WBD575 Audio Transcription

Censorship & State Capture with Nic Carter & Lane Rettig

Release date: Wednesday 2nd November

Note: the following is a transcription of my interview with Nic Carter & Lane Rettig. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Nic Carter is a Partner at Castle Island Ventures & Lane Rettig is a core developer for Spacemesh. In this interview, we discuss the Ethereum merge specifically addressing the issue around increasing censorship of Ethereum transactions, the chilling state attacks on privacy and what Bitcoiners could learn.

“You could describe Proof of Stake in two words: shareholders vote. And guess what, that is how the world works already… I want to build a system that at least has the potential to be democratising, and move towards decentralisation, censorship resistance, these properties that we care so much about; and I think Proof of Stake is a huge step in the wrong direction.”

— Lane Rettig

Interview Transcription

Peter McCormack: Welcome, Nic; welcome, Lane.  How are you both?

Nic Carter: Hello.

Lane Rettig: Good to be here with you both.

Nic Carter: Lane has travelled a great distance to be here.

Lane Rettig: Very far.

Peter McCormack: Where have you come from?

Lane Rettig: Home.  It's not that far.

Nic Carter: I came 15 minutes.

Peter McCormack: Come on, man, we've come the most.  Danny's come from the other side of the whole planet.

Lane Rettig: Yeah, I think Danny wins pretty much always on this count.  Thank you, Danny.

Nic Carter: Thank you for making me your number one most featured guest; is that right, on this show?

Peter McCormack: Yeah, on the show.  Well, I mean how does it work?  If you exclude Lyn, because she gets a monthly slot.

Lane Rettig: I was going to say, Lyn, yeah.

Nic Carter: We love Lyn, but she doesn't count, because she was part of the show.

Peter McCormack: She was a monthly slot.  But as somebody who is just invited every time I want to talk to them, yes!

Nic Carter: And you still talk to me, even though I have been cancelled!

Peter McCormack: So, I've got the cancelled bitcoiner and the cancelled Ethereum guy.

Lane Rettig: Yeah, we realised this recently when we were catching up; it's a nice symmetry.

Nic Carter: We're actually switching sides.

Peter McCormack: I'll probably get cancelled for making this show.

Nic Carter: But you know you're doing the right thing when both sides kind of hate you, right?

Lane Rettig: If you're not pissing someone off, you're doing something wrong basically.

Nic Carter: We've pissed everyone off.

Lane Rettig: Well, good thing we have each other!

Nic Carter: That's all we've got left!

Peter McCormack: Well, Nic, you're my friend, so as long as you haven't done anything super-bad, you would stay my friend, I'm still going to talk to you, you're still one of the smartest people I know.

Nic Carter: Thank you.

Peter McCormack: I don't give a fuck what other people think, I'll always talk to you, because if we weren't making this show, I'd call you up and say, "Let's get dinner".  But when I am here, you've always got so much smart shit to say, I'm going to talk to you.  I don't care what you're doing in ETH, it's a Bitcoin show and that's what I'm focused on.  And even your paper recently showed that you offer so much value.  So, yeah, I just don't care, you're here for multiple reasons.

Nic Carter: Thank you, Peter.

Peter McCormack: Lane's here for multiple reasons, also cancelled by the ETH community, also a friend and also someone I like talking to.  I think you can get a lot of value from people who aren't within -- actually, I think you sometimes get more value from people who aren't in your cohort, because you get to challenge things.  So, yeah, whatever.  If we're going to make a show discussing proof of work versus proof of stake, for me I don't care about the value in proof of stake, I just care about the value in proof of work; and if I learn about that by comparing it to Ethereum, that's great.  And who better to talk to than one of the best writers in Bitcoin, and somebody who has spent so much time explaining to me everything that's fucked with Ethereum.

Lane Rettig: And there's more now, so we're going to have fun with that today.

