform it's built into. So whether you're looking for AI to supercharge developers in IT, empower and streamline customer service, or enable HR to deliver better employee experiences, ServiceNow is the platform that can make it possible.

Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately. For example, smarter self-service for changing 401k contributions directly through AI-powered chat, or developers building apps faster with AI-powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

With ServiceNow's platform, your business can put AI to work today. It's pretty incredible that ServiceNow built AI directly into their platform. So all the integration work to prepare for it that otherwise would have taken you years is already done. So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow.com slash acquired. And when you get in touch, just tell them Ben and David sent you. Thanks, ServiceNow.

All right, David, take us in. And listeners, as always, this show is not investment advice. David and I may have investments in the company's assets, protocol tokens... Utility tokens, Ben. Utility tokens. Utility tokens. I checked with the SEC. That we discuss, and the show is for informational and entertainment purposes only. These are commodities, not securities. Commodities. That's right. Before we get into it, two things. One...

This is obviously the season eight finale. Like, what a season. This is crazy. So we started with Bitcoin. We did the New York Times Company. We did three freaking episodes on Berkshire Hathaway. And we're ending with Ethereum. We have Meituan. Like, this is wild. I just like, it's so cool. We get to do all this crazy stuff. Yeah, it's remarkable. We can find bull cases in all of those things when they've got daggers pointed at each other. Particularly crypto in Berkshire. Oh.

Well, there are at least daggers in one direction from Warren and Charlie to crypto. I don't know about the other direction. Oh, I think the Bitcoin maximalists are very excited to see the time of Berkshire Hathaway be in the past. In the past. Yeah, that may be true. So freaking cool. Thank you guys all for just being with us on this journey. So awesome.

Number two, before we dive in, huge thank you on this episode to Camilla Russo and her book, The Infinite Machine, which came out recently and...

served as basically the main narrative source for history and facts here. Camilla is an excellent journalist, was part of the technology team at Bloomberg. Brad Stone has quite the crew that he's assembled over there. And now Camilla runs The Defiant, which I think is sort of a play. It's the defy. But wonderful book. Highly recommend. Everybody go check it out. And thank you to Camilla for writing this book.

Amazing history. Okay. So speaking of history, if you remember all the way back to the beginning of the season with our Bitcoin episode, you'll remember that the Bitcoin white paper was published, of course, in 2008.

But it wasn't until May of 2010 when the famous pizza day, pizza transactions happened where two pizzas were purchased for, what was it? It was like 10,000 Bitcoin, something like that. That sounds right. Yeah, man, those were some spendy pizzas. It obviously took a little while for this whole idea of sort of

crypto to gain steam and enter the not even the mainstream, but just sort of broader awareness. And then the killer app for Bitcoin, which, of course, was the first killer app, which was the Silk Road, didn't launch until February 2011.

So it was right at that time, the very next month, in fact, in March of 2011, that a new user shows up in the Bitcoin talk forums online. How many of these acquired episodes start with someone showing up in the forums? Someone shows up in the forum. I feel like probably like half the China Tech episodes are like so-and-so is hanging out on IRC with all the other future giants. Yep.

Amazing.

So the Bitcoin Talk forums were kind of the central hub of this sort of like early Bitcoin community. They were actually created, I didn't realize this, by Satoshi himself. He created the forum. Oh, no way. Yeah, in 2009. And this is where the pizza transaction happened. This is where the famous HODL post was in the Bitcoin Talk forums that generated that meme. Super cool. So this new user who joins the forums...

is very unlike Satoshi in pretty much every dimension. And the most obvious dimension that he's unlike Satoshi... He has a name? He uses his real name. There is no username. The name, like everybody else is like, oh man, in the episode, who is the... Smokes too much. There was the user smokes too much that had posted to the forum. But this new user is just simply Vitalik Buterin.

Right there, laying it all on the line and saying forever, you will know me by my name. I'll be a public person. I'll be a figure that will identify with all of my comments. And whether for good and for bad, for being vulnerable, but also for galvanizing a movement, this real name tied to my real identity is how I will do that. Real name, no gimmicks. Vitalik Buterin.

So who is this character and why, when everybody else, literally almost everybody else in Bitcoin land and crypto land at the time is using a pseudonym, why is he willing to use his real name? Well, he's willing to use his real name because he's just a high school kid. He's got nothing to hide. He's got nothing to lose. He's 17 years old. He joins because he is looking for a way to earn some Bitcoin.

Pretty awesome side gig as a high schooler. And where is he at this point? He is in Toronto at this point. So, okay, Vitalik 17, he was born in Russia, in post-Soviet Russia, to two undergrad computer science students at Kolomna, which is right outside of Moscow. It's kind of hard to imagine, like,

Just think about being born. He was born in January 1994. I've never been to Russia, but I hear January is pretty... I have been to Russia in February, and I can tell you it is freeze your face off cold. A whole new level. Probably makes Canada look like... Toronto look like balmy and tropical. Yeah, southern Canada may as well be the beach. Yeah. So it's 1994. He's born to these two very young, very unprepared parents. Not long after he was born, they would get divorced. Right.

Russia at the time is in total shambles. The Soviet Union had collapsed a couple of years before. There's hyperinflation, double digits per month inflation. People are losing everything. There's a depression. People are starving. I didn't realize how bad this was. Life expectancy in Russia declined by over 10 years from the collapse of the Soviet Union to the time that

Vitalik was born. Which is five years. Yeah. Yeah. That's crazy. Average life expectancy for people was down into the 50 years. That is insane. So on the one hand, you've got all this huge amount of turmoil he's born into and grit that he's going to have to develop out of this. His parents are getting divorced. I mean, that's so hard for anybody, let alone with all this other stuff.

But he also has all these huge opportunities. So he kind of wins the genetic lottery. Like both of his parents are...

not only hyper intelligent, which of course Vitalik is as well. Anybody who probably everybody listening to this has at least heard his name, if not heard him speak. He is quite literally a genius. I bet that's overstated. I bet. I actually think the majority of listeners do not know Vitalik's name. Oh, interesting. Well, we'll have to... Just to level set for anyone out there who's like, what? What are you talking about, David? Like,

He's a public figure to us because the last six months, especially, we've been diving into the world of crypto and blockchain. That's a good point. We've done months of research to prepare for this. But last year this time, did I know Vitalik's name? I don't think so. Hmm.

That's funny. I sort of like think of him as this public intellectual. Maybe that's just because he's buddies with Tyler Cowen and goes on the conversation. Yeah, he's been on. Yeah, he's been on some fairly mainstream podcasts at this point. Yeah. Anyway, so not only his parents hyper intelligent, and of course, Vitalik is his parents are computer scientists in Italy.

the mid nineties. This is a great time to be a computer scientist. So even though they get divorced, it's very amicable. So they agree his parents to basically live their lives like together, but separately. And like number one priority is giving Vitalik every opportunity they can.

So the first and maybe most important of these things is when Vitalik is five, they decide to leave Russia and emigrate to Canada. And they settle in Toronto. Vitalik gets put into the gifted program in Toronto's public schools, which is kind of funny. So he didn't speak English at all until he arrived in Canada. It takes him a few years to really get comfortable speaking English. But he's clearly a genius person.

at math and computers and taking after his parents. He's also really good at writing, though, and writing English. So this is crazy. When he's seven years old, I don't know if this is a school project or just something Vitalik did for fun. He writes a 30-page document in English in Microsoft Word called

The Encyclopedia of Bunnies. And he structures it. He's really interested in bunnies. And he structures it like a scientific paper. He's got graphs and charts, and he lists all the chemical elements that make up a bunny. Is it like typeset and LaTeX? I can just imagine this being an overly academic thing for a child to write. Totally. His dad, Dimitri, would joke later that it was Vitalik's first white paper. Yeah.

Having read quite a bit of Vitalik's writing preparing for this across blogs from 2013 and before, through the white paper, through a lot of the stuff he's written today, he is a talented, succinct, incredible communicator. Totally. Especially given how young he still is. Yep. I think he's 27 at this point as we're recording this.

So for high school, he's clearly so talented. His parents decide to take him out of public schools and enroll him in this school called the Abelard School in Toronto. I didn't even know schools like this existed. There are only about 10 students per grade at this school. And it's a very intensive curriculum, but also lets kids explore their own passions. So this is where we pick up the story. Vitalik is a junior in high school.

Both of his parents are still in tech. His dad is an entrepreneur, runs a software company. And his dad tells him, this is 2011, tells him about this thing called Bitcoin that he's heard about. He's looking into as part of the company. It's pretty cool. And supposedly at first, Vitalik, you know, like all teenagers, I was like, yeah, yeah, yeah. Cool, dad. Like, whatever. Like, no big deal. Like, I don't know, like crazy virtual currency.

But then he like, obviously, he spends a lot of time on the Internet and he starts hearing about it himself. He's like, oh, actually, maybe this is kind of cool. Maybe I should focus on it.

So he decides he wants to participate in this whole movement, but he doesn't want to just go buy Bitcoin. Like that would be really boring. Plus he's a high school kid. It doesn't feel like participating in the movement if you're just sort of buying. Yeah. He really wants to like be part of this. He wants to earn Bitcoin. So you would think at this point, listeners, you're probably going like, this is where Vitalik turns all of Abelard's like computer labs into a giant distributed Bitcoin mining machine. And like, oh,

Oh, I actually didn't know that. No, he didn't. That's what you would like. I'm thinking at this point that this is what he would be doing. But no, this is when he logs onto the forum. And the reason he does is the way he wants to earn Bitcoin is he wants to write about Bitcoin as he's going deeper in the community. He's like,

People are not doing a great job of communicating and evangelizing what this is. I think I can do. I'm good at technical writing. I think I can do a good job. So specifically, he creates his account to respond to a post, a request for writers from the publisher of a organization called Bitcoin Weekly.

which is a news site that no longer exists, but you can go read all this in the forum. The initial post reads, I am willing to pay five Bitcoin for anybody who would write an article and authorized me to publish it under the public domain. Pitch an idea to me and I will think about it. If I like your idea, you will get four days deadline to write your article and three days deadline to finish your final draft. I am one of the most reliable employer on the market.

You can imagine the mustache twirling on the other end here. So young Vitalik responds and he's like, hey, I can write. Why don't I write about economics and the dynamics of why using credit cards doesn't make sense for microtransactions? This is all sorts of stuff I can write about. So the publisher responds. He's like, yep, yeah, sure. Send in your submission and I'll see if I like it.

So, Vitalik does. He writes the article. He gets paid for it in five Bitcoin, which at the time was worth $4. Today is worth, what, five Bitcoin? I hope he kept those. Yeah, I hope he kept those, indeed. $150K today. Yeah, $150K plus.

His posts, though, he keeps writing, his posts start to become really popular. And so he strikes a deal with the publisher because he's kind of the only one writing for this thing that people are reading. Because it sounds like a scam, the way that it was posted about. Well, get this. So they decide that what they're going to do, Vitalik's going to write for free for Bitcoin Weekly.

They're going to post the first paragraph of all of his articles on the site. And then they're going to hold the rest of the article essentially for ransom, where there's like a fee that has to be crowdfunded by people for a certain amount of Bitcoin for each article that people have to pay into a wallet address to unlock everybody seeing the rest of the article. Oh, it's interesting. So it's not just like a paywall. It's like the only way anybody gets to read this is if enough people pony up. It's like a Kickstarter. Huh. Yeah.

Fascinating. It's like a Kickstarter for Bitcoin articles. Amazing. So with this, they start making like pretty decent amount of Bitcoin. Good for young Vitalik.

This goes on for a few months. But unlike the original post, Kiba, the publisher, is not exactly one of the most reliable employer on the market. And Bitcoin Weekly goes under by the end of the summer that year in 2011. So people don't really like Vitalik's writing. And that August, a dude in Romania named Mihai Havlina.

Alice and his girlfriend, Roxanna, who were fans of Vitalik's writing. They think, hey,

What if we started like an actual magazine to give Vitalik's writing, you know, a new home and he can be the head writer. So they reach out to him. Unclear if they knew that he was a high school kid in Canada or not. But, you know, hey, it's crypto. Magic of the Internet. It's like you kind of also don't have to disclose that. Exactly. Exactly. So they reach out to him with the idea to start Bitcoin magazine, which they do. They team up with a few other folks in the forums and they get to work.

The initial idea is that they're going to start slow. They're only going to publish online and then they'll work up to a real physical magazine. One of the other people who becomes involved, though, a guy under the pseudonym Matthew N. Wright,

He has a different idea. So Mihai, he goes to incorporate this company. They decide to incorporate in the UK. So he flies from Romania to London. He's incorporating. And then he's like in the middle of traveling. He's on his way back. Matthew, quote unquote, messages the group online. He says, let's dream big.

And then he hits publish on a press release that he's written. And I don't think he's told anybody about the press release is entitled first issue of Bitcoin magazine goes to print. And it says a 64 page glossy magazine is on its way to the printers with a 5,000 copy initial run and subscribers are going to get their copies within two weeks, which of course no one has done any of that stuff, right? Literally nothing has been done. This is like the, um,

The whole time I was thinking when I read this, you know, the World of Warcraft Leroy Jenkins meme? Yes. That's exactly what this is. The Leroy Jenkins the magazine. So it's not clear that this guy is someone you want to work with long term. No, I think he ends up staying for like another month or so. And then they're like, are you going to get out of here? But at this point, like, you know, Vitalik's using his real name. He's starting to get out there in the community. A promise has been made. So they're kind of like...

hey, I guess we should make good on this so that we're viewed as reputable people. Right. And necessity is the mother of invention. So Mihai, Roxanna, and Vitalik, they're like, all right, we got to do this. Amazingly, they make it happen. I don't think they hit the two-week deadline, but they publish a real physical Bitcoin magazine. It gets picked up eventually in Barnes & Noble. It becomes a real publication. It's pretty cool.

So with that, Vitalik, he's the head writer. He starts becoming even more of a Bitcoin and crypto celebrity. Which at this point are kind of the same thing. Right, they are exactly the same thing. In this 2012-ish timeframe, there is no other crypto. I don't think so. Not of note anyway. Certainly nothing of note.

And as we'll get into most of the other projects that are happening, I think Satoshi's already disappeared at this point. But most of the other crypto projects that were happening, I think were happening on top of the Bitcoin network at this point. So it's fall 2012. Vitalik has now graduated from high school and he starts as a freshman at the University of Waterloo studying computer science. Super prestigious. The great CS school, yeah. So Vitalik at Waterloo...

He's still writing all the time for Bitcoin Magazine. He's taking a whole bunch of courses. This is no walk in the park to actually be a CS student at Waterloo. Yep. He also starts working as an assistant to this legendary professor named Ian Goldberg. Do you know Ian Goldberg? I don't. So...

He was one of the OG Cypher funks back in the day. He hacked Netscape's SSL implementation as like a researcher. Ended up, he was chairman of the Tor Foundation, helped get that off the ground. And for folks who don't know, Cypher funk is the email listserv of sort of renegade...

cryptographer, computer scientists that actually that wasn't Bitcoin sort of hatched and proposed on the CypherFunk email list. Yeah. Well, certainly in that community. So it's all intertwined. And Ian is buddies with Neil Stevenson. So I think like a lot of Ian's work kind of influenced a lot of Neil Stevenson's sci-fi.

Pretty cool. So yeah, Vitalik is busy. Right. So he has sort of the side hustle thing that is earning him a name in this community with Bitcoin Magazine. But then he also has the approved societal path of being at university where he is also connected to that community through his professor. Yep.

So by the time the spring rolls around of Vitalik's first year at Waterloo, he's ready to do an internship and start going. He's like, he wants like, I want to go get some actual programming, real world experience at a company, but I'm really interested in all this crypto stuff. And right around this point is when Ripple was getting started. So we said, actually, we should have take back what we said earlier, that there were no other crypto projects. There was Ripple. And at the time, Ripple still exists and has had

Lots of controversy since, but it was a super hot idea to bring blockchain and crypto transactions into the existing banking systems. They raised a ton of money. So the founder of Ripple, we talked about this on the Bitcoin episode, was Jed Ripple.

mccaleb remember he was the dude who also created mount gox that's right and uh created mount gox and then he sold it and so like he sold it to the japanese has he's not responsible for the collapse but that's right that's right huh yeah and jed now runs stellar which is you know one of the many sort of that's a fairly credible current very credible project yep yep whereas just to make sure we're super clear on ripple there's like a

SEC lawsuit against them that's being worked through, right? It's being worked through. Yeah. I think it got delisted from Coinbase and certainly it's accomplished a lot. I mean, at some point, I think the market cap of Ripple was in the tens of billions. Wow. Yeah. That's a crazy story for another day. But for here, so Jed, at this point, Jed's already like, he's also a big player in the crypto community. Yeah.