Peter McCormack: Yeah, we're post-merge.  I've got a bunch of questions about that first, but let's get into why is it important?  You wanted to make this show, you reached out to me and said, "Let's make a show on this".

Lane Rettig: Did I?

Nic Carter: Well, I think it might have been my idea.

Peter McCormack: Yeah.  But for me, always understanding the value of proof of work is useful.  We've been hit with a bunch more FUD since ETH has completed the merge, from the press, from the World Economic Forum, from mainstream media, from ETH-heads, from crypto people who've suddenly used this as an attack vector against Bitcoin, which is fucking ridiculous.  So sometimes, people might be surprised, you as an ETH guy also involved in proof-of-stake work, wants to talk about this.  They assume because you've done work in other ecosystems, you're not a bitcoiner, but you are a bitcoiner.

Lane Rettig: Yeah, I mean bitcoiner first. 

Peter McCormack: Shitcoiner second!  Danny, is this the first time we've had two shitcoiners on the show?

Danny Knowles: It is.

Lane Rettig: Oh, boy, you are really increasing the cancellation risk here!  No, look, the very first project I worked on in the Ethereum ecosystem at the Ethereum Foundation in 2017 was proof of stake, was the merge.  And so, I had a lot of questions about it, both leading up to and now in the wake of the merge itself, people asking what I think and how I thought it would go and how it went.  I'm really of two minds about it.  On the one hand, I think it's really good that it happened.  I think it further drives home the contrast between Bitcoin and Ethereum; they're even more different now.

I think maybe one of the reasons that Nic was excited to talk about this topic was because it gives us even more ground to stand on when we talk about proof of work matters, why it's important, why Bitcoin is different in that way.  So, you and I spoke about the reasons I have my reservations about proof of stake; they all still exist, but more information is better.  We have orders of magnitude more information about proof of stake now than we did.  We were just speculating when we spoke about it a year or two ago, and now it's running and blocks are being produced, and Nic and I were looking at the numbers on the way over here, so we can talk in much more concrete terms, which I think is a more productive conversation.

Peter McCormack: Can I tell you something that stood out to me with the merge, is that the day after, the world hadn't ended, Ethereum hadn't blown up which, not that I wanted it to, but I expected something super-bad or terrible to happen, some kind of collapse, and it was back to normal.  DeFi platforms were getting hacked, money was getting stolen.

Lane Rettig: In retrospect, I think the most remarkable thing about the merge is how unremarkable it was, like you said.  I stayed up, it happened kind of 2.00am here on a Wednesday night or something, the night of 15 September, and it just happened, the rollover happened, the first block and the first epoch was justified and finalised and it was like, "Okay, get on with our lives". 

I think no matter what you think about Ethereum, no matter what you think about proof of work, and we'll get into that, you have to respect the engineering work that went into this, because it was legitimately a really epic project.  The fact that it happened so seamlessly is remarkable, after all those years of work.

Peter McCormack: But isn't it design choices that required such epic engineering?

Lane Rettig: Yeah, that's fair.  I guess that's not required in Bitcoin, because it's not changing in the first place.  But look, again, other things being equal, and I'm not saying other things are equal, we'll talk about that; but if you imagine other things are equal, the fact that Ethereum's using 99% less energy than it was the day before…

Nic Carter: Can I address something though?  Justin Drake and Vitalik and many Ethereans claimed that Ethereum's merge reduced global electricity consumption by 20 basis points; 0.2%.

Lane Rettig: I saw that number.

Nic Carter: That is false.

Peter McCormack: Why, because all those ASICs started mining Ethereum Classic?

Nic Carter: Partially, that's part of the answer.  Another part of the answer is they're relying on figures from Digiconomist for the energy consumption.  It was by my count, and by the counts of ETH miners that I talked to and other academic researchers, it was more like 8 basis points in the first place, so about a third of the claimed figure.  Then also, some of those GPUs were not just thrown away, some of them were thrown away, but the high-end GPUs, the Nvidias, they are now out there churning away running AI models, they're running Stable Diffusion.  I can attest to this; I am actually an investor in the start-up that does this.  They were mining ETH, now they're running Stable Diffusion.