Vitalik gets in touch with him and Jed's like, oh yeah, we got to hire this kid. And they would have, and history would have taken a very different turn, except they can't get him a US visa. So remember, Ripple is like being a legitimate cryptocurrency company. The idea is they're going to bring it to the US financial banking system. So obviously they're a USC corporation. Right. You got to have a US visa, work visa to work for them. They can't get Vitalik a visa. Right.

So they're like, all right, you know, sorry, let's like stay in touch. We'll be friends. But you can't like actually come work here for the summer. So instead, Vitalik says like, well, you know, Mihai and I like and Roxanna work. We're close. This Bitcoin magazine thing's going well. I'm just going to take the summer off. I'm going to go over to Europe, go hang out in Romania and spend the summer with them. We'll write for the magazine. And Mihai and Roxanna were working on a project to basically build a legitimate subsidiary.

Silk Road. It's like Silk Road exists at this point. What does a legitimate Silk Road even mean? I know. I was wondering this. We're going to accept crypto payments. It's going to exist as an online marketplace, but we're not going to mail drugs through the USPS. Basically, it's eBay. It's like, oh, yeah, we should just do a decentralized eBay. Maybe.

I don't know if that's a good idea or not, but clearly the killer use case was drugs. So needless to say, that project didn't get very far, at least at that point in time.

They end up having this kind of wild summer. They move around Europe. Mihai and Roxanne are also pretty young. I think they had graduated from college like a couple, maybe a year or two before. They move around Europe. They spend most of their time hanging out in an anarchist commune in Catalonia. And for Vitalik, he's always been this super, super serious kid. This is like mind expanding for him. So he's having a great time. And by the end of the summer, he emails Waterloo and he's like, hey, I think crypto...

and Bitcoin is a really big thing, I want to take a year off and just focus on working on these crypto projects and being in the community. I'll be back in a year. Much like actually the sentiment of a lot of super ambitious young technical people right now who are doing that on everything that Vitalik would go on to create. He was sort of the first to say, yeah,

Maybe it's time for me to take some time off to focus on crypto. Yep. And also, it just hits me over the head how much the parallels between Vitalik and Mark Zuckerberg, again, 10 years earlier, that we're going to keep getting into as we go along here. But same deal. I think when Mark took that summer to move out to Palo Alto and work on Facebook...

I think he was intending to go back to Harvard. Maybe he did the same, like, I'm going to take a year off and be back. Obviously, neither of these guys end up going back to college. So this starts this kind of incredible journey that directly leads to Ethereum. So...

What Vitalik decides he's going to do, there are all these Bitcoin meetups and conferences that are happening all over the world. He decides he has enough money that he's making from doing his writing, especially as Bitcoin, the currency, starts to appreciate. He decides he's just going to travel around and go to all of them and meet the community and hear about all these projects that are happening and write about them. What year is this? This is summer 2013. Okay. So we're very close to the start of Ethereum here.

He goes to one conference in Amsterdam where he meets a guy named Amir Chetrit, who was working on a project in Israel called Colored Coins. This is where it's all going to start to come together. So Colored Coins was building on top of the Bitcoin network, and they wanted to bring in real world assets like real estate or fiat currencies, real world financial assets, securitize them and bring them

onto the Bitcoin blockchain. Like, okay. That was an idea a lot of people were thinking about. So he invites, Amir invites Vitalik to come to Tel Aviv and meet up with him, see the team. And there are a few other projects that are happening in Tel Aviv at the time that they're sort of collectively calling this group Bitcoin 2.0. It's a self-proclaimed group.

of people in Israel that are going to create Bitcoin 2.0. And it's essentially like a layer on top of Bitcoin, right? They're not proposing any changes to Bitcoin itself. That's the thinking. They're going to start building... Vitalik would later use the analogy and other people would use the analogy of like, they're going to turn Bitcoin into a Swiss army knife. Like Bitcoin is the chassis of the knife and they're going to build, you know, the small knife and the screwdriver and the toothpick and all the different tools around it. And what Colored Coins was doing was sort of like...

hey, I'm going to put the fact that I own this property on the blockchain so that this property or any physical fig of the real world can be sort of identified by a marker on the blockchain. I think that's right. It's like a representation. I think that was the plan.

So Vitalik goes over, meets up with a bunch of teams. One of the other teams in this sort of Bitcoin 2.0 movement is a team called Mastercoin. And what they're thinking about, their sort of Swiss army knife tool that they're going to build on top of Bitcoin is the ability for anybody to create their own other currencies on top of Bitcoin, the Bitcoin network, and then fundraise for those currencies. Hmm. So

This sounds like something people might want to do in the not too distant future. For sure. And this is where it's worth disambiguating a couple things just as a vocabulary lesson. In the world of Ethereum, Ethereum, and I know I'm flashing forward here, Ethereum is the network and Ether, abbreviated ETH, is the token, the currency that exists on that network. But

In the world of Bitcoin, the blockchain is called Bitcoin and the coin or token is called Bitcoin. And so there's like, you can buy and sell Bitcoins and there's a blockchain that exists that is also called the Bitcoin blockchain. And so their proposal here is basically like, we want to find a way to create other currencies to exist on the Bitcoin blockchain that is not Bitcoin. That is not Bitcoin. Exactly. Yeah. It's confused. Bitcoin is basically... Bitcoin is two things. Two things.

We talked about this a little bit in the episode. Bitcoin is Bitcoin on Bitcoin. Bitcoin being the currency and the Bitcoin network being the blockchain. So, yeah, the way that MasterCoin was going to make this happen of allowing these other currencies to exist on the Bitcoin network was through this

this computer science concept called smart contracts, which people might have heard of. And people talk about Ethereum being the smart contract language. So smart contracts were actually, the concept was invented by Nick Sabo way back in the day, who was the dude who proposed Bitgold, if you remember from the Bitcoin episode. Which was also on the CypherFunk email list. He was also sort of a CypherFunk. He was actually a lawyer too, I believe. He wasn't technical. So he never implemented Bitgold. It was just a proposal. Yeah.

But it's one of the couple proposals that were sort of closest to what Bitcoin... Definitely inspired Bitcoin. Definitely inspired Bitcoin. Whoever Satoshi is definitely worked from that sort of foundation. Those were the shoulders that Satoshi stood upon.

So Sabo, he defined smart contracts as, quote unquote, a set of promises. Remember, he's coming from a legal background, a set of promises specified in digital form, including protocols within which the parties perform on these promises. So what does that mean? Basically, smart contracts, this is what I realized in doing the research, it's just code. It's code that can be arbitrary, but it

executes if and only if certain conditions are met. That was kind of the innovation. And then when you marry that with a blockchain and something like Bitcoin, where there is a ground truth, nobody can argue over whether conditions are met or not, then you seed the

for these smart contracts to actually be really useful. Right, yeah. What you're saying is if everything is actually on the blockchain, the assets, the cryptocurrency, and the conditional logic is also on the blockchain, then you can have things that will sort of preemptively

of provably do what you think they are going to do. Whereas, you know, in the real world, you've got a contract that's written by a lawyer, and then it takes people actually carrying out the work that that contract says, you know, they're effectively dumb contracts. They then require a human compiler to go through and then make sure that the logic that is in that

contract can be sort of parsed and then interface with things in the real world. And you can get into all sorts of arguments about like, well, were these conditions met or were these conditions not met? And that's why we

have our legal system and judges and lawyers. Yeah. There's one spec that's written that is executable that has direct manipulation over the assets to move it. It's pretty genius. Yeah, totally. So the Bitcoin network in Satoshi, it's not like he didn't know about smart contracts. It uses it. There are smart contracts in the Bitcoin network, but they're limited. There's only a very...

very small set of functions that you can call functions in the programming sense that you can call as part of Bitcoin's smart contracts. And so what MasterCoin and Colored Coins and all these other folks were doing in the Bitcoin 2.0 movement, they were writing essentially more functions that you can call in smart contracts.

So Vitalik, he's hanging out with these guys. He's like, well, this is great. I love these ideas. I'm good at writing. Maybe I can help you guys write up white papers for your projects and sort of help evangelize and crystallize what you're doing. That's great. They're like, sure, go to town, work on white papers for us. As he starts the process of writing, though, for each of these projects, he realizes like

hey you know these things are all separate projects and this is all kind of cool and building on top of bitcoin but you're all just kind of scratching the surface of a bigger idea like this is sort of whack-a-mole of like adding set functionality to bitcoin but if you know anything about programming like the beauty of programming is this idea of turing completeness that like

a programming language that is turned complete, you can do anything. You can create a developer, doesn't need any permission, doesn't need any set functionality. She or he can write their own functions and do anything ad infinitum. It's the way that any piece of software technology works, that you have these varying levels of abstraction. And at the highest user-facing layer, you have this sort of

application where that is designed for a specific purpose, often for a very specific type of user performing a certain business logic. Take Slack. That's a very abstract thing that is a field that you type in that's got a chat window. It's an application. And what people are sort of doing in this Bitcoin land, and this is a little bit of a stretched analogy here, but they're basically building high

highly specific applications on top of Bitcoin and trying to sort of extend it. It's kind of like the Bitcoin network as a calculator, not a computer. Right. And what Vitalik's basically saying is, but what if the instruction set, the sets of functions or instructions that we could sort of call were very general purpose, very sort of abstract, where there's...

even further levels of abstraction applications that could be built on top of that. And it's

a dangerously difficult undertaking because it's exploitable in all sorts of ways. It requires incredible amounts of security. It requires you to really think through every way that someone could use your very primitive set of low-level instructions to craft whatever they want. But if you can do it, then it's a hell of a foundation. This is a huge idea. Huge. I mean, basically saying like Bitcoin is a calculator and

Let's build a computer. And if we're going to build a computer, it's got to be a wholly different thing. So he goes first to the MasterCoin team and tells them about this. He's like, hey, I'm working on your white paper. What if you guys did this instead? And the MasterCoin team, sort of half to their credit, they're like, wow, that is a big idea. That's really cool. And then half to their incredible detriment, they're like, we're going to stay focused on what we're doing. Yeah.

That was probably a mistake. Let me just crystallize this even further, just because I keep thinking on that. It is a stretched analogy, but it's like someone handed you a Macintosh without Mac OS for it. And what you said was, well, I'm going to start building Slack or I'm going to start building. I'm just looking at my dock here, Chrome or Photoshop. And then it's like somebody proposes to you. Whoa,

whoa, instead of just building Photoshop, build Mac OS and imagine the potential that we will unlock with that. And you're like, no, but I really want Photoshop. And we only have so many resources. There's this amazing email that's in the Infinite Machine that Camilla cites from the founder of MasterCoin to Vitalik. He says, but I'd rather see MasterCoin doing its core functions before we start experimenting with scripting. Scripting being...

what you would need, like universal scripting language as part of this to turn it into a real computer. So Vitalik, at first he's a little disappointed. And then he's like, wait a minute. I'm Vitalik Buterin. I've got a following. People in crypto land know me. I'm good at writing white papers. I'm also pretty technical. I think this is the future. I'm just going to go do this. So he leaves Tel Aviv and heads to

probably the one place in the world, certainly then and probably still today, where the best place where if you've got the big world changing idea, you want people to take you seriously, even if you're not super well known. He goes to San Francisco. So and of course, remember, he knew the Ripple team and Ripple's based in San Francisco. He shows up, he couch serves, he crashes on the couch in the apartment of Ripple's CTO, Stephan Thomas in Soma. And

And he spends two weeks in San Francisco and he just like, he alternates between during the days he goes like on long walks around San Francisco up and down the hills and

And then he comes back and he just writes the white paper like he doesn't talk to Stefan. Stefan wants things like, hey, I want your thoughts on, you know, Ripple and like, right. Maybe you should write about Ripple, you know, and evangelize us. He's like, no, no, no, I'm focused. And so he writes the white paper in two weeks. What would become the Ethereum white paper? At first, he titles it the ultimate smart contract and decentralized application platform.

And then he kind of realizes, you know, again, Vitalik, he knows how to write. He knows how to convince people. He's like, I need a cool name for this project. So he starts scrolling through Wikipedia looking for science fiction terms that he can sort of use as inspiration, sci-fi terms. And he comes across the word. I don't know if it's pronounced ether or aether. I always thought it was aether. A-E-T-H-E-R. Aether. Let's just call it aether.

This concept, I remember this from way back in middle school. It originated with the ancient Greeks who thought that ether was the fifth element out there. There's like, what is it? Wind, fire, water, earth, I think were the four elements. Yeah, that makes sense. So the ancient Greeks postulated that those were like the human elements, but there was this fifth element called ether that the gods, the medieval Greek gods breathed.

And this idea kind of never got stamped out in human history. So like in medieval times, just when the scientific revolution was kind of getting going, people postulated that ether was a invisible substance that permeated the universe, that light traveled through. Yeah, it's like the force. It's exactly like the force. And specifically, light was conducted through ether. Ah, okay.

You know, the gods breathe it, whatever. Anyway, been disproved. Not the case. But Vitalik thinks this is perfect. He's like, oh man, the substance that the gods breathe, that it permeates the entire universe, that light gets, you know, conducted through. Great. I'm going to borrow this term. So actually, ether does exist and I'm going to use it to title my project. So he comes up with the Ethereum project.

network of which the currency native currency on top of it is ether boom

It's born. Pretty good name. And if you read this white paper, it's pretty A, long, and B, technically complex. Yes, this is not like the Bitcoin white paper. No, the Bitcoin white paper, while it does have some reasonably complex mathematical formulas, it basically succinctly lays out in prose how each of these clever mechanisms exist and how they'll sort of all work together. The Ethereum white paper is like

Here's the instruction set architecture for a new type of assembly language and the type of machine that it will run on and the registers are going to look like this. I mean, it's like going back to my operating systems class in college. Yeah. We'll link to it. You should go look at it, read it, but don't... You should go read the Satoshi white paper. Anybody can read that and understand that. This, it's for a technical audience. Yeah.

The funny thing is then there's even a further technical specification on top of that called the yellow paper, which is like when I was at Microsoft, we had the PMs wrote the spec. And then once the specs were signed off, then the devs wrote the design document, I think was actually how the software would be architectured. So it's sort of like the spec and then the developer design doc of Ethereum. So funny. That would come a little later. More drama before then. So basically, we've talked about Ethereum being the computer versus Bitcoin, the calculator or like a...

computer without an operating system. There are two kind of like big consequences of this. So one, you've got a Turing complete, generally programmable computer with a native currency in it. You now have code with money. So, you know, with Bitcoin, you have money and not really code.

With normal non-crypto world, you've got code. Lots of code, but completely separate from money. Completely separate from money. Here, so the way Vitalik architects Ethereum, there are two types of accounts in the Ethereum network. Accounts that can hold and spend and do things with Ether and can execute code. There are user accounts, you know, which humans would hold. Like by wallet. Like a wallet. Yeah, they're user accounts. But then there also are contracts and smart contracts.

contract accounts. They are exactly the same as user accounts. Yeah, this is kind of like the cleverness of abstraction thing that we were talking about earlier. It's like, how low level and customizable can I make stuff? And you just see it show up in the fact that both user accounts and

contracts are sort of a subclass of account. And the cleverness of, yep, this account exists over here and you can upload your contract to it. And of course, you have to pay. And we'll talk about that of getting your contract to go live in this location. But then at any point after that, people can send inputs to it. The contract will execute and then the outputs happen. Send money to it. Yeah. Yeah. So you've got literally the code, contracts,

that are the same as the user accounts, meaning they have their own money. The code has its own money. This has never happened before. This is huge. So that's just one of the two big ideas. The other big consequence of this is that if this network actually gets instantiated, it's going to be a world distributed computer like there has never been before. So like, you know, people call Ethereum the world computer. This is what they mean.

of course there's AWS, there's Azure, you know, there's all sorts of like cloud computing out there, but like Amazon owns AWS and like, right. You can go find like all the locations that all their data centers are and like, you know, whatnot. It's like a,

thing. It's unlikely it's ever going to go down, but Amazon runs it. Right. Let's take the smart contract and just remove the money component for a moment here. It's sort of like thinking about serverless architecture or even server architecture. You write some code, you deploy it to an endpoint somewhere, you expose an API that has an input and output. But that code lives on one server. There's probably some replication, but it's on a server in a data center. When you deploy

an Ethereum, your contract to a location on the blockchain, that is replicated on all million or whatever, hundreds of thousands of nodes on the Ethereum network that

sort of have a copy of that. Just like every node on the Bitcoin network has a copy of the ledger with all the transaction history. Same deal here. Every node on the network has a copy of all the code. Right. And as you're visualizing this, where your brain should go is, wow, that's powerful. And...

then simultaneously it should go, geez, that distributed nature, I could really imagine that being like, you know, it's hard to take it down. Like you can unplug a server from the wall, but like once that code's kind of deployed, that smart contract, it's pretty hard to undo. Oh, we are going to get into that. And lastly, your mind should go to a place where you're like, well, that's pretty inefficient. Like, wait, so it has to go to every...

what? That's going to cost a lot of energy and time. And geez, maybe there'd be a lot of network congestion. So already, as you're starting to understand the architecture of this, you're like, okay, really, really good for some stuff and at great cost. Yeah. I had this later in the notes, but to pull it forward, just for context, people talk about even today, in 2021, mid-2021,

the relative power of the computer that is Ethereum, you know, the world computer, is roughly equivalent to a Raspberry Pi on a home broadband connection. And that is running everything. But it is stable AF, David. Yeah, that's right. Maybe, maybe. We'll get into that. Okay, so this is all pretty freaking cool, especially for like an 18-year-old. So November 27th, 2013,

Vitalik, I think he's still in San Francisco at this point. He's done his draft of the first draft of the Ethereum white paper. He emails it out to a very small group of people that he knows from the crypto community to ask for their feedback. So Camilla writes in the Infinite Machine here that I'm going to quote that Vitalik was, quote unquote, sure his work was going to get torn apart. With an idea this big, there has to be a very good reason why nobody has tried to do it.

But that never happened. Vitalik's email got forwarded and then forwarded again so that instead what he got was a flood of responses from people who were excited about the project and wanted to work with him. Vitalik's vision was much too big to be constrained.

He was thinking about creating a base layer for everything, a computer that could simultaneously live in all the nodes of an enormous global network, which would be able to process anything you threw at it without downtime or interference. So developers could build whatever they dreamed of and nobody would be able to stop them or their applications like an infinite machine.

Pretty freaking cool. Very cool. So cool. Definitely sci-fi. Definitely. I mean, either. We were all wrong. The Greeks were right. It exists. Okay. So pretty quickly after this, a core group of five people starts to form to...

pull this ambitious thing together and try to make this project happen. So there's Vitalik, of course. There's Mihai, his buddy, his Bitcoin magazine partner in crime. There's Amir Chetrit, the guy that he met in Amsterdam, the colored coins guy who initially brought him to Israel. Amir's like, oh, I get it. This is cool. I'm gonna go do this with you. Even though at Colored Coins, we're not going to do this as a part of that project. I get where you're going. I get where this is going. And this should be its own thing. And

Now, Amir's going to give me some drama here because Amir doesn't leave colored coins. He's still working on colored coins. And then two more people. So the first is a guy named Anthony DiIorio, who is also from Toronto and was a Bitcoin enthusiast, but unlike everybody else here, actually had some wealth in real world money. He worked at Goldman Sachs, right? Yeah.

No, that was Joe. He's going to come a little later. I forget how Anthony had made some money, but he had some money. So he gets brought on to kind of like, he's like, hey, I'll bankroll this while we're getting started up. And he's like, we should also get my buddy Charles involved in this. Charles Hoskinson. And for all Ethereum and crypto fans who've been following this space here, probably you're probably smiling to yourselves right now because you know what's about to happen.

So Charles had done work on the idea of decentralized cryptocurrency exchanges, which of course would become a very big thing on Ethereum a few years later. And these are DEXs, if people have heard of that. So Coinbase being like a centralized... I mean, it runs in AWS. Yeah, it's like the New York Stock Exchange. Right. It's a SaaS application that happens to connect to a bunch of blockchains underneath it. Whereas a decentralized exchange or a DEX is like...

It uses decentralized technology to create the exchange to trade. It runs in the nodes of the network. We'll get much more into this when we get into DeFi at the end of the episode. The other thing that Charles had worked on was helping pioneer this idea of a concept, which was just sort of like, you know, out there at the time of a concept called a DAO, a Decentralized Autonomous Organization. Right.

Also going to come back up in a minute here. So Anthony's like, hey, Charles, like, you know, he's a he really knows the stuff. He's good, you know, and he's got some experience running projects. He would be really good to bring on here. And he knows what he's doing. And the group quickly decides that Charles should be the CEO of this fledgling Ethereum something company foundation project. We will see.

Charles, of course, would later go on to found Cardano. Quickly after that, so they've got Vitalik, who wrote the white paper and is, you know, technical, but like he's still a kid. He's a second year computer science student, essentially. Right. You've got Amir, who's not technical. You've got Mihai, who's not technical. You've got Anthony, who's not technical. And you've got Charles, who's like borderline technical, but not a developer. Right.

So they realize like, hey, we need some devs. So they bring on two developers, the first of whom is a amazing developer named Gavin Wood, who also for people in crypto land, you know, Gavin. Legendary name. Yeah. Truly a gifted programmer. Incredible.

incredibly gifted. Gavin had intersected with Mihai and Roxana before. And when he hears about Ethereum and the white paper, which is now making the rounds in the community, he emails Vitalik and he says, yes, how far along are you encoding it? Can I help? Vitalik responds like, not far. Yes. Yes. Start tomorrow. So Gavin drops what he's doing and he gets to work right away on a C++ implementation of a

client to run Ethereum nodes on the network. Gavin makes the first commit to Ethereum's GitHub on Christmas Eve, 2013. So he's dedicated.

Right around the same time, a Dutch developer named Jeff Wilkie also joins the project. Wilkie was at MasterCoin. So he was in Amsterdam, but he was working for MasterCoin and joins this as sort of a side project. He continues working on MasterCoin as well. And Jeff gets to work on an implementation project.

of an Ethereum client in Go, in the Go programming language. So Gavin's working on a C++ version. Jeff is working on a Go version. Which if I remember right from the book was sort of accidental at first. It was like, hey, we both know different programming languages. We both kind of want to do this. We're both just going to get started. It wasn't like this intentional, hey, we should have redundancy to make sure that if we misimplement something in one of the languages, it doesn't become the way Ethereum works. Which actually ended up being one of the

few good decisions in the early days of Ethereum. And I think it was probably really a boon to have both of these versions out there. So the next month in January 2014, the original five plus Gavin and a few other folks, not Jeff, Jeff decides to stay in Amsterdam. They convene at an Airbnb in Miami ahead of the

Miami Bitcoin conference. I thought the Miami Bitcoin conference this year was like the first one. No, no. I totally thought that too, because there's so many Miami jokes that are happening that we should totally acknowledge that Miami 2014 was when Ethereum first happened, when it was presented, when this group got together. Miami's got OG tech grid. Absolutely. Do you know if the Bitcoin conference happens every year in Miami? That's actually a good question. I don't know. I should know.

But nonetheless, it happened there in 2014. So Vitalik, they decide that this is where they're going to announce and launch Ethereum. Vitalik is slated to give a talk at the conference. But this is all happening so fast. He's just giving a talk as like Vitalik Buterin, writer for Bitcoin magazine. He's not even on the main stage in the conference planning. Like, it's hilarious. Yeah.

So they all show up at the house. Also, Joseph Lubin, Joe, who you were referring to earlier, shows up at the house.

He'd been introduced to Vitalik through Anthony. Also, Joe was at Goldman and then in the hedge fund world, also a Princeton alum. Go Tigers. And they decided to bring him on board. He's got some money as well. So he also helps finance things. So Joe and Anthony are just out of their own personal finances or financing these early days. And it's not like there's ether to buy at this point. They're literally just spending money to cover the costs. Yep.

So they decided at the house that the original five will be co-founders of Ethereum. So not Gavin, not Jeff, not Joe. And the co-founders will get the largest personal stakes of Ether in sort of the pre-allocation before the network goes live. And that's sort of decided in the early first day at the house. Gavin's there meanwhile. He had been coding. He's coding furiously at the house trying to get a test net up to demonstrate during Vitalik's presentation.

And as he's coding, he's kind of like, he's looking around. He's like, dude, I'm the only one who actually knows how to build this thing here. What are all these other people doing? What would you say you do here? So he starts getting a little salty and he's like, guys, I should be a co-founder and I should be CTO because what are you going to do without me? So he and Anthony actually have a pretty big argument supposedly at the house and

But everything's happening so fast. Nothing gets settled there. They're like, all right, well, let's just like get to Vitalik's presentation and launch this thing. We'll see what happens after that.

Finally, presentation happens at 9.30 a.m. in the morning on Sunday. I think that was maybe the last day of the conference or something. January 26th. Still not on the main stage, but word had gotten out that this was going to be a big deal. So Vitalik takes the stage. The room is packed. Everybody in the crypto community is there. And he announces Ethereum...

I think he announces that the test net is live and people go nuts. It's like a rock concert. Like there's a standing ovation. There's cheering. Like people are,

really jazzed about this idea, as they should be. I mean, it's so ambitious. The reason it hadn't been done is largely because it's just phenomenally risky and a ton of work, and then will require an enormous groundswell of community support in order to make it happen. Bitcoin already had this huge lead, all these network effects, and

It's kind of like me saying, like, I want to start a new operating system and then I'm going to build a new app store on top of that operating system. Like, it's just nutty. Yep. I don't know. I mean, we could rally the acquired community to make it happen. Bencoin. Acquired magazine subscribers. Acquired magazine subscribers. Unite. That would actually be pretty dope.

We should have a 64-page glossy magazine that's shipping in two weeks. One for each company that we've covered. We are one of the most reliable employer on the internet. Okay. All right. Back to the story. All right. Back to the story. So literally, as Vitalik is walking off the stage, everybody and their mom is like,

Hey, can I give you money? Like, I want to fund this thing. I want a piece of this. So before the announcement, the team had been planning to do a $5 million crowd sale of Ether to bootstrap the network and raise initial funds to pay back Anthony and Joe and get going and fund development. Yep. They decide, though, in the wake of this, it's like the Roblox IPO. It's like, we got to postpone this. Like, the demand is too high. So they said, like, hey, let's postpone.

Let's leave Miami. Let's regroup in Switzerland, because at the time, Switzerland had the most sort of Swiss neutrality, best friendliest laws for crypto companies in the world. And let's decide how to proceed.

Actually, before they get there, in the aftermath of the conference, Gavin kind of continues to be a squeaky wheel. And they decide, you know, okay, great. We're going to expand the group of co-founders from five to eight. We're going to include Gavin. We're going to include Jeff from Amsterdam, who's running the Go implementation. And we're going to include Joe as well, because he's now financing this. Big founding team. That is eight people, of which like two and a half are technical on the founding team for an incredibly technical project.

The next big question, though, that once they get to Switzerland, they got to start figuring out is like, well, how do we structure this thing? Is this a company? Is this a foundation? Like, is this Linux? What is this? As Camilla puts it in The Infinite Machine, the question was, would they be Google, a for-profit company with revenues and cash flow and profit? Or would they be like the Mozilla Foundation? Yeah.

which still would have revenue and resources, but is a nonprofit that would allocate resources to developers to both internally and externally to further the project. Yep.

So here's where things kind of go off the rails. Basically, Charles Anthony... Remember, Charles is the CEO, titularly, at the time. Charles Anthony and Amir, the colored coins guy, they all want the for-profit, the Google route. Yep. They're seeing dollar signs. Which is so funny that they're seeing dollar signs because it would be a corporation. In retrospect, there were a lot of dollar signs because it wasn't a corporation. Arguably a lot more dollar signs. I mean, we'll never know what would have happened otherwise, but...

Meanwhile, Vitalik and Mihai, they want the Mozilla route. And then the developers, Gavin and Jeff, I think mostly they don't really care. They're just like WTF guys. We don't have anything right now. We got to build this damn thing. And you're arguing about corporate structure? What the hell? If you press them, they probably want the Mozilla route. But mostly, I think they just don't really care.

This becomes a huge schism. Charles wants to go to Silicon Valley and go do a tour and go raise money from venture capitalists and get the cash in the door, which they certainly could have done. And then everybody else is like, you're going to go raise money from VCs? This is still crypto land. The whole point is to rage against the machine. You're going to go raise money from the traditional financial system? Meanwhile, fortunately for the way things would go, crypto...

Crowd sales of initial tokens for various projects were becoming more and more of a thing on top of MasterCoin, which existed at this point. And there starts to be a really viable argument that, hey, like you were saying, Ben, you can get plenty of money in by making this a non-profit foundation. The question, though, is, is it legal? Because let's rewind. Has a foundation ever been behind something where you are selling tiny chunks of

That can potentially be used in the future to have some utility. But today, don't have any. Are speculative in nature. Yeah, it's totally speculative. And also, because you're a foundation, you don't have shares. So it's not like you're selling pieces of your company because it doesn't exist. So it's this weird sort of like. It really is a gray area. Right. But it really looks on the surface a lot like a securities offering. Weird.

which of course would be like a major no-no. Right. The SEC would have something to say about that. And not a no-no in the sense of like, you can't do it. A no-no in the sense of like, you have to register with the SEC to do that. You need like effectively an IPO. You need to list on an approved exchange. Like there are ways to sell securities to the public, but- But not the way the Ethereum guys are thinking about it. Yes. Not to mention, you know, there's the US, which is obviously the biggest financial market in the world.

But this is a world project and a world computer. And most of these people are not Americans. So there's that. Yep. So they retain a whole army of securities lawyers all around the world to figure this out. They even managed to get, this is amazing, a former SEC commissioner, a guy named Joseph Grunfrest, who was SEC commissioner in the Reagan administration. He's now teaching at Stanford. They get him to advise them on like what to do here. And the question all comes down to like,

Ether, the currency, what is it? Is it a security or is it a commodity?

Well, that's a good question. And the reason you're saying commodity is because it's a good that people can trade that has a utility rather than it being a share that people trade that is speculative that the price will go up or down in the future because it's tied to the performance of an entrepreneurial venture that's managed by some management team. Yep. So if it's a security, no dice on this offering. If it's a commodity, all good. Anybody can start

selling something. And the thing that really gives them that credible argument around it being a commodity is the fact that it has utility in the Ethereum network. Exactly. So we mentioned gas fees. The way the system works is Ether is the currency on top of the Ethereum network, but

Ether exists to pay fees to the nodes on the network to get them to process transactions. It's effectively a bounty. And when we're saying gas fees, you can think of gas and Ether effectively interchangeably. It's effectively a bounty where you say, all right, I need someone to do something with this smart contract that I've written. I need it propagated. You need an incentive to do that. Yeah. Here's what I'm willing to pay.

for you guys to send this all around the world. Yep. So Vitalik wasn't even thinking about the securities law implications of this when he wrote the white paper, but he calls it gas. He's like, this is the analogy. It's like, you got to buy the gas to put the gas in the car to get the car to go. Yep. So they go to, I want to say good friend, like the Berkshire episodes and Solomon Brothers, no, Grundfest, the former SEC commissioner. And they say like, well, hey, so here's how this works. It's gas fees.

So real world gas isn't a security. Obviously, that's a commodity. I can just set up a gas station and sell gas. I don't need to register that as a security with the SEC. Unless I always sunny style then go and hoard all the gas in my basement in the back of a van and then try and resell it later at a higher price. But yes, continue. They probably don't bring that up with Grunfest. Yes. So like, isn't Ether the same thing? Shouldn't it be a commodity? Grunfest kind of thinks about it. He's like, yeah.

I guess you're right. It's amazing. So they take this to their US securities law firm, Prior Cashman, and they get Prior Cashman to write an opinion letter saying that, based on Grunfest saying this, we are of the opinion that Ether is not a security. It's a commodity. A bunch of other law firms also write opinion letters. And boom, the doors are wide open, not just for Ethereum to now do an initial crowd sale of their utility token, but

But for anybody to do an initial crowd sale. Oh boy, a lot of people rubbing their hands together here. Oh, talk about those dollar signs. You know, man, if only the people that wanted to go the C Corp route had known about this, they would have changed their tune. So once this is settled, they all get back together in Switzerland. This is now June 2014.

to make the final call on the direction to go. And everybody thinks going into this meeting that this is just going to be like a rubber stamp, like, great, we're going to approve. We're going in the Mozilla direction. We're going to do the crowdfunding. All good here. Not a big deal.

Camilla titles this chapter, the red wedding in the machine. Basically, this becomes about way more than how they're going to structure the company. The devs are starting to really resent Charles as CEO and the decisions he's making and how he wants to run things. And they don't think he's doing anything. They also don't think that Amir Amir is still running colored coins as well. So like,

what the hell is this Amir guy doing? Like, why is he part of this? He's not even doing anything. Yep. So there ends up being like a mutiny in his meeting and everybody's screaming at each other. They all turned to Vitalik. Vitalik hadn't been in Switzerland. He was still traveling around the world, evangelizing, you know, talking about Ethereum and the white paper and everything. And he had just been awarded the Teal Fellowship to officially, he then emails Waterloo and he's like, hey guys, I'm not coming back. And he drops out to work on this.