So, the electricity consumption didn't go away, it's just they were repurposed to other tasks.  So at most, it's 7 basis points, but most likely it's not all of that, because a lot of those GPUs are still in action.

Peter McCormack: I think there's no honest conversation to have about a reduction in energy usage that has any material effect on the world.

Nic Carter: I mean, whatever it is, it's a small reduction.  But I'm telling you it's not 20 basis points of global energy consumption.

Peter McCormack: I think the primary conversation with a reduction in any consumption is how it's been used as an attack vector on Bitcoin and is completely misleading.  But I don't see that it's made any material impact on the world.  And when you look at the cost trade-off and what it's lost by going to proof of stake --

Lane Rettig: Can we just dig into this a little bit, it's interesting.  So, there's two ways to look at this.  There's the reality, which Nic is speaking to, like what is the actual on-the-ground impact on world energy consumption.  But I think there's also perception, and perception's important as well.  And I think, but tell me what you guys think, this leaves Bitcoin a little exposed, in the sense that our friends, the politicians and the regulators, are going to look at it and say, "Ethereum did this thing where they, 'Turned off the power', Bitcoin needs to do this as well".  It's going to make Bitcoin less favourable in the eyes of people who are environmentally conscious; that's what I'm going to say.

Nic Carter: I completely agree.  From a PR narrative perspective, it's very strong and it's very hard to explain to people that Bitcoin can't really marshal that kind of momentum around a massive change, and that it's built into Bitcoin's fabric that it wouldn't make a change like this.

Lane Rettig: They wouldn't want to in the first place.

Peter McCormack: And if they tried, it would be fought and all the old ASICs would stay mining.

Lane Rettig: But if you look at it specifically in this way, I just wanted to make this point, it is a masterful PR move.

Nic Carter: From a positioning perspective, yes, completely.  It's not just PR, it's like actual governments are responding to this.  Look at the EU, they're actively trying to ban proof of work; they weren't successful, but they're trying.

Lane Rettig: This is one of the main reasons the world hates crypto so much.  There were projects, pretty big projects, like SOLO comes to mind, that launched an entire chain; a whole ecosystem raised hundreds of millions of dollars specifically around being carbon neutral.  So I think Ethereum's move has stolen their thunder.

Peter McCormack: Well, again, I think it's misleading, but I understand the PR side of things because I've seen it.  I've seen the articles that came out the day, the day after.

Lane Rettig: There were two front-page articles in The New York Times, two in the day following the merge.

Nic Carter: It's a big win, yeah.

Lane Rettig: Yeah, and those articles weren't terribly great and they got facts wrong as they always do.

Peter McCormack: Well, this is why we need to ensure we continue to fund people like the Bitcoin Policy Institute to start writing the articles to try and educate these people, and at least offer them some real fact-based information.

Nic Carter: But the upside, as Lane says, is that now we have real data coming out of Ethereum proof of stake.  I mean obviously, there were other proof-of-stake protocols, but Ethereum proof of stake is a big one where now we can actually clearly delineate the influence of either consensus protocol and --

Lane Rettig: It's the biggest by far, but also we have to, when we compare proof of stake, like Ethereum-flavoured proof of stake, to the others, we have to emphasise that it's really different, because it's not delegated proof of stake.  This is I think the first chain that is really doing it as this large, decentralised scale with hundreds of thousands of validators; that hasn't been done before.

Nic Carter: Yeah, other chains that are proof of stake are basically consortia of a handful of known, named validators.

Lane Rettig: Although, you could make the case that Ethereum is too!

Nic Carter: Well, compared to Binance, SmartChain, just like Binance hits the brakes because something goes wrong, that's not really like an open-consensus system.

Peter McCormack: And Solano, Solana?

Lane Rettig: Solano!

Peter McCormack: Solana.

Nic Carter: Solano!

Lane Rettig: I started calling it Solano because of you!

Peter McCormack: I've forgotten which one it is now, because I keep getting it wrong!

Nic Carter: We are not telling you!

Peter McCormack: Nolberto Solano, wasn't it, the old footballer who played for, was it Villa?

Lane Rettig: Is it up today?

Peter McCormack: Fuck knows.

Lane Rettig: We need, IsSolanaUp.com!

Nic Carter: Yeah, but they have the highest Nakamoto coefficient, have you seen this?

Peter McCormack: Don't they just turn it on when they need it?!

Lane Rettig: They're saving energy!

Nic Carter: These other ones, these non-Ethereum proof-of-stake chains are more brutal and they definitely rely on a smaller consortium of large validators.

Lane Rettig: Well, to be fair, we don't have enough data on Ethereum yet.  I mean, this merge just happened less than a month ago, Solana's been running for a couple of years, so let's see how stable it is.  I mean, the Beacon Chain has been running, so proof of stake has been running since December 2019, so almost two years; three years?  Two years, sorry, December 2020.

Peter McCormack: The Beacon Chain?

Lane Rettig: Yeah.  So, by the way, if you want to do a background story, it's always helpful to catch people up like, what is proof of stake; how did this all happen?  We could go over that, but we just don't have much data on how stable it's going to be, so we'll see.

Peter McCormack: But one quick question that might not have a quick answer, now the merge is done, is the transition done, or are there still things that have to be done?  Or, is ETH2 just live now and all the old stuff's dead?

Lane Rettig: This is complicated, I'll try to give you a really brief answer.  So, the merge itself is done, there's nothing else to do on the merge.  The Ethereum roadmap has evolved quite a bit.  The running joke in my days, when I was doing Ethereum stuff, is that every time Vitalik had a shower, the roadmap would change.  I mean, it's not quite that volatile anymore, there's a pretty agreed-upon roadmap forward with five steps, the first of which was the merge.  So, there are four more big steps to come.

Peter McCormack: But what did the merge do; what was that step for?

Lane Rettig: The merge was the transition to proof of stake.  So, it was hot-swapping out the consensus mechanism from proof of work to proof of stake; that's all it did, nothing else.

Peter McCormack: And that took three years?

Lane Rettig: Seven or eight years of research and four years of development.

Peter McCormack: Wow!

Nic Carter: You're going to love the rest of the roadmap, because it rhymes!

Lane Rettig: Yes, I can't even get them all right, but merge, verge, surge, purge, and then I'm forgetting one.

Nic Carter: Splurge.

Lane Rettig: Splurge, right, of course.  The splurge comes last.  Everything in Ethereum is rainbows and unicorns and rhymes!

Peter McCormack: I was going to say, is there a song?

Nic Carter: Don't you love it?

Lane Rettig: I'm sure there's a unicorn dance song.

Peter McCormack: There's a unicorn dance song that they're going to do next, dressed as fluffies!

Lane Rettig: I'm telling you, the more I realise this, the more I realise Ethereum has got its marketing game on lockdown, all this stuff.

Nic Carter: I mean, a rhyming roadmap, it's incredible.  And the words mean stuff.  There's actually --

Lane Rettig: There's substance behind it, there really is.

Peter McCormack: What's that book, something Huxley wrote?

Lane Rettig: Aldous Huxley?

Peter McCormack: Yeah, what's the book he wrote?

Lane Rettig: Brave New World.

Nic Carter: Brave New World.

Peter McCormack: Yeah, so that's Brave New World, Ethereum's Brave New World, and Bitcoin is 1984!

Lane Rettig: This is the utopian and dystopian views of the future.

Peter McCormack: Yeah, and as I said to you before, Ethereum sometimes feels like it's defined by unity, there's a lot of unity around things; whereas Bitcoin is defined by the lack of unity, the fight.