So he shows up and he's got like a full on full on mutiny on his hands. So they all look at him and they're like, you make the call. You decide who's in and who's out. Which can I just say incredibly foreshadows the fact

the future of Ethereum, where despite this being, and they're not saying the eight of them are this decentralized governance, but despite the fact that there's eight people with eight voices, ultimately, when push comes to shove, everyone looks at Vitalik and says, all right, what do we do? Yep. Rightly or wrongly, there's no, you know, it's not a company. He's not the CEO, but yeah, everybody looks at Vitalik.

So supposedly he goes out on the terrace of this house in Switzerland in Zug where they are. And apparently he just sits there for like a super long time. He's got a yoga ball that he's like hugging to his chest. He's like rocking back and forth like a baby. I'm just imagining the weight on this guy. So he's 20 years old. So meanwhile, back in the house, everybody's like staring at each other. It's like the tension is crazy. Finally, he comes back in. It's like smoke is coming from the Vatican. He declares war.

Ethereum will be a foundation, full stop and for all time. Charles and Amir, you're out. You're done. You're gone. And the project going forward is... It's me, it's Gavin, it's Jeff, it's Joe, and it's Mihai. And...

You two are out. This is pretty heavy stuff. As I was reading about this, it was reminding me of some of the Zuckerberg Yahoo vomiting in the bathroom moment. Oh, it absolutely is that sort of high tension, high drama, pins and needles moment. Because this is literally the entire future of the project is on him here. This is like Facebook could have sold to Yahoo for a billion dollars. This is the same moment. The code's not done. There have not been any tokens sold yet.

Six, seven years later, the market cap of all the tokens out there would be half a trillion dollars. Yeah. Like this is a high tension moment because, well, of course, they don't know that everyone believes that if this thing succeeds as the world computer. That's going to be pretty valuable. Yeah. Yeah. There's a lot at stake.

So they incorporate the Ethereum Foundation as a Swiss nonprofit. They move forward with the crowd sale. Can you incorporate? Is that word mean corporation? I don't know. I don't know if that's the right... They start. They instantiate. Yeah. To use a developer phrase. The crowd sale starts on July 22nd, 2014 at midnight Swiss time. It runs for two weeks. They sell $2.2 million worth of Ether in the first 12 hours. And then they start

By the end of it, they sell a total of 60 million Ether for 18.3 million USD, which was way more than any other crypto crowd sale in history to that point. Yep. I mean, even just thinking back 2014, this is essentially a seed round for a company. And 18 million to use the VC world analog. That's crazy. Nobody raised that much money. Totally. This was huge.

So the next question is, okay, now we got to actually launch the thing. Gavin's like, I've been telling you guys all along, like we got to launch the thing. The plan is that they're going to launch in January, 2015. And then throughout the year of 2015, they're going to roll out the network in five days.

By the end of 2015, they will have rolled out the final fifth phase, which is going to be called Serenity is the code name. All five phases in that first year? All five phases in the first year was the plan. And Serenity was going to transition the underlying network and blockchain from a proof-of-work blockchain to a proof-of-stake blockchain, which is going to be a lot more scalable. It's all mapped out. Okay.

Non-crypto people who are listening and wondering why we're laughing. Why is David cackling like a madman in the corner over there? So yeah, we're now in June 2021. There is no serenity. There is no proof of stake. It's coming.

Soon? July. There's a huge milestone theoretically this month. Listeners, before we dive back into the story and say exactly all the ways in which this did not go to plan, it's worth dwelling on this proof of work, proof of stake thing for a moment because we haven't really talked about proof of stake.

We talked at the end of the Bitcoin episode about how proof of stake theoretically was going to require a lot less energy, but would retain a lot of the same characteristics of that sort of security, verifiability, tamper proof. Immutability. Immutability. Let's save that for a moment. I do want to talk about proof of work because there was a key detail in the Bitcoin episode that we missed in the history of proof of work.

which of course is the cryptographic way of consuming energy to do a very hard math problem and end up with a mechanism that verifies the integrity of the chain, of all the transactions that came before. So of course, it was mentioned by Satoshi, who proposed it in the Bitcoin white paper, proof of work, and its prior use in Hashcash.

But it was actually invented way back in 1993 by Cynthia Dwork and Moni Naur. And I did want to call this out because it is way too easy to make it seem like crypto was pioneered by a bunch of dudes. And so it's notable that... There are so many dudes. Oh my God. It's hard to tell the story. There's so many dudes. Dude, dude, dude, dude, dude. It's all based on research done by Cynthia, a female computer science professor from Harvard in the early 90s. No way. Oh, that's so awesome.

It's funny how this concept that was originally intended to make it cost prohibitive to be an email spammer ended up becoming the underpinning of crypto blockchain, this whole world. That's right, because hash cash was an anti-email spam thing. Yep.

Super cool. I did not know that. Yep. Proof of work. Ninety three. Wow. Dang. Vitalik wasn't even born. It's wild. Wow. OK, so on July in the middle of July, July 30th, actually, 2015, middle of 2015, the team finally releases the first of the planned five phases of Ethereum. The frontier release goes live and Ethereum is open to the public. Amazing. Yeah.

Two weeks after it goes live, the first new other token crowd sale happens on top of Ethereum. Augur, which is a decentralized prediction and betting market, raises $5.3 million USD in a token offering of the Augur tokens that is built on top of Ethereum. They

build on the quote unquote ERC 20 standard that makes it really easy to issue currencies on Ethereum, just like MasterCoin on Bitcoin. Now with the ERC 20, you can do it super easy. ERC being the Ethereum request for comment, kind of putting out there, hey, hey world, hey, open source friends, here is a

proposal that I'm making and I'm requesting comments on it. Eventually people comment, the proposal gets revised, and then at some point it receives a number. And now it's a thing out there in the world that is the sort of standard upon which you can operate. Because remember, you know, Ethereum at this point, they are now operating and still do like the Linux foundation, like the Mozilla foundation, you know, there are people out there in the world, they say like, hey, we should add this. And then the foundation is like, okay, cool. We'll add that. So...

The ICO boom is born. Just two weeks after the public launch, the first ICO on Ethereum happens. That's wild. That was something from the research that I did not realize that was so fast. Like, hey, there's this new thing, Ethereum. It's not even like, cool, there's a world computer. Imagine all the uses for that. It's like gold rush to launch my coin on this new thing. Now, I think Augur is like a real...

Sure. I'm not saying all ICOs were scams, but there were some... I don't always drink beer, but what did I do? There were some tulips in the garden. Oh my goodness. Yeah.

So the next year in 2016, while Augur does happen very quickly and was a legitimate project, at least to the best of our knowledge, it does take a little while for people to realize how much gold is in these hills. The next year in 2016, there are 64 ICOs on Ethereum that collectively raise over $100 million. So this is like, I mean, that's like a lot of money. People are like, dang, ICO boom, 2016. Yeah.

Well, 2017, there are 966 ICOs that collectively raise over $10 billion. Floyd Mayweather, DJ Khaled, Paris Hilton. Everyone's getting a little sweetener for promoting it on their social media. Oh my goodness. We talked about all this on the Bitcoin episode. Amazing. But what we didn't realize was...

Just like Silk Road was for Bitcoin, ICOs were the killer use case to bootstrap up the Ethereum network. And just like the Silk Road, it sort of didn't matter how illegitimate the initial use case was. What it did do was bootstrap a network that could be then used for all sorts of purposes now that you have this sort of decentralized... It literally played out exactly the same way. So thankfully, by the end of 2018, the ICO bubble had deflated. Still, though...

Even in just like the first, I don't know when it really popped during 2018, but let's say the first six, nine months, I'm making that up, but I'm estimating of 2018, there were 2,300 ICOs that raised $11 billion in

Oh, my God. At the start of 2018, Ethereum had risen up to a for a long time, all time high of just over $1,350 per token, giving it a market cap of over $100 billion. And then when the ICO bubble deflated at the end of the year in December, Ether had crashed to $84 a token or a market cap of just under 10. So 90% down.

of the value in the Ethereum network or of the Ether token vanished over the course of 2018. It is fascinating that this bubble had a very specific reason for it, that there was utility in Ethereum to be used by anyone launching an ICO. A lot of the times there's these bubbles in crypto where you can't quite point to exactly the reason why the token was getting so much more valuable other than...

a snowball of excitement building around it. But this one, it was very clear what the boom was about and what the bust was about. Oh, it was about the money. Yeah. It's all about getting the money. All right. So speaking of money, there's one before we dig out a can't wait to move on from ICOs. We got one more we got to talk about that is probably the wildest part of this whole episode.

So one of the, what was it? 64, I think I said in 2016 ICOs, something like that, you know, sort of in the early part of the tip of the spear and the wave was a little project that a group of folks had put together that they called Slockit. S-L-O-C-K dot I-T. And the idea behind Slockit was it was going to be a decentralized system

Airbnb and other sort of sharing economy platform where you could send transactions into the blockchain and use those to unlock hardware locks like on doors and on bikes and on cars and stuff that would be connected to the blockchain and the specialized hardware and then you would pay the rental fee as part of the transaction on the blockchain and it would all happen on smart contracts on the Ethereum network.

I mean, okay, it sounds like freaking crazy and really dumb now, but at the time, people were excited. So they decided to do an ICO for this. But the Slocket founders, they were like real believers. They were like, yeah, this is the future. And a lot of people were excited about this. Thank God for the diaspora of human enthusiasm and creativity, because when some new piece of technology comes out like this, nobody knows what the future is. Nobody knows what the killer use cases are. And so thank God there are...

legions of people that take their own harebrained ideas and try and execute them. Because absent that, we would never have the discovery mechanism to discover what the actual great applications are. Yeah, totally. You could argue whether it was good or bad that this Lockett team did this. Remember, though, like I said, they're true believers. So they get a bunch of money in the eyes or either get a bunch of money. No, no, it hadn't happened yet. They were lined up. They thought they were going to get a bunch of money. They said, hey, we're going to go a step further.

Remember, I introduced a little while back with Charles Hoskinson, the idea of a decentralized autonomous organization. Which, by the way, that is actually in the original Ethereum white paper. Yeah, as an idea of something you can do on Ethereum. Yep. And for folks wondering, like, okay, these words, decentralized autonomous organization, to the

To the extent that a company, a corporation is made up by a set of documents. You've got your articles of incorporation. You've got employment agreements. A corporation is defined by a big pile of dumb contracts. A DAO or decentralized autonomous organization- And the corporation is defined by a board of directors and a CEO and a management team that are making the decisions. Totally. And those people are given powers by the contracts, by the documents. Yeah.

The DAO is simply that, but with smart contracts. It's all in code. Yeah. Why couldn't you have an organization that runs in a provable sort of code legislated way? Yeah. So the idea is in a DAO, the allocation of resources, be it capital or time or effort or dev resources or whatever, get allocated to

in a decentralized way by people who hold the tokens of the DAO and everybody can vote and their protection mechanisms for minority token holders versus the majority. And anybody can take their money out at any point in time if they disagree with the direction the DAO is going, but it's a, it's a decentralized organization. Okay. Pretty cool. So the Sloket guys, they're like, we're going to be a DAO. So if you don't like what we're doing, you know, you can vote, you can have a say in the governance of Sloket. And if you don't like what we're doing, you can take your money out.

Then they decide to go even one step further. They say, you know, actually, we think this Slockett thing is cool, but there might be other things people think are cool, maybe cooler than Slockett. We'll allocate our money to anything and we'll just let the Dow decide where the money's going to go. It's like a reverse Berkshire Hathaway. Everyone has a say in capital allocation. It's exactly what it is. It is the opposite of Berkshire Hathaway.

To say the crypto community goes nuts for that. This is like catnip for the crypto community. People are jazzed. So by the time the ICO closes in May 2016, remember, this was originally for a decentralized hardware Airbnb competitor. They raise $150 million into they renamed the whole thing. The Dow. They're just the name. Great. That is what they are. So great. So, so great.

150 million bucks. That is more than most first time VC funds in the world. That's like a lot of money. That is like, I think the biggest crowdfunding of all time. I think the only seed funding that is larger than that for a single entity is probably like Quibi. Oh boy. Oh boy. The parallels. That is more Fred Wilson and Union Square are going to come into the story here in just a minute.

150 million bucks into the Dow is more than USV's entire first fund. And they're one of the most active venture capital investors in crypto at the time. This is a lot of freaking money.

It turns out, though, that there is a security flaw in Ethereum and specifically in the part of smart contract code where DAOs like this one, like the DAO, operate. Yeah. And to put a finer point on that, there are a few programming languages, but there's one very popular programming language developed specifically for writing smart contracts called Solidity. And Solidity, it's kind of like JavaScript. If you know how to write JavaScript, you can pretty quickly learn how to write Solidity.

So the DAO is basically a big pile of Solidity smart contracts that all interact with each other. But to your point, in order to run Solidity, there is code underneath in Ethereum's core software that needs to make sure that when those Solidity smart contracts are running, they're doing what the programmers intended for them to be doing. And that code all exists on all the nodes in the Ethereum network. There's some downsides to distributed systems here.

So right after the DAO finishes their ICO and gets all this money in the bank, so to speak, one of Solidity's core developers realizes that there's this bug in Solidity. And the consequence of this bug is that you could drain money. An attacker could come in and drain money out of a DAO. Uh-oh. Yep. So...

And probably one of the biggest unforced errors of all time, they in the foundation, they're like, okay, great. We're going to update this. We're going to update our clients. We're going to post about it. We're going to let everybody know what's going on. We're going to post like, okay, so they do that, right?

But it's a distributed system. So like not everybody, not all the nodes in the network update the client software that they're running on to patch the hole. And anytime on the Internet, you're going to have bad actors, especially in crypto land. Well, a bunch of hackers are like, oh, shoot, here's a whole blog post about how to exploit DAOs and how to drain the funds. And here's this DAO that has 150 million bucks in it.

I'm going to go start hacking on this thing. So the initial exploit was actually wouldn't have been discovered, we don't think, except for the fact that the Ethereum Foundation published about it. Yeah. I mean, it could have been independently discovered by other folks, too. But yes, one of the core developers on Solidity found the bug and then fixed the bug. And then they published about the bug.

But it wasn't all fixed yet. They breathe this deep sigh of relief. Yeah. Huh. Until...

The balance in the Dow's account starts slowly going down. So this is a crazy thing. It's like, you know, it's like the main plot point of The Last Jedi, you know, where it's like the slow motion cruiser chase throughout the whole movie where it's like they're just saying it's like happening in slow mo. This is exactly what happens. So the way this exploit worked, you could steal money, but you could only steal it very slowly and you could do it in a way that like was unstoppable. You did. Yeah. You sort of dripped it out.

So for two weeks, everybody is freaking the F out. Vitalik is losing his mind. Everybody is losing their mind. The DAO was so big. That $150 million was 14% of all Ether in existence was in the DAO. And it's getting robbed. So Vitalik calls on all exchanges like Coinbase, Binance, everybody to stop trading ETH. Stop.

Stop trading. Oh my God. Literally pause everything. This is amazing. A group of white hat hackers band together and they're, they call themselves the Robin hood group and,

They're like, we're going to hack the DAO as well. We're going to attack the DAO, but we're going to do it. We're going to drain the funds into an account that then we're going to take that account and we're going to give it back to all the people. So great. So great. You cannot make this stuff up. Figure out how to drain it faster than the black hat attacker. And the craziest thing, because we've talked about this a couple of times, but the way that you can...

get stuff to happen on the Ethereum network is by spending ETH by offering a reward to do it. It's like the more they can bankroll their white hat efforts, the faster it will happen. And so they're out like raising money. Yeah, they're asking anybody who they know who is a big ETH holder. A lot of the true like early true believers like

hey, send your ETH to our address so then we can drain the DAO faster. And when they start doing this, they aren't even publishing about it yet. So they're kind of freaking out that like, wait a minute, we're actually just black hat hackers right now until we tell the world what we're doing and why. And everyone realizes that like,

We're doing this for the good of everyone. It's this crazy Spider-Man gif with all the pointing. Yes. This is such a giant cluster. Unfortunately, nothing works. The White Hat, the Robinhood group, they're draining the DAO, but the Black Hats are also draining the DAO. Everybody's freaking out. The Foundation and Vitalik decides, all right, we're going to do what's called a soft fork of Ethereum, where we're going to get all the nodes that are running Ethereum, all the miners, to...

update their software and basically stop. We know the addresses of the black hats. We're going to get them to stop processing transaction requests from the black hats. We can do that by just like update the software. It's fine. And then everything will continue on.

Cool. It's not great, but it's not good. Well, I mean, it really makes you wonder how decentralized is this really? Well, wait till we just wait. Let's see where this is. Like, wait a minute. You're telling me that you're willing to modify the core code to just be like, yeah, everyone except that address. We don't like those guys. Yeah, exactly. Well, so they're about to do this.