Lane Rettig: We say Ethereum is a big tent and Bitcoin is money for enemies, so I think that's accurate, I agree with that.

Nic Carter: I think groups look homogenous from the outside, and from the inside they look heterogenous.  So, the probably say the same about bitcoiners.

Peter McCormack: Even ETH?

Nic Carter: Yeah.  That's just a common sort of phenomenon.

Lane Rettig: I think the thing about Ethereum as a community, to the extent that such a thing exists, is it is complicated and it does feel diverse on the inside, because there are all these projects that are Ethereum-adjacent.  So, is Polygon part of the Ethereum community; is NEAR; is Polkadot?  Some of these projects move in and out of Ethereum's orbit, it's messy.  Whereas, Bitcoin is Bitcoin basically.

Peter McCormack: Okay, so we've done the merge; what's next?

Nic Carter: I don't even know what the next one is?

Lane Rettig: I'm trying to remember.  So, I think Danksharding is the next thing.  Oh, no sorry, the first thing is withdrawals.  So, 30-second recap.  So, the Beacon Chain launched in December 2020.  All that did was proof of stake, so validators could deposit ETH on the mainnet, the existing running Ethereum Network, and then people who wanted to run validators, that would give them a validator slot on the Beacon Chain.  So, for whatever number of months that is, 19, 20 months or something, that did its thing, but it's not coming to consensus over anything meaningful.  They're just running and it's just literally testing the consensus mechanism.

Then the merge happened, so now the security of the running Ethereum Network has been transferred as I said.  All the proof-of-work miners have been shut down, that's been transferred to proof of stake.  So now, the consensus is still running on the Beacon Chain, but it's now securing something.  The next step is enabling withdrawals.

Peter McCormack: So you have to stake to be a validator; and it's 32 ETH?

Lane Rettig: Yes, exactly 32 ETH, correct, yes.  So, that's one validator slot, it's a fixed amount.  So, the next thing is enabling withdrawals, which is supposed to come in something like six to eight months.  So basically, once you deposit now, you cannot withdraw those funds, so they're locked on the Beacon Chain.

What you can do, and this is actually an interesting nuance here, you can exit your validator.  So what that means is, let's say that you are, we won't name names, but you are a regulated entity or company who, for whatever reason, doesn't want to censor, doesn't want to produce censored blocks.  We'll talk about the censorship thing, I think.  Your only other option would be to exit your validators and stop validating, but you can't actually withdraw the coins.

Peter McCormack: So, even if you exit you can't withdraw?

Lane Rettig: Correct, not yet, but that will be enabled in some number of months from now.

Peter McCormack: And the useful thing would be, what, people don't want to withdraw all their coins but they want to withdraw the yields that they've generated?

Lane Rettig: The rewards, yeah.  So, this is also complicated.  There are two components to the yield you get when you're a validator.  So one is the block rewards or the block subsidy; and the other is the fees, obviously.  The fees can be withdrawn, because they just land in your regular Ethereum account.  The block subsidy cannot yet.

Peter McCormack: Okay, so what's the complexity around withdrawals?

Lane Rettig: That the funds live on the Beacon Chain, not on the running Ethereum Chain, I guess, so there needs to be some mechanism --

Peter McCormack: So, will both chains continue, or will the Beacon Chain merge into the main chain?

Lane Rettig: So, there are now two chains basically, and as a validator you actually need to run two pieces of infrastructure.  So, the terms we use are EL and CL.  EL is Execution Layer; CL is Consensus Layer.

Nic Carter: I'm glad you're here, because I didn't know any of this shit!

Lane Rettig: I wasn't following this all super-closely for the past couple of years.  As you guys know, I have a day job that's not strictly Ethereum-related, but I've been catching up on it lately, partly because of the merge, partly because of the show, partly because Devcon is coming up and I didn't want to sound like an idiot.

Peter McCormack: When's Devcon?