And then a group of researchers at Cornell, led by Professor Eamon Gunn-Sreyer, figures out that if they were to do this, the way they were going to do it, I don't know the technical details, they would actually open up the network to big distributed denial of service attacks. So you could do this, but this is not going to be good. So they decide, all right, we're going to call off the soft fork. So that leaves only two options. One, do nothing.

And the attackers steal 14% of all the ETH out there. And they've already stolen one third of it. Like the Black Hat guys have 50 of the 150 already stolen. Yep, exactly. Or option two is do what's called a hard fork and actually modify the underlying protocol itself to cut out the history. Like go back and modify the history of the blockchain. And that necessitates ending the current Ethereum blockchain and

and wholesale starting over with a new one. Basically, you're rewinding the tape before the attack started. You're changing the code then. So you're sort of like undoing all the transactions. Everyone's like having the money move sort of like from destination accounts back to source accounts. So like all that gets undone. And then...

the bug gets patched, and then we fork, and now we're just playing everything forward again from there. The future can unfold with this bug fixed, and none of those transactions happened. Yep. So it actually, to a lot of folks listening, I think

Going with the hard fork and option number two might seem like the obvious right path here, but this has a huge philosophical consequences. As you were alluding to, Ben, you know, this is essentially a bailout that we're talking about here. It's like it's just like 2008.

We screwed up. The consequences of our actions ended up in some bad places. Rather than taking responsibility and moving on, we're going to have some deus ex machina. A government, like a higher authority, is going to come in and reset things here. Right. And what they sort of proved is like, geez, these Ethereum Foundation people have a lot of power over this ecosystem. Like if they come out and Vitalik comes out and says, okay, everyone, we want you to hard fork.

Then as long as 51% of people hard fork, and really it's 51% of the sort of mining capacity. So it's not that many players that need to, you just get a few of the big guys together. They hard fork. That is the new source of truth. Yeah. And sure. Technically the way that you look at the architecture is that it's decentralized, but like if we were willing to wind back the clock and rewrite history, then we kind of could always do that. And in the future, uh,

We always...

sort of will be able to do that again. And so really you're betting the farm, not on, you know, what you thought you were, which is like contract is code and this is immutable and unchangeable, but really in like, well, if a few people decide that the quote unquote right thing to do is to undo history, make the change. And then how is it go forward from there? Then like they could be different than Jerome Powell deciding to, you know, parachute money in. Yep. So, uh,

Vitalik is like, again, this is a huge decision. He's really stressed. Finally, Eamon, the computer science professor at Cornell sits down with him and he says to Vitalik, I'm going to ask you a question. This is a quote, and I want you to answer truthfully. I'm not going to judge you. Just be completely honest. Are you serious about building the world computer or are you trying to appeal to illegal money flows, drug dealers, illegal gamblers and whatnot?

And Vitalik responds, no, that is not what this is about. We want to build the next generation of applications. Like I really believe in the world computer. And he even says, okay, well, immutability is,

not doing the hard fork is paramount. If you want to appeal to this illegal money crowd, if you don't, and you're serious about the world computer, then it's completely reasonable to do a fork. And so that kind of convinces metallic. So they do it. They do the hard fork. All the miners switch over. Literally people are popping champagne at the foundation and at Cornell. Uh, it's all happening. And then a couple hours later,

All of a sudden, the old blockchain comes back to life. This is another dramatic moment where like you're imagining them sort of watching the old chain on some monitor somewhere. And you're like, wait a minute, they're adding new blocks to the old chain. How is this even possible? It's like the end of Return of the Jedi when like the fireworks are going off and like everybody's having that like, you know, the first order, though, is like they're brewing. So what's going on there?

Well, so it's unclear to me, at least. I don't know if it's known, if anybody else knows or broadly, whether it was either on a mistake that some of the miners just didn't get the message and update their- Kept mining the old chain. Kept mining the old chain, or if it was on purpose, kind of a protest. Right, true believers. Or the attackers themselves were like, hell man, I want my money. Right. So that old chain keeps going. It is still going to this day. It is called Ethereum Clouds.

Classic. You can buy Ethereum Classic tokens on Coinbase. It has a $4 billion market cap. It's the 22nd largest cryptocurrency by market cap. Amazing. Amazing. Ethereum, of course, the main thing, quote unquote, main chain, has a $200 billion market cap, as we were saying. So it's obviously more successful, but like

Yeah, this is crazy. Yeah. And Ethereum Classic is in some ways Dogecoin-like, where people are trading it even though they know there is a fundamental flaw and its future development does not have any effort behind it to fix bugs and develop new features. And it's not going to evolve the way that Ethereum is going to evolve for the future. So...

they survive the DAO. And this becomes known in history. This is one of the defining moments of Ethereum. And ironically, look, there's Ethereum Classic, right? There's the fork and everybody who really is into immutability and whether you want that for philosophical reasons or to do illegal stuff or whatever you want that for, that exists. But for the main Ethereum blockchain,

And ironically, this kind of helps it because they're like, look, we're going to do the right thing. We are a system and a protocol that is in development. We are evolving. There will be bugs. There will be hacks. When that happens, this is not Bitcoin. When that happens, we're going to do the right thing and we're going to fix it.

And you can understand why that's actually pretty appealing to a lot of folks. It demonstrates a pretty extreme amount of pragmatism. It's very interesting how this crypto community started as exclusively true believers. And then as it got more into the mainstream and as there's more money behind it and as it needs broader societal adoption, this sort of

trappings of traditional society start to seep in a little bit. And there is this sort of realization that, geez, maybe safety nets are kind of good. And maybe having someone at the helm who has good judgment and

Also, maybe that's kind of good. And the future of Ethereum, as much as Vitalik wants to sort of work his way out of it, for better or for worse, there is a little bit of a benevolent dictatorship going on there between Vitalik, the foundation, and the largest mining pools, where ultimately we are putting our faith and trust in something. Yep. And certainly hard to know what would have happened otherwise, but had there not been a Vitalik...

I don't think the hard fork would have happened. Only he, just like all the co-founders put the gun in his hand to set up how the company was going to be, how the organization was going to be. Without somebody like that at the helm, there's a good chance this would have just devolved into chaos. Right. With Vitalik, so goes the community. Yep. So that doesn't necessarily mean, though, that...

Ethereum is out of the woods, shall we say, or that all is, you know, sunshine and rainbows and kitties and unicorns. David, we did say at the beginning of the episode, this is the world computer and it's also the world's slowest computer. It is maybe the world's slowest computer. And we should talk about also like

your comment about the Raspberry Pi, there's not any sort of more Raspberry Pis getting daisy-chained to that thing as this is growing. So we're seeing the ICOs, we're seeing all these people spinning up Coinbase accounts during COVID. We're seeing, I'm sure you're about to tell us about the boon of DeFi and- DeFi summer, baby. It's still all happening on this little Raspberry Pi. It's still all happening on a Raspberry Pi. Yeah. So

So scalability as more and more stuff is happening on Ethereum, the Raspberry Pi is like having a harder time keeping up. And there has been this explosion of stuff.

So for a sense of scale, right now, the Ethereum network processes somewhere on the order of call it like 15 to 45 transactions per second. So that's like the entire Ethereum world computer, 15 to 45 transactions per second happen on it. And that's...

And those transactions could be anything. If you really want to abstract this, think about that as like an actual transaction, like a wire transfer or, you know, something about in software, like a tweet could be a transaction, like any sort of movement of bits from one place to another. Any read-write on the system. Yep. For...

Comparison purposes, the Visa network can at peak load process about 50,000, 5-0-1,000 transactions per second. Woo! Centralization, baby. You can really scale with that. A lot more. Now, in theory, once the final Serenity release of Ethereum, which together with a few other things is being called Ethereum 2.0, once that is live in theory,

the Ethereum network will be able to process up to 100,000 transactions a second. So like, dang, that's like a pretty serious, it's like a Tesla Roadster style upgrade. And you're probably scratching your head going, wait, wait, wait, how's that possible? So let's, maybe let's put a pin in that and now, but it's coming, dot, dot, dot. And it's been coming for six years, but it's coming. It's coming. But right now, you know, it's not here. So as network congestion increases,

gets worse and worse...

The way gas fees, the amount that you have to pay to get the nodes to validate your transaction, the price that you have to pay, the gas fees keep going up. It's supply demand. It's effectively your CPU still has the same clock speed, but now there's a kajillion people that want to do stuff on that CPU. Yeah. So it goes from like a de minimis amount in gas fees that you have to pay in 2015, 2016 to I think in 2017, it hits like maybe like $13 per...

fee equivalent of 13 USD per transaction you have to pay, then that dies down a little bit. And then at the peak... It's like 70 bucks this last year? Yeah, at the peak in the last few months here as DeFi has just totally taken off. And DeFi involves lots of transactions. DeFi.

decentralized finance. There is no application that requires more transaction throughput than high-frequency trading, lending, all that stuff. Yep. It spikes up over $70 just to execute one transaction. So obviously, this is a problem. And Vitalik and the Ethereum Foundation knows it's a problem, but progress is not happening super fast. So there's this famous...

Fred Wilson, quote, Fred Wilson from USV, one of the most prominent early VCs investing in crypto, board member of Coinbase, plenty of other, of Dapper Labs, maker of CryptoKitties, which we'll get into in a sec. So he's doing a fireside chat that's on YouTube at Multicoin Capital's 2018 summit. And he just goes off on Vitalik and

And Ethereum like literally goes off. He argues that they're incompetent, that they can't ship, that they're blowing the lead for the whole ecosystem. He says somebody needs to go over to Switzerland and fire those efforts who don't know what they're doing.

Boom, he lays down the gauntlet. And his rationale for that is like, hey, at this point, it is a growth stage startup. There are playbooks here to run. You know, he was on the board of Twitter. I remember reading Hatching Twitter and feeling like, actually, this Ethereum story, it feels similar to how Twitter came to be this band of renegades, sort of pseudo anarchists. What was the Twitter? We've been making the comparison between Vitalik and Zuck.

in this episode. Really? There's also a comparison between Jack. Yeah, absolutely. Totally. And so much tumult happened at Twitter, but Fred witnessed here is how you take something that is unbelievable product market fan and is scaling like crazy and figure out how to put great management in place. Gotta get our boy Dick Costolo in there. Oh, man. So Vitalik then responds. He goes on Laura Shin's Unchained podcast and is like, yeah, I mean, like you're a VC, like you want them, but like,

No. And it's debatable who's right here. But in the meantime, so developers need their... They're building stuff that's really cool. It's executing very slowly. Performance is such an issue on the network. Other blockchains start popping up to compete. They're like, well, hey, there's a problem. Yep. It's a free market. Like...

We'll start an Ethereum competitor. So we've referenced Cardano from Charles Hoskinson. Unbelievable that that guy was one of the co-founders of Ethereum and then went on to start Cardano. And went on to start Cardano. Polkadot comes out from Gavin. Gavin Wood had left the foundation and started working on... This is the genius programmer who did the initial implementation of... A Rust client, a Rust Ethereum client as part of Parity, I think is his company, and was a great

contributor from parity into the ethereum ecosystem for a long time but then they start polka dot which is a competing chain a little different but competing chain there's eos which raises 4.2 billion dollars in an ico before that bubble burst they end up getting sued by the sec uh there's binance's smart chain there's lots and lots of folks out there

By and large, though, A, a lot of these projects still here in 2021 haven't even shipped. So you think Ethereum shifts slowly. Look at some of these other ones. None of them get real traction, though, except maybe Solana, which we'll get into Solana in a little bit. But meanwhile, these transactions are exploding on the Ethereum network. We talked about what they are, DeFi and NFTs. Let's get into it. So NFTs...

I thought the NFT boom kind of came after DeFi. No, I'd forgotten about this. NFTs became a thing first. Huh. So... Well, it's CryptoKitties. Exactly. Yeah. So at the end of 2017, the Ethereum Foundation hosted their first official Ethereum Foundation hackathon in Toronto. And a Canadian startup incubator called Axiom Zen from Vancouver, they're like, oh, we're looking at blockchain stuff.

We're going to send our team over to Toronto. We're going to participate in the hackathon. Totally. At the hackathon, they come up with this idea. They're like, look, there are these ERC-20 tokens, which are used for ICOs and creating your own currencies on top of Ethereum. Those are commodity tokens. Every token is just like every other token. So they're fungible. They're fungible. Yeah. It's like American dollars. Sure, they have serial numbers, but if I have 20 bucks and then I exchange that for a different 20 bucks, I still have 20 bucks. Still 20 bucks.

What if we implement a new token standard where every token is different? Every token is unique, and that's actually the appeal. We can make them collectible. We'll do things and like, this is the internet. Let's make them cats. The internet loves cats. And this is Ethereum. I mean, that community is like a cats and rainbows community. Oh my God. To say it's like catnip is obvious. CryptoKitties. So literally, I didn't know this. CryptoKitties invented...

Yeah. I don't think I knew the phrase NFT. Like, uh, I actually came very close and really regret not buying crypto kitties in 2017. I remember going through the website and being like, this is wild. I can't believe they're doing this, but yeah, I don't think NFTs entered. People didn't think about it as an NFT and it was just a crypto kit. Right. It's, and people thought, Hey, we could do this for other things. In fact, I, there was a, uh,

friend and another venture capitalist that was pitching me on this idea of baseball cards, but on the blockchain, like crypto kitties for sports. And so people were thinking about like, hey, we could take this idea and do it for other stuff. But there wasn't like a category name that was in the public consciousness. And of course, you know, many listeners will know

CryptoKitties, Axiom Zen, changed its name to Dapper Labs. Amazing. And they are the company behind NBA Top Shot now. Amazing. So freaking cool. So CryptoKitties accounted for, at its peak, 15% of all the transactions on the worldwide Ethereum network. Crazy. So yeah, that's NFTs. And then, of course, that goes on to people and the alien, everything going on now that people probably know about.

The other big set of applications, though, that are happening on Ethereum in the sort of post-ICO summer after the ICO winter is DeFi. So decentralized finance. For people who aren't up on it yet, we're not going to go super deep. We don't have time here, but like it is super freaking cool. And basically the idea is like,

The idea behind Bitcoin was we're going to create a decentralized currency, a non-fiat currency. We're going to go outside the traditional financial system to create money. Yep. DeFi is like, well, what if we take that a step further and we just go outside the traditional financial system for every financial product? It's something like...

15%, 10%. I can't remember exactly what it is, but a meaningful percent of the US GDP is the finance and financial services industry. So clearly like- Lending, borrowing. There's a lot of stuff that needs to happen. Yep. A lot of instruments, a lot of different professionals to manage those things. All sorts of stuff. If we've got a new type of money and we've got a new set of rails that that money can move around in programmatic ways, we need all those instruments in this ecosystem too. Yeah.

And remember, what is Ethereum? You know, one big idea is the world of computer. The other big idea is it's code with money. Oh, shoot. Well, you got code with money. Now you don't need the code with institutions. The code's got the money. Mind blown, David. So DeFi, the first major DeFi project was actually MakerDAO. Yes, DAOs are back. MakerDAO launched the DAI

stablecoin, which was a totally decentralized stablecoin. You didn't need to have a counterparty like with Tether, on the other hand, saying like, don't worry, I hold USD in some bank account somewhere. Like, don't need that anymore. Then at the end of 2018, Uniswap launches and Uniswap was like... Liquidity pools, baby. Liquidity pools. Now suddenly you don't necessarily need a specific counterparty to trade with. There is a, exactly what it sounds like, a pool of basically pairs of

tokens from one to another if you want to swap assets without somebody on the other side of the trade. And there's a very, very acute and real use case for this, which is like, hey, I want to buy a coin.

Before Uniswap, I would go to Coinbase. I would go to FTX. I would go to some centralized exchange and I would do it. I would sell some Bitcoin and I buy some Ether or whatever, or I would put money in. And then I would pay a whole bunch of fees to that exchange. Well, with Uniswap, where you just do this decentralized peer-to-peer, no centralized exchange, no fees. Great. People love it. In June of 2020, another project...

a decentralized lending platform called Compound, they go even further. They say to participants on their system, which are lenders and borrowers, if you participate in the system, we're going to give you a new Compound token. We're going to give you a utility token for Compound by participating in the system.

This kicks off a craze. This becomes known as yield farming, and this kicks off DeFi summer, and it is all up and to the right from there. Before this compound event, at the start of 2020, there was about 1 billion USD worth of collateral that was in DeFi.

By the end of the summer last year, it was $12 billion. In May of 2021, last month, it hit $100 billion USD equivalent. Which is half the market cap of ETH. Of ETH, yeah. So you can imagine the pressure that this is putting on the Raspberry Pi that is the Ethereum computer. Right, quite a constrained world computer at this point. Totally.