Lane Rettig: Next week, so I'm actually on my way to Bogota.

Nic Carter: In Bogota.

Lane Rettig: Yeah.

Peter McCormack: That will be nice.

Lane Rettig: That's going to be interesting.

Nic Carter: The cartels are warming up.

Peter McCormack: Have you got your unicorn outfit?

Lane Rettig: I mentioned, I was packing for Bogota and it was really hard because I was trying not to bring any crypto --

Nic Carter: You're going to want to have good OPSEC when you're down there.

Peter McCormack: Yeah, I mean of all the places to choose to put a bunch of rich crypto people, let's go to Bogota!

Nic Carter: It doesn't seem wise.

Lane Rettig: A bunch of teenagers who, exactly, are newly crypto wealthy, who've never travelled in Latin America before.

Peter McCormack: Yeah, okay.  So after withdrawals, what's coming after that?

Lane Rettig: I think the next thing after that is sharding, and this now is getting a little bit beyond my expertise.

Peter McCormack: Did you see Danksharding?

Nic Carter: Yeah, they re-branded it.  I think it's because it's the name of the academic, so it's not dank as in "cool", it's because it's actually this guy's name!

Peter McCormack: Well, that's a cool name!  And sharding does what?

Lane Rettig: The idea of sharding is that rather than having a single chain, where each validator has to validate every transaction on that chain, there are now multiple chains and a subset of the validators.  So, the chains get broken up into sort of subnets, and so you only need to validate a subset of the overall transactions flowing through the networks.  By the way, sharding is a really old idea, it comes from databases, it's been around for decades.  You have some method by which you split up your transactions and your accounts across different chains?

Peter McCormack: To reduce load, to make it faster?

Lane Rettig: To reduce the load on the validators, because you want it to be easy to run a validator basically.

Peter McCormack: So, it sounds like that's probably quite a complicated thing.

Lane Rettig: That's very complicated.  So, the plan was originally that that would be included in an earlier phase in what used to be called The Ethereum 2.0 Roadmap.  And I think Danksharding is like, again this is getting a bit beyond my expertise, but the original plan was to have something like 1024 shards or something and they'd all look and feel like Ethereum, and the scope of this has been reduced considerably.

Peter McCormack: Okay, and are there any risks to sharding in that parts of the network go offline; is it a new attack vector?

Lane Rettig: The biggest issue of sharding is that it breaks composability.

Peter McCormack: Do you want to explain composability for the audience; I obviously know what it is?

Nic Carter: Well just that now you're literally splitting the ledger up from a canonical ledger of record to many different ledgers that need to be reconciled with each other.  And now the challenge is, how does a transaction happening on this piece of ledger talk to a contract on that piece of ledger?  And composability is the nice thing about blockchains; that's what makes DeFi work.  Having those settlement assurances means you know that these contracts are going to work together.

Lane Rettig: I agree.  I think Ethereum's killer feature is composability, so this means that literally, in a single transaction, in a single block, you can touch three, four, six or eight different applications, and both in the sense of building blocks of code and things like this, but also in the sense of assets.  You can do these wicked arcane kinds of transactions that, you know, take a flash loan here and do something over there, and then return the flash loan at the end. 

That is the thing that was never possible before Ethereum, and is only possible on Ethereum, or a system like it where you don't have shards today, and I'm specifically referring to how things work in the Web2 world, where you have APIs and asynchronous calls and you have this thing called The Train-and-Hotel Problem, which is like, "I want to book a train ticket and a hotel.  But if, for whatever reason, the train reservation doesn't get made, I don't want the hotel; and if the hotel reservation doesn't get made, I don't want the train".  So, we want these things to be bundled as a single kind of atomic operation so it's all or nothing.  This is called atomicity in computer science. 

The moment you move to a sharded model, as Nic was mentioning, you have these multiple domains, and now you have these very, very complex asynchronous tools as a software developer that you need, where you have to fire off a thing and sit around and wait for it to come back, and maybe it will fail and then you have to revert the first thing, so it just makes writing applications and using them much harder.