Totally. And for all these DeFi projects, each one has an associated token. I mean, that's kind of the crazy thing is they all work the way that Ethereum does, where there's a utility token that allows you to do stuff on that platform. And of course, that platform is a sub platform that sits on top of Ethereum in the same way that you could have, like going way back to our earlier example,

Ethereum is the operating system, but like somebody made a browser and then you could have web apps inside the browser. And so there's sort of these, it's an application or a platform within a platform within a platform type thing. Oh my gosh. But it is crazy that... And the computer scientist in you is getting excited. Absolutely.

Each one of these projects that has a purpose also has an associated utility token that you can trade that can do something inside of that project. It's just like the speed at which the complexity of this thing is just growing. It's really hard to stay up on what is the current frontier. And it's so exciting, too. I mean, these are real things that are happening.

you know bitcoin's a whole separate thing and like i think bitcoin is a store of value like that makes sense i think it's a good idea but like that's what it is like all this stuff is how there's so much innovation happening and like new value being created in ethereum it's awesome so that brings us to today at the start of 2020 the price of eth was 140 bucks a token

Last month in May of 2021, that had skyrocketed up to over $4,000 a token. And Ben, as you referenced at the top of the show, about a $450 billion market cap for ETH. That has since come down by a factor of about two. ETH is right around $2,000 a token right now and right around $220 billion market cap.

Not bad for a raspberry pie. In December of 2020, the Ethereum Foundation did finally launch phase zero of the Ethereum 2.0 upgrade, which started the beacon chain to start the process of moving to proof of stake. But

but sharding, which we haven't really gotten into, but that's going to be the real scaling. Listeners, we'll get into Ethereum 2 and sharding here in analysis because that is the conversation that we want to have around what does the future of Ethereum look like and how should we think about this thing going forward. But let's pause on that for the moment. Let's pause on that. Yep. So yeah, here we are. It's kind of amazing.

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Man, I was so freaking pumped for this episode. I was doing all the research, all the crazy stories, all the history. The one thing I didn't have time to do was I meant to go back and reread all the great pieces that Paki has done on the whole Ethereum ecosystem, on Web3, on all the applications, on DeFi, especially his great piece he just did on Ethereum. Zero knowledge proofs. It would really help with...

our analysis if I had done that. Yeah, well, you are in luck. And I just heard the doo-doo of joining our Zoom call here. Is that Paki McCormick I see on Zoom? Hello, Acquired. What's up, Ben and David? How are you? What is up? Great to have you, man. I am so honored to be here for the last episode of the season. I was wondering why Zoom was open on my computer this whole time. I'm like, David's here in person. This doesn't even make any sense. I hope he joins at some point.

Well, I'm here now. This is going to be so fun. A topic that is near and dear to my heart and a podcast that is near and dear to my heart. We're like the Super Bowl halftime show of podcasts. You thought it was just Ben and David, but boom, there's Beyonce. Well, Paki, the first sort of analysis section we want to do here is the bull case and the bear case for Ethereum. And because...

You're Mr. Unicorns and Rainbows and Bubbles and Sunshine and the optimist. I would love for you to lay out what is the bull case for Ethereum from here? Why is it going to beat all of the challengers? And we haven't even really talked about some of the challengers yet. How is ETH2 going to go well? What the heck is ETH2? So I don't know where you want to start, but I think you painting the bull case would be...

just perfect. Fantastic. So when I wrote my piece called Own the Internet on Ethereum, I think ETH is around 2400. So I'm about $400 more bullish now than I was then. But I think the bull case

ends up being pretty simple and something. And I think this is maybe a meta theme for kind of all of crypto for it to work. It kind of has to have analogies to traditional business. And I think the bull case here is more demand and less supply. You can boil it down to that. So I know you've talked about some of the use cases. We've talked about DeFi. We've talked about NFTs, maybe touched a little bit on DAOs. There's all this stuff being built

I'm talking to so many people who are building things on top of Ethereum right now who are not in the least bit perturbed by the price. I think that high value art sales will continue to happen, but there's going to be this long tail of NFT kind of content that is created on the internet where there's just ownable files. I think there's a...

explosion happening in the DAO space right now. Cooper Trilley just wrote a great piece today kind of laying out the whole landscape. It's so crazy that DAOs are back. DAOs are back after the worst thing. They almost broke Ethereum and they're very, very back. I mean, there's so many interesting projects being

There's a company called Syndicate Protocol right now that is essentially rebuilding investing infrastructure on the blockchain. And there's all of these projects being built by people, some of whom are crypto native, some of whom are coming from kind of traditional web to traditional Internet that are building on top of the blockchain.

The fun thing about ETH is that, you know, I kind of view it like, you know, Ethereum is AWS if you had to use Amazon stock to use AWS. So you had to buy Amazon stock to use AWS. And then when you used AWS, they actually did a share buyback and ate up some of those shares.

And when you say supply-demand, you're talking about ETH, the token, or Ethereum, the network, or both? Both. The way that it works is to do nearly anything that you'd want to do on top of the Ethereum blockchain. You essentially need to start with ETH, which you pay transaction fees in the form of gas fees. So you need to buy the thing, create demand, and you need to spend that thing on top of the blockchain. And you might buy other tokens that you use in certain projects, but you're buying them with ETH and you're still paying gas fees.

For the most part right now, what happens is with ETH1 or Ethereum, we are in a proof of work world, just like Bitcoin, where people are solving math problems on their computers and they're getting rewarded in ETH to do that. And then they're having to sell a lot of that ETH to go pay for...

The computers themselves, the electricity to pay their taxes that they're making off of this. And so all these are being minted and then just kind of like kicked out of the system. So there's a big kind of sell pressure on what's happening with EIP-1559, which was a proposal that is approved and is about to be implemented. What's happening with EIP-1559 is that gas fees are splitting into two.

a base fee and a tip, where the tip is, you know, there's a bunch of transactions at any given block, and you can pay more to be further in the block. So that's one thing. The other piece of it, which is a huge change, is that the base fee is being burned. So instead of going to the miners and being sold to be cashed to do whatever, that's just being wiped out. So it's effectively deflationary

Or potentially deflationary, because you're basically saying the amount of ETH that exists in the world, of course, mining will continue. So the people will sort of continue creating more ETH. But now there's a way for it to be destroyed also in the base fee basically getting burned.

Exactly. So the more things that are happening, there's more demand for the currency itself. And then as more of those things happen, more of the currency is burned off. So it's potentially deflationary. So there's this meme that goes around in the Ethereum community that if Bitcoin is sound money because it has a cap supply, then...

Ethereum or ETH is ultrasound money because it has a decreasing supply. And so if you've seen the bat and the speaker on Twitter, that is the ultrasound money meme. And so that's the one part of it. The other thing that's happening is the switch to ETH2, which will change it from being a proof of work consensus mechanism to a proof of stake consensus mechanism. Actually, one thing, but before we get into proof of stake versus proof of work,

I hadn't thought about it. I knew what you were just saying about the deflationary aspects, but am I right that this will also remove a huge amount of selling pressure, as you were saying? Not only is it going to be deflationary, but you have now all of a sudden all of these essentially sell orders that were coming in from miners that are now going to not sell.

come in, right? Exactly right. And so the inverse of less sell pressure is essentially more buy pressure. It's more buy pressure, right? And so it's essentially like all of the stuff that was being sold to pay for computers and electricity and all this stuff off-chain is now essentially being bought, assuming everything goes well. Always a big assumption with Ethereum. Always a big assumption. And that is a whole nother thing. I think

EIP-1559, less of a huge assumption. ETH2 is the very big assumption. We're probably like six months out from ETH2. All right. Straw poll amongst the three of us. First to happen, ETH2 or full self-driving Teslas? Yeah.

ETH 2, but not by much. I'll go with ETH 2 too. I'm also going to go with ETH 2, but I think it's interesting, right? And that like all these things that seem like technological challenges are also kind of human challenges. Just like Tesla, everyone's like, oh, you know, the tech is there, but it's the regulation. I think same here.

There's a bunch of people who are ETH miners who are bummed that they've bought these rigs and they have their whole thing set up and they're no longer going to be running these proof of work things and making ETH for doing so. And so that I think is the opposing camp to ETH to is the miners who've been making all this money off of proof of work.

But if it does switch to proof of stake, which it seems like it will, the big thing that happens there is that instead of spending a lot of electricity to solve really hard math problems and maybe hurting the environment, maybe not, depending on if you use renewables, all of that, what happens is you put up

whatever amount of ETH, I think to do it directly on chain, you need to hold 32 ETH and put them up or stake them. And you essentially vote, yes, this is a good transaction. We can allow this. No, this is a bad transaction. We won't allow this. And you earn ETH and that's where you get your yield from staking your ETH if you're voting in the right way. But if you contradict yourself or if it's proven that you've voted in a way that's bad for Ethereum, then you lose your stake. And so you're staking the stuff to vote.

But what it also means is that the yield for staking means that all of a sudden, instead of just being kicked out of the system, the value that is being created on top of Ethereum actually starts accruing to ETH holders. And so that's like the really big thing where it's always been this disconnect in my mind where the question that I would always ask people is like, great. So people use Ethereum.

What happens? Like how does value occur to ETH? And proof of stake is how value accrues to ETH because you need ETH to stake to secure the network. And then for doing that as a holder, the value accrues back to you. Yeah, it essentially makes it a cash flowing asset. It makes it a cash flowing asset.

Okay, so let me, to identify what proof of stake is, let me throw out the question that everybody has to have in their mind at this point. So proof of work, you get rewarded with a token in order for spending money on energy to do some hard math problems. Proof of stake makes it seem like, okay, well, now just the people who have...

The existing ETH are the people who get to vote whether something's legitimate or not. So it almost feels like we're shifting the power from labor, from the computers doing the work to mine, to the power going to capital. Whoever currently has the most ETH and is willing to risk it to say, yep, I'm staking my ETH on the line here to say that this is the most...

legitimate transaction and you can take it away from me if it's proven later that it's not a legitimate transaction. Is that the right way to think about it? I think Bitcoin fans, maximalists, whatever you want to call them, Bitcoin people would say that a proof of work is a much more democratized, open, fair way to do it because anyone with a computer in the world is able to become a miner and

On Ethereum, you need to own a certain amount. And so it's 32 ETH. That's a meaningful amount of money. That's $64,000 at today's prices. You can also stake smaller amounts if you do it through Coinbase and a bunch of other projects where you're able to stake ETH in smaller amounts and then they'll pool them and stake for you. So it's not like you have to be the richest person in the world. The fear in all of this is if somebody gets 51% of the...

in circulation, then they can just take over the network. They win. The whole thing is done. They take everything. But there's always a 51% issue with any of these decentralized networks. There's a 51% issue with any one of these for sure. We should say this actually was... I was going to bring this up later, but it's worth calling out now. If you look at the pie chart of current miners of Ethereum, Ethermine, F2, Pool2, and Nanopool combined own like

something close to 60%. So it's only those three mining pools that could hard fork if they wanted to. But of course, it's not in their incentive to do it because then people wouldn't trust the system, their holdings. They want ETH to continue to get more valuable. Which is the other really kind of interesting, I think, piece of a bull case for Ethereum. And yeah, I guess for Ethereum more than Bitcoin is that

It's in the interest of anybody building on top of Ethereum for ETH to be more valuable because the more valuable that ETH is, the more secure the network is. So there's all these different ways, I think, where the value can accrue. Yeah. So in some ways, like the bulk case there would be that it's so geographically distributed that you can't turn...

Ethereum off. You could crash the value, but there's no way it's going to go down completely. So it's like it's censorship resistant, but it's not collusion resistant. Like if those three parties colluded to do something, they could.

But there would still be a lot of other people out there running ETH nodes, and it's in everybody's interest, running Ethereum nodes, and it's in everybody's interest to make that network as robust as possible, such that if any single set of actors does something bad, then there still exists a large network. And to buy up enough, or for those pools to continue to own enough, or for any outside party to come in and buy up enough to influence anything and to do a 51% attack. Yeah, because in proof of stake, it's not about

the miners anymore. It's about how much ETH itself you hold, right? Exactly. And so if ETH is all of a sudden $10,000 and the market cap goes up to a trillion dollars, then it costs $510 billion to run that attack. If it goes up to 20, it costs a trillion dollars to run that attack. So the more valuable it is, the more secure the network becomes, which I think probably is why Ethereum, I think just the lindiness of

and the fact that it's been around. Explain Lindy. Okay. So Lindy is this concept that the longer something has been around, the

the longer it's likely to be around. So if something's only been around for a day, then the chances are probably in another day, it's going to be gone. Like this could be a buzzy social app. This could be whatever else. If it's Play-Doh and people have been referencing Play-Doh for millennia, then chances are people are going to be referencing Play-Doh for millennia in the future. And there's a bunch of reasons that that happens. One is, you know, quality, I think, rises to the top over time. There become these network effects where people start teaching philosophy courses and using Play-Doh and all of that.

And I think with a blockchain, it's network effects and Lindy a little bit on steroids where there's also this financial piece kind of tied into the Lindy and it's attracting money and attracting money. It's like you own Play-Doh coin in addition to teaching Play-Doh. Exactly right. Exactly right.

And so, okay, we talked about EIP-1559, which you've now said enough times that I actually know the number, which is about changing the way that gas fees work and changing the way that mining works, and potentially will make ETH deflationary. So now...

We talked about switching to proof of stake. Paki, do you have a good handle on what the proposal is for these side chains that are proof of stake to interact with the one main core Ethereum blockchain? So now we're getting into sharding.

And so right now there is a single chain. It's one of the reasons that there's all of this congestion is because everything that you're trying to do is fitting a block, each single transaction into the main chain. And that's,

And so, of course, there's going to be congestion, particularly when DeFi was exploding and NFTs were exploding. Gas fees were high because people were bidding to get in. And so it was it was just insanely expensive to use Ethereum and the network was congested. With sharding, what happens is that these transactions kind of get batched off sharding.

the main chain in any number of like maybe 64 shards and then come back down to the main chain as one transaction. So instead of 64 separate things happening,

It happens one time and comes back down to the main chain as one transaction, which decreases congestion. Yeah, let's introduce the scalability trilemma. So this was an interesting concept that was proposed by Vitalik, where he basically said, look, there are three sides of the triangle. You've got

There's decentralization, which we hold dear. There's security, which we also hold dear. And then there's scalability, or you could think of that as like bandwidth. And David and I talked about, you know, you can get 15 plus transactions a second, but it's certainly not 5,000 transactions a second. Like, it's not going to scale to a lot of transactions.

And so the proposal for these sidechains is interesting because you're basically saying, we're going to punt a little bit on either security or decentralization in order to get that scalability. So for little ticky-tack transactions that you don't want to pay huge fees for, but also if they don't matter as much, if there's a lie in it somewhere or there's an attack on it and it's not that big a deal, it's kind of fine for that not to happen on the main Ethereum blockchain. Right.

It's almost like not all laws are the Ten Commandments. Things can be treated with different weights. And so for those things, maybe it's okay to have these side chains that, sure, we're going to punt a little bit on the decentralization, or sure, we're going to punt a little bit on security, but it's going to enable a lot of these ticky-tack transactions to happen in a way that actually makes the whole system kind of work better.

So that said, there exist things like Solana that are Ethereum-like in the fact that they are global scale computers, but they make different trade-offs in that trilemma and definitely get a lot more scalability, but perhaps don't have the same level of hardcore security and decentralization as Ethereum. The only thing that I would add to that is...

There is this concept of the execution layer and the settlement layer. And right now with Ethereum, those two things are all bundled into one. So it's like having all of the trades happen in real time on the New York Stock Exchange and then all the settlement and the bank accounts and the money trading hands at the end of the day also happen in that same spot.

sharding on Ethereum or things like Solana could be where a lot of the execution happens. But because Ethereum is the most secure and more decentralized potentially than the other ones, a lot of the settlement will still happen on Ethereum, even if a lot of the activity happens in a bunch of different places. Yeah. The analogy I've been thinking about with Solana, they're the most interesting competing other chain with Ethereum. Yeah.

And I kind of think about it like, yeah, like lots of organizations use AWS and they use Snowflake. And like, that makes sense. You know, like, it's not like you're only going to use one or the other.

Just to put a fine point, because you brought up the execution layer and settlement layer, it's worth making the analogy to the current financial system where, you know, we've got a very low bandwidth connection between banks that doesn't need a lot of transactions. You've got Fedwire that needs to be bulletproof. But how many per day really need to execute? Like, not that many.

But credit card transactions, yeah, we need tens of thousands per second around the world because a lot of people are doing that. And there's going to be some issues. There's going to be some fraud. There's going to need to be some reversals. We need to build all sorts of other mechanisms. But do all of those need to happen on Fedwire? No, no, they don't. So to put the bow on the bull case, is it fair to say this is the next internet?

Web 3 is the next breakthrough paradigm shift for technology, the way that the internet was. It will power trillions of dollars of new economic activity, the same way the internet did. And importantly, this is part of the bull case, Ethereum will be the base layer upon which it all happens. That is a good summary of the bull case. Yes. Ben's been reading Paggie's pieces. Okay. So then let's go to Bear.

I mean, the very first one here that I think we've all been alluding to is like,

either ETH2's switchover doesn't happen and they blow their lead in the corresponding network effect because it's technically difficult and also difficult to get the community on board, or that it goes poorly. And in trying to make the system work faster, they actually kill the golden goose of this existing bulletproof-ish but slow system. That, to me, feels like the big bear in the room. Does that seem right? That seems right. And I think, again, if you talk to

Solana or some other single-chain, single-shard protocols, I think what they might say is that

Because you're switching over to sharding, this beautiful thing that we haven't really discussed, but is one of the reasons that people like building on top of Ethereum and like building in Web3 in general, which is composability, or people call it money Legos or media Legos, where you can have all these things that snap together and work together instantly. These are like smart contracts that exist at different addresses on chain that you can sort of daisy chain together.

Exactly. So it's like a bunch of open source projects that fit together really nicely that anybody can just kind of take off the shelf. And so there's a bunch of those daisy chains that happen that if they're not on the same chain and they're sharding, then there's speed lost in that kind of moving down from the shards to the main chain. They kind of just break composability for certain use cases. And it's like, maybe there's enough things that somebody else can come in and say, like, look, we can do all of the things that

Ethereum can do, and we're single shard, and we're faster, and X, Y, and Z. And so maybe there's enough there to kind of provide the activation energy needed to move over to another chain. Right. It's sort of like to bring it to the Web2 world. Like I built this great application. It calls these three other APIs. And I send data into this API. It sends data out, which then calls this other API. It's beautiful. Actually, though, between these two, there's actually a phone call that needs to get made.

Right. And it's happening much faster and all of that. But I think that's a really good analogy. Yeah. Yeah. I mean, they do have this huge lead, but they threaded a needle the first time by creating Ethereum at all. Like the concept of a Turing complete globally distributed computer upon which other not only applications, but platforms for applications could be built. Right.

Like that's a rabbit out of a hat. That's threading the needle. And they kind of need to do it again in order to make this shift to a scalable future. In doing the research for me, it seems like there's also like people like Fred Wilson, like are just kind of fed up with how slow it's moving, right? Like we've known that scalability is a problem for a long time. We still don't know when it's going to get fixed.

And I guess there are risks that despite all these benefits to Ethereum, it's going to reach a certain point in the equilibrium where gas fees are too high and it's just too much of a pain for developers where they're like, all right, fine, I'm out. I don't know. What do you think, Becky?

I think that's certainly a possibility depending on how slow it moves. There are already some things like audience project, which is a distributed kind of music player, which is building on both. And it also settles on Ethereum, both Solana and Ethereum. And then like for really fast things like,

or upvotes on certain things. There's just these really quick transactions. That's all happening on Solana. And then it's coming down and settling on Ethereum and all of that. But there is this idea that different pieces are being picked off. But there's also this thing where if there are enough good transactions

blockchains like Solana that can interoperate with Ethereum, but that certainly lower gas fees and lower congestion. And if there are enough side chains that gas fees just get so low that even if a bunch of people use this thing, maybe the take is just so low that not enough value is accruing to the holders of the token. Of Ethereum. Of Ethereum. Oh, that's the...

That's the bear case for ETH, is that this thing becomes so rarely used that those tokens don't become super valuable. Potentially, right? The transaction, even if everybody in the world...

used the credit cards, but interchange dropped to 0.0001%, Visa and MasterCard become a lot less valuable. And so maybe there's something at play there. There may be a very good response to that critique, but that's one that's just kind of in the back of my head a little bit is what happens if everything gets so decongested and gas fees drop so much that

There's actually not that much money to be made, even if this is something that a lot of people are ultimately settling back on. And it's interesting, your comment there on the credit card companies, it would both, because ETH's value is derived from the supply-demand match, it's actually a worse quote-unquote business on two axes. It'd be that smaller percentage SPF, and there would be way fewer transactions happening.

So it's sort of like a exponential problem for them if a lot of the demand for transactions on the Ethereum blockchain shifted to other blockchains. I think that's right. At least for ETH holders. I think that's right, yes.

Everything is a double-edged sword, right? I mean, its strength is also its potential downfall. Well, I think that covers it for sort of high-level bull and bear. And I think in Playbook here, we may discover some more, but do you want to shift to power? Yeah, let's do it. This is interesting. I guess we did seven powers for Bitcoin. It's a whole new world in...

like protocol level power. This thing's, it's almost like first, I kind of want to wrap my head around what's the power of HTTP. And you, you raise the right point that like Bitcoin is kind of simple and

It is complex and clever in the combination of genius insights to create the system that worked beautifully together. But Ethereum, it's actually quite difficult to wrap your whole head around it the way you can wrap your whole head around Bitcoin because it exists in all these different layers. So maybe as we're doing power...

We should define it a little bit tighter and say the Ethereum network rather than trying to say the asset of the tokens. I like that. I like that. Okay. So for folks who are new to the show, the options here coming from Hamilton Helmer's seven powers are counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And...

Normally, the way this is kind of defined is what enables a business to achieve persistent deferential returns above their nearest competitor, sort of how to be more profitable than their closest competitor. Of course, this is a foundation. And of course, this is a big open source community. So it's interesting, how would we define the persistent deferential returns of the Ethereum network so that we even have some criteria to figure out the power?

I think that's easy. I think that's the value of Ether. Does it all keep coming back to that? Actually, it's the market cap of Ether. Yeah. It's the total combined value of all the Ether in the world. So yeah. I mean, gosh, I'm tempted to say Ethereum has every single one of these powers. Wow. David's got laser eyes over there in the corner. I know. To me, I think network effects are, for any blockchain...

The number one thing that any of them have. And this one actually works in a couple of ways. One, there's kind of the concept that we talked about that everything gets more secure, the more people who are using it and the higher price the ETH is.

And then I think even on top of that, all the things that are being built on top of Ethereum, I think really benefit from it, where the holders of a token of a certain project are more likely to stick around. So I think that's the potential power of businesses built on top of Ethereum is that they're incentivizing users to...

Get more of their friends to use the thing that they're using because their token gets more valuable as they do it. And so those things have their own really strong network effects, I think, that then I think benefit back down to Ethereum itself. Yeah, it's multi-layered. It's multi-layered.

You're right. It's interesting. I keep trying to come up with a good non-crypto analogy because I think the Mac OS one that I threw out earlier where Ethereum is kind of the operating system upon which you can build platforms and applications, that felt right. But there is also this element where it's also like being a shareholder in Apple as well as Mac OS. Well, this is where I think there's counter-positioning too, right? If you view AWS and the like as competitors to...

the Ethereum network. There's no way that Amazon, even in a post Jeff Bezos world is going to be like, yeah, cool. When you use AWS, you get paid in Amazon stock. Right. Right. Yeah. It's like, no, we want to capture that upside. Yeah. Like that's our leverage.

Oh, there's massive switching costs. I mean, if you're going to go write something for Solana, you don't write in Solidity. So like any of these applications that have already begun development or are already developed for Ethereum, there are some other systems that are compatible with the... They call them EVM compatible with the Ethereum virtual machine, basically the globally distributed computer that is Ethereum. You can, with minor tweaks, port those over to non-Ethereum blockchains. But like...

For ones that are dramatically different and better in a lot of ways, like Solana, it's going to be hard to get the developer community to really shift at this point. It's not that Ethereum has a 30-year lead, but they have like a four or five-year lead with the developer community that is non-trivial.

I think there's another element of switching costs too, which is for participants in the crypto economy, Ether is the coin trading pair, du jour, and Bitcoin too, but probably Ether more than Bitcoin for other coins and other options. You want to buy an NFT, you're buying that with Ethereum. You're not buying that with Solana tokens. Or you want to buy Solana tokens, you're probably buying that with Ethereum. Or you want to trade on Uniswap. I think Ether is the number one

trading pair on Uniswap. And then there's another level, which is that if you're accruing tokens for participating in something that's built on top of Ethereum, those are ERC20 tokens. And so maybe there's some mechanism where you sell, you convert to something else, and then you get a new token if the project switched to another chain. But it seems incredibly complicated, if not possible, to pull that off. And so I think just the fact that all these tokens are ERC20 tokens is a switching cost as well.

Yeah, the thing that springs to mind is on the Bitcoin episode, we were talking about how entrenched the US dollar is versus Bitcoin because the government both settles its debts and collects taxes in USD. And there are so many things that plug into the Ethereum network at this point that it's sort of the same effect where if you're participating in a lot of these different projects, you're going to end up with ETH one way or another. And then it's work for you and it's transaction costs for you to move that to a different blockchain. Yeah.

All right. What's next? Let's keep going here. So there's some that it doesn't have. What's the cornered resource? I don't think it really has that. Vitalik, maybe? Although people aren't exactly cornered resources. But maybe I don't think there's any other single person who is as much the face of crypto as Vitalik. And it's a liquid asset. So this is not exactly right, but there's something about

ETH holders or at least serious ETH holders or people who've held for a long time that are effectively cornered resources, like people who just aren't going to sell and who are incentivized for ETH to become more valuable. The ETH hodlers. Maybe not as boisterous or passionate maybe as the Bitcoin hodlers. I can buy that. I can buy that. I think there's something there where, I mean, at some point you have to pay a bunch of taxes if you sell your ETH. So maybe that's the cornered resources. There's a bunch of people who don't want to pay a lot of taxes.

latent capital gains. What about, I think there's probably scale economies. Definitely scale economies. With the, currently the mining network and then in a proof of stake world, the number of ETH holders out there who are staking. That's true. There's also, I mean, you could argue that there's been negative scale economies as well, where, you know, gas fees got

prohibitively high because too many people were using the network. I mean, maybe it's negative network effects as well, but too many people using the network degrades the experience and all of that. So maybe those are things that if you assume EIP-1559 and ETH2 go through smoothly become powers, but in the short term may not be. That's a great point.

Yeah, we've been to sunshine and rainbows over here on that point. Yeah. Ethereum as a network got less utility in several ways as it got bigger. Yeah, for sure. And like that is the opposite of what happens in a WhatsApp or a Facebook or any of these like true network effect businesses.

Or just to stay on scale economies, it's also the opposite of what's true in like a Netflix where you have that pure play scale economies where the bigger it got, the more cost effective it got for them to do things like license content. That doesn't show up here at all. Okay. Maybe not then. The bigger it gets, the more secure it gets and the more people are willing to build on top of it. But then there's also certainly the diseconomies of scale up to this point. Yeah. Yeah.

So continuing down the things that it's probably not, I don't think there's really process power. There are a lot of people who contribute to this thing. You know, it's a big open source project, but I don't think that gives it power. I think in large part that has held it back. Yeah. I mean, if I did, well, Fred Wilson would say it's held it back. Yeah. Yeah.

And so much of the value actually happened when there wasn't a lot of process to it at all, when it was the sort of founders and sort of early folks contributing to it that kind of created the initial system. Yep. All right. We haven't talked about branding yet. It's the last one. How do you guys feel about that? Yes, it has branding power. The way this would classically be defined is that... It's Tiffany's. I'm going to pay more for this diamond because it's from Tiffany's. And I don't think this has that.

I would say maybe that's it's other than network effects. Maybe it's its biggest power, right? Like, all right, let's go. So Vitalik wrote a post that I, that I referenced in the piece too on legitimacy and how like one of the main reasons that different things in crypto have, um,

value is because they have legitimacy. And so you can get legitimacy in a whole bunch of ways, but because Ethereum has been around a long time and performed well in the past and all of these things, it keeps accruing legitimacy. And so you could build and people have built

forks of Ethereum. There's Ethereum Classic out there right now, which is the same thing, but it doesn't have the brand power associated with. And so it all kind of ties in together where there are network effects because people moved over. And so it makes sense because other people are moving over. And so there's a bunch of things jumbled into one. But I think the existence of an Ethereum Classic or an existence of a bunch of other chains that technically are the exact same as something like Ethereum, but

Their coins are nowhere near as valuable.

I think to me, that's kind of brand power. That ties into the Lindy thing we were talking about before. Yeah, that's a really good point. Because it's funny how the psychology of would I go put $5,000, again, not investment advice, into Ethereum feels like, maybe. It's probably not going to go to zero. But when I put $5,000 into a brand new coin that someone told me is doing something technically interesting but I've never heard of, I might be like, hmm.

How about 500? There's definitely some kind of test the waters thing. And it's funny that it's actually more around how much would I be willing to invest, not how much would I be willing to pay. But there is a brand power that accrues to it from a trust perspective to even though it is a very, very volatile asset, give me some amount of trust that it's here to stay. Yeah.

I buy it. I mean, Paki, you're spot on with the ETH Classic argument. We appreciate you joining our Liquid Super team to bring us this great insight. It has been an honor to be on your Liquid Super team.

There is something that's sort of been ruminating, and I know we already did bear and bull, but there's got to be a bear case on all of crypto that's like the bear king here that we're not talking about. I mean, there's a variety of things that are pseudo-Black Swan-y, like quantum computing, or someone figures out how to crack RSA effectively, or let's put those Black Swan type things aside. I mean, where is there a perma-burst on the entire crypto bubble?

I think there are still a lot of things that are happening on Web3 or happening on Ethereum because it's early and cool and they have no impact on the real world. And so one kind of big bear bubble burst case is just that it doesn't find applications where it's that much more useful.

and useful enough to be worth kind of the extra complexity. That's not my belief, but I think that's maybe one of them is it just doesn't find the application still. I think that's been de-risked over the past few years. Another one is everything is still so tied to the price of Bitcoin and Bitcoin is, you know, it's blessing in disguise. I don't think there's anything fake about it just because it is kind of built on human belief and the fact that other people will accept Bitcoin and

But if people decide for whatever reason, you know, it has tanked a bunch recently. If people decide for whatever reason or governments start to crack down and it's just not worth the headache, then if Bitcoin goes down, at least temporarily, everything is going to absolutely crash. It's been wild to watch just these last couple of months, like as Bitcoin has swung around.

Ether has swung around. Solana tokens have swung around. And it's like nobody realizes these things are completely not connected. But they are, which is your point. That one's a big one to me. Just even the fact that they trade together, I think, is a big one to me, let alone what happens if Bitcoin drops. The fact that they're not being priced independently yet is either a phenomenal opportunity or something to be worried about. How do we feel about the...

state actor government risk not necessarily i mean in terms of like oh a government and a state actor is going to do a 51 and like destroy these things but more like like what we're starting to see with china of like hey no we're gonna make it illegal to do this we're gonna try and prevent our citizens from participating in either bitcoin or or in the whole decentralized ecosystem and ethereum i think

I think Uber is a good analogy, actually, where it's this race between what governments decide to do and how much people really want to use this thing. And so if it can get to a point where there's a ton of utility and it enables cross-border payments and people who are in hyperinflationary markets need cryptocurrency as a stable thing to keep their money in, if those use cases...

accelerate past the point of what kind of governments can control and there's a groundswell, then that's awesome. And the Uber case is that they would go into town, they'd break all the rules, but customers loved Uber so much that they could fight the local governments and win because they had all the constituents on their side. And so I think that's probably the race that plays out is can crypto find enough use cases and provide enough real value to enough people that if the government's tried to crack down, it would cause an uproar.

Right. Because right now that cross-border payments thing is real in countries that are having monetary crises. But in terms of actual real use cases, most of them, while there are very cool things like Audius out there, most of them are for true believers. And so to your point of if a government bans it,

There has to be enough of the citizenry who is in it for the utility of what's already built rather than in it for the belief in the future to sort of continue its sort of development and momentum. Right. Like you couldn't ban the Internet at this point. There was probably a time in the early 90s, late 80s where the government could have said, yeah, no Internet. And people would have been like, that would have been cool. Right.

I'll use my web TV instead. I'll use my web TV. And there wasn't money tied up into it. And I think we're past that point now, but I think that's the race. Okay. Thank you for helping me tie off that section in a way that calms my, uh, just felt like we were, we, we missed something there. Playbook. Yeah. Playbook.

So the first one that I thought was really interesting is that, just to contrast this against the Bitcoin episode, Bitcoin's pretty set in stone. But Ethereum evolves, and they've demonstrated this ability to learn from mistakes, adjust the underlying software and the contracts to change to what the community feels is best.

And that's for better or for worse. Is Ethereum truly immutable? Does it have strong... What's the phrase? No, I don't think it's truly immutable. And yes, it does have weak subjectivity. There still are... There have been a bunch of hard forks. Right. There are decisions that are left to human actors who can influence 51% fairly easily. And then it changes the way the world works. We talked about the three mining pools.

It's sort of this, in contrast to Bitcoin, it does represent the human element of the way that all of our existing social monetary technology systems are structured, where we do have faith in institutions. Not that I think this actually happened, but like, it would be much less crazy than with Ethereum to say like,

Bitcoin was probably given to us by the aliens. I'm not saying that it was, but it could have been. It was like a technology transfer from an advanced society where they were like, here it is. Whereas that is not, as we've seen with the history, Ethereum has been built in public by humans. Yep.

Yeah. The other thing that makes me think Bitcoin was built by aliens is no human could sit around with $60 billion in a bank account and never touch it. You're talking about Satoshi. Satoshi, Bitcoin's dig. Yeah, totally. I've got one that I think is a really, really big playbook theme that we've only scratched the surface here and we can't fully dig into, but I think we're going to in the future of Acquired quite often.

is, you know, look like Fred Wilson's arguments against Vitalik and against the foundation had a lot of merit and rewinding back to the original history and the founding, you know, Charles and Anthony and the desire to do a for-profit company for this as the vehicle and to raise venture financing. There was merit for those things.

Ethereum and so many other crypto organizations since Ethereum have proven that there is another way to generate and for people and institutions to capture amazing amounts of value outside of a traditional USC corporation with a foundation. I mean, like Solana is a combination of a foundation and a C corporation that is operating things. But most of the value and most of the tokens are held by, I believe, by the foundation. Right.

This is a whole new way of structuring projects, companies. It's kind of like Paggie's Liquid Superteams idea. It totally is. And this is going to change a lot. And certainly lots of VC funds, USV, Andreessen Horowitz, et cetera, have been like... And crypto native funds have been like, yeah, cool. We get it. We're going to buy tokens instead of buying shares in C-Corps. Yeah.

Cool. And maybe it's that simple, but I think we're just scratching the surface of all the implications of this. Yep. All right. I got another one that we touched on earlier, but it's worth sort of repeating that would we literally think of what was the playbook to build Ethereum? What was the playbook to build Bitcoin? It was bootstrapping the network with illegitimate use cases. But then once that

network has been laid, you do really cool stuff on it and cool legitimate stuff that is better than what came before or at least serves a different use case because now you have this infrastructure. And I was trying to think, where did this show up or did we see this with the internet?

In the same way that we've seen it in crypto, where you had the Silk Road and Bitcoin, you had ICOs with Ethereum. People talk about the adult industry being an early adopter of the internet and pioneering video technologies. And that happened to some extent. It also happened with Ethereum. We didn't talk about it really in history, but there's a thing called Spank Chain. Spank Chain, Spank Coin, something like that, that it for sure was one of the first applications on Ethereum. Yep.

But I guess the contrasting point that I want to make is it's interesting to me that the internet started in university computer science departments. And maybe I'm missing a huge chunk of internet history, but it doesn't feel like a bunch of nodes were lit up on the internet because people wanted to access something illicit. And it's fascinating to me that that has happened twice in crypto. Yeah.

but was not a part of the internet or really, I don't think, a part of the PC revolution and didn't really seem to be a part of the phone revolution. It's sort of like a new way to- Not to the same scale, I don't think. Gain widespread adoption. Yeah. Yeah. Yeah. It's a spectrum.

So the playbook is start with an illicit use case if you want to get adoption. The crypto playbook is figure out how to get as many nodes on your network as possible, as fast as possible at whatever cost so that you can gain what will happen, the benefit of what will happen down the line with it. Makes sense to me. Packing any playbook themes? I mean, I think the interesting thing on that playbook theme is that

who are operating selling drugs in porn all had a really hard time operating in the existing system. So I think it's less illicit use cases and

And it's more enabling something that wasn't possible for a group of people before. And those people were not able to transact in the existing system to the same extent that they were in something kind of decentralized and a little bit more anonymized. And so I think certainly that piece is true, but I think that's maybe a playbook theme is that, you know, if you're enabling something that,

that wasn't previously possible to a certain group of people, that's where you get your first adoption. Maybe like marketplace building 101 is find that passionate core niche and expand outward from there. I think maybe that's the kinder, gentler way of looking at what happened here. Another playbook theme to me is there's something around the idea that

There's all of these use cases that are internal to the network right now, and they're still looking to find ways to kind of influence the quote unquote real world a little bit more. But I wonder if there's a playbook theme around how do you build up use cases that are internal to your network to get that initial activation energy before going out and taking over external use cases? Yeah, absolutely.

Man, it leads me to another thing that I've been thinking about a lot with Ethereum and crypto broadly. I sent out this tweet the other day that was...

It was in this vein of jobs to be done that you're sort of talking about, Paki, which is, what are examples of blockchain-based applications that A, created a lot of value besides profits from speculation, B, would have a worse user experience if built on centralized technologies, and C, has a primary function that is not finance or currency? And I got a lot of really good pushback from a number of people, including friend of the show, Chad Whitman, that were basically like, why would you put C in there? Like,

Why does it have to have finance or currency not be a core part of it? Because what Web3 is, is bringing finance and currency in an integrated way to networked software. And it's like in the way that Web2 was about bringing dynamically loaded data into your web pages, it's kind of like asking, what's a good example of a Web 2.0 app that doesn't use AJAX? It's sort of like the

The jobs to be done of all things on Web3, on the crypto internet, do involve a transfer of value between people. And I think I'm sort of coming around to the idea that I'm not going to see the next Spotify that is just straight up better than Spotify, but decentralized. And because it's decentralized, it's like, no, we're going to see a version of Spotify that lets me transact directly with artists because transacting directly...

or something involving decentralized finance is actually the point of Web3. Yeah, I think DAOs are fascinating here as well. The big innovation and where most of the people are doing their work, it's not on the technology side, but it's on the...

incentive design and the tokenomics and all of the things to help coordinate groups of people on the internet in ways that might otherwise either not be possible or be filled with so much friction. And that comes back to the financial aspect and

Whether or not it's financial, the tokenization aspect where at least you have status from owning a bunch of tokens or other things. And so I think that idea of baking incentive design into the core of the product and letting the community design incentives for themselves is mind-bendingly fascinating. Shoot, guys. I mean, like I've been and I've gotten Ben interested in tokenization.

In BitCloud, that's such a good example of this, right? Like what is BitCloud? It's Twitter with money, right? But like Twitter with money is super freaking different than Twitter. Totally. Like many times I have wanted to invest in someone some way that I thought was criminally underfollowed for the quality of their content. And like, yep, that is exactly what it lets me do. Yep. Cool. All right. I think that about wraps it for Playbook for me. Me too.

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Are we going to decide on air how to do this? I guess so. I thought you had a plan. So I'll tell you what we're not going to do. And Paki and David can doodle on what we are going to do.

So we are deliberately not grading this one on the investment return of ETH. Bitcoin, I think we talked about, was a 3 million X in one decade. That is the single greatest return in human history on any asset in one decade. But that is not what Ethereum is about. It is the world computer.

Sure, it's a financial asset, but it's not primarily a financial asset. And so, of course, it is a cryptocurrency. But I think if we focus in on grading and sort of tying this episode up based on its investment return, I think we're missing the point. Yeah, totally agree. So, David, how are we going to grade this one? Put on me. I think we should grade the Ethereum Foundation on their stewardship of the Ethereum network over the past...

seven years. Yeah. And to abstract it even more, you could say like, grade how Ethereum's implementation, how successful has it been given the sort of germ of the idea initially of the world computer that exists on a blockchain? Yep. I think it is utterly amazing what has happened here. Like no Vitalik, no white paper, no,

no foundation, none of this would exist. No DeFi, no NFTs, no CryptoKitties, no NBA Top Shot, no Audius, no. And like, yeah, none of these things are quote unquote mainstream yet, but they're like pretty darn close. And there are billions and billions and billions of dollars of economies that have been created here. So like that is out of this world.

That's on the one hand. Now, on the other hand, look, 2014 was a long time ago. They've shipped like a bunch of versions, but like relative to certainly the initial promise of we're going to be at the Serenity release by 2015, we are way far behind here. And I think Vitalik himself has certainly said and admitted that there are many things he would want to go back and change about the beginning of Ethereum and the trajectory that it's

been on. So I'm going to land on an A-

I think it gets A range because of the first part of what I just said of like, this is freaking unreal. Now, the actual execution, like you're not ready for primetime yet, guys. So, you know, they're getting there, but that's I'm gonna go A minus. And it's funny how it's like it just parallels so many other open source things. Like famously, the meme in the early 2000s was next year is the year of Linux on the desktop. Right.

This stuff, you're herding cats. And Vitalik is literally herding cats. He's literally herding cats. So it's sort of to be expected with the path that they chose. The question is, was it executed better or worse than your sort of average open source project execution?

given what a world-changing idea they had to start with. I do like your A-. The only thing, and I'm going to violate the way that I initially opened this by talking about ETH here, the only thing that would...

possibly push me closer to an A, but I'm not going to go there and I'm going to land with an A minus, is the fact that they have created $200 billion plus of market cap in six years. And you look at like Uber that IPO-ed at 80 billion after 10 years and like that everyone refers to as like, geez, if I could just get a little Uber in my portfolio, you know, like just one, all I need is one. Like you hear so many VCs that are like, yeah. So the value creation activity is

or at least perceived value creation activity that Vitalik and the team have done in the last six years, seven years, whatever it is, is remarkable and outpaces basically every hyper growth startup. For sure. Yes. I cannot argue with that.

But A minus to your point of like, if this is the route that you choose in this open source foundation way, and this is the way you choose in which to execute it, there are laws of human physics that govern your ability to continue to affect change. You got to manage it well. And they've managed it okay. Yep. Packy? You left the A wide open for me. And of course, as the rainbows and unicorns and butterflies guy.

The other big kind of crypto thing that we've touched on a little bit, but not...

that we haven't talked about too much is the idea of trade-offs. And I think there's a bunch of trade-offs inherent with the way that they decided to do things. They have a human team that is just the starting point that they dealt themselves. So if you're starting after that, I think given the fact that they have a human team, given the fact that they don't want to change things too many times and change things too quickly, they've forked and they've made some decisions in the past that, that, you know, are very human decisions, but

they can't do that too frequently and still be viewed as a secure thing. They're of course going to be slower. Obviously it'd be amazing if they were faster, but look at the explosion of things that has happened on Ethereum in the past year, despite all of that. And maybe they made the exact right trade-offs even accidentally over the past few years to get to the point. Maybe the world wasn't ready five years ago to get. Well, certainly. I mean like,

The world wasn't ready. It was accidentally super lucky that, you know, it was at least stable during the time when we were all locked inside and looking for new ways to organize ourselves and all of those things. So there's a ton of luck involved as well. But I think looking from then to now and then what's potentially

potentially going to happen in the future and like the seeds of things that are being planted right now to even just be alive to this point when there have been other blockchain spinoffs and Bitcoin spinoffs and other things and Ethereum is still standing as number two and the most exciting in terms of just like world changing potential. I mean, I don't know how you do a much better job than that, whether it's by skill or luck or some combination of the two. You have to give it an A.

All right. There we go. I didn't expect anything less. Paki McCormick, not boring as expected. Yeah. Well, you guys want to do some carve-outs before we wind it up here? Yeah. I actually have some great ones for this episode. Ooh, multi-carve-out. Yeah. Well, it's two in the same category. So...

criminally as long time listeners to the show you know I've been reading sci-fi for not my whole life but like a number of years now I really enjoy it love it been through you know the Asimov books and everything like so fantastic I have not until the last couple weeks read Arthur C. Clarke and

It's fantastic. I love his stuff. Famously, he coined the term, any sufficiently advanced technology is indistinguishable from magic, often quoted in the tech world and plenty of other things, concepts he pioneered. He was writing in the 50s and 60s, kind of like same time-ish as Asimov. And his writing is great. I really like it. So first book I read was Rendezvous with Rama.

That's a really cool one about a dead seeming alien spacecraft enters our solar system and what happens. That's super cool. And then I'm in the middle of the city and the stars right now, which I'm also really enjoying set billions of years in the future where all of mankind has been reduced to one single city on earth. Yeah. The rest of earth is a desert. Yeah. Super cool.

I highly recommend. I like it. Adding to my list.

I'm going to do a little bit of a popcorn one this time because I think I've been a little heavier in the past. I'm watching Loki right now on Disney Plus, and it is exceptional. It is so clever. There are so many little details. It opens in a way where I'm like, oh my God, I totally didn't realize there was this hole in Avengers in the MCU where they created an opportunity to go and tell this entire story with Loki. And as

As soon as I saw the beginning of the first episode, I was like, oh my God, of course, that was unresolved. And I just think it's Marvel and it's Disney at their absolute sort of storytelling best. And just so that I don't say full rainbows, I contrast it heavily with the Winter Soldier show that they've come out with, where it seems like Loki was...

made for people who like are looking for these sort of really clever fascinating Marvel on top of their game shows they're made for the nerds yeah and then they just like cranked out that Winter Soldier thing like it was like Pacific Rim or just like it felt really off-brand in a way right I was uncompelled so it's interesting to see how some of these spin-off shows they're doing from the MCU and from did you watch WandaVision I did that was that was great too Loki's like WandaVision caliber

So if you're into that, go check out Loki. It's great. Great. All right. So I'm actually going to go to sci-fi as well. It's pretty much over the past year and a half, all I've been reading. And recently my friend, Ben Rollert, a composer recommended that I read diamond age by Neil Stevenson. And he's famous for snow crash and coining the term metaverse and all of those things. Yeah. Diamond age is really fascinating because it's,

a non-digital future. It's a future where a lot of the innovation has come on the physical side of things. And the world map is split up in all of these interesting ways. And it takes place in what is today China. And they have these matter compilers that make all sorts of interesting things, including islands and airships and

just like a totally different view of the future where no one spends any time on computers and it's all centered on this book that talks to the reader and is

is actually read out loud by a real human actor. And it's just a very different view of the future that I'm used to reading in sci-fi. And the best part is it reminds me in terms of writing style, a lot of Kurt Vonnegut. And so it's just this really fascinating book to read. I would highly recommend Diamond Age by Neil Stevenson. Awesome. Love it. Since this is the season finale, I got two more. Can I throw in two more? Let's keep going. All right, let's keep going.

I've been playing on Xbox Game Pass near Automata, which is a Square Enix game. I never would have played otherwise. It's kind of a weird game to play because you've got to play through it like four times. It's like watching The Big Lebowski. Yeah, it's like an auteur type piece. It's kind of cool, though. Paki, you reminded me of it, like this weird future. It is sci-fi in that you play as an android and you're fighting robots, but like...

Yes, that's a very different vision of the future that I find interesting. And then my other one, the pandemic has subsided here in the US. We are very lucky on that front. I've been vaccinated. A couple of weeks ago, I did a...

in-person recording with Jeff at Software Daily. Oh, it was so good. It was so freaking fun to be back in person. Ben and I are here now. Paki, we got to get you out here next time live. It's so great. And at the end of it, we were hanging out. We're like, it's so great to hang out.

you want to play some Magic the Gathering? And so we put a Magic the Gathering night together with a couple of buddies and like, God, it was so much fun to just be like back in person playing cards. Like so fun. That's awesome. Listeners, if you haven't checked that out yet, it's a great episode with Jeff and David. So go listen. Well, speaking of Packy, where can people find you on the internet? You can find me at not boring.co or at Packy M on Twitter. Great. Well, Packy, thank you so much for joining us. Listeners,

What a season. We really enjoyed being on the journey the last six months. I mean, whiplash and holding all these competing ideas concurrently and just forming new perspectives and new ways of looking at the world. I hope you've enjoyed it as much as David and I have. And it's truly a privilege to be able to do this and get all the incredible feedback and comments that we do from you all. So thank you. Thank you so much.

If you want to be a part of what we do here, you should become an LP. We're going to do more Zoom calls in the coming months and more book clubs. And we got 50 plus great, I think probably closer to 75 plus great LP episodes in the catalog for everything from the basics of VC fundamentals through pricing and packaging through hiring and building great teams, all sorts of good stuff in there.

If you want to become a part of the Acquired community, that is free. And no doubt we will be discussing this episode. You can join the Slack at acquired.fm slash slack. And lastly, if you aren't subscribed, you should. And if you like this, please, please, please share it with a friend, share it on social media. We really appreciate you helping to grow the show. With that, thank you so much. And we'll see you next season. We'll see you next season.

Is it you, is it you, is it you who got the truth now?