Peter McCormack: Okay, so this needs to be solved by the coders building the application?

Lane Rettig: This can't be solved, this is the fundamental truth.

Nic Carter: You can't solve it.

Peter McCormack: It can't be solved?

Nic Carter: It's the problem with legacy payments, is they aren't composable.

Lane Rettig: By the way, this is why you have things like a two- or three-day settlement period; this is exactly why.

Nic Carter: Yeah, it's why interchange exists with credit cards; it's why fraud risks exist.  It's because legacy payments aren't composable.

Peter McCormack: Okay, so what's it going to break on Ethereum; it's going to break something?

Nic Carter: The whole premise, in my opinion.

Lane Rettig: DeFi, in a nutshell.

Nic Carter: Yeah, DeFi.

Peter McCormack: Okay, so does that mean it's not going to happen, or is this a big debate?

Nic Carter: I think it will come down to it and they'll walk back from the brink and not go the sharding model.

Lane Rettig: Would you say Ethereum is "on the brink"?!

Nic Carter: I mean, other smart contract chains are selling against this.

Lane Rettig: Exactly.

Nic Carter: So, Solana's whole thing is, they're going for composability, they're not going for the sharding model.

Lane Rettig: And then you have chains like NEAR that have already deployed the sharding, and I don't think it's super-popular, I don't think there's been a ton of uptake.  I want to make one other point, which is --

Peter McCormack: Yeah, but hold on, if it breaks composability, why would it even be considered if this is ETH's --

Lane Rettig: The answer's scalability.  There is a limit to how many transactions you can put through a single chain.  One really important point, this problem already exists.  Why?  Because we have multiple chains and because we have rollups and layer 2 stuff now; it's precisely the same problem.  You now have these towers or these islands, these silos, I guess would be a word for them.

Nic Carter: Well, it predates blockchains. 

Lane Rettig: Yes, exactly.

Nic Carter: This is a problem with payments, is if you want efficiency, you need deferred settlement.  That's the fundamental payments trade-off.

Lane Rettig: There's no squaring the circle; this is a fundamental trade-off.

Nic Carter: So, we rediscovered this in blockchain.

Lane Rettig: We're rediscovering a lot of things in blockchain.

Peter McCormack: But if it breaks one of the USPs of Ethereum --

Lane Rettig: The killer feature.

Peter McCormack: -- the killer feature, then it changes Ethereum, then what does Ethereum become with it; is it just a more complicated Bitcoin?

Lane Rettig: This is the whole journey of crypto.

Peter McCormack: Oh, God, I have to emphasise a point there, because somebody listening will be like, "It's not Bitcoin".  I know that, but does it just become money and not smart contracts?

Lane Rettig: I think that the whole journey here is -- someone summarised this by saying that crypto bros are learning the lessons that finance learned in decades in fast-forward; that's kind of what's happening.

Peter McCormack: Right, okay.

Lane Rettig: The short answer is it becomes more, to Nic's point, like the existing financial system.

Peter McCormack: So, if they do get through sharding, what's after that?

Lane Rettig: So, statelessness is a big thing on the roadmap.  This is the purge, I think, so the idea that running a node now takes hundreds of gigabytes of data, a lot of cruft from years ago, spam attacks and things in the past, and there's no reason for nodes to need to store all this data.  So, there are pretty advanced techniques involving things called Verkle trees, it's another fun branding thing, that basically just advance cryptography, that means that you don't need to store all of the legacy data to run a validator.  So again, this is in the interest of making it as easy as possible to run a node or run a validator.

Then later phases, like the splurge thing, once we've done this and we've cleaned things up and we've streamlined things, then you can add more fun stuff in the future.

Peter McCormack: It sounds like a project that's going to take decades?

Lane Rettig: Yeah, it's been almost a decade.

Nic Carter: Well, it's like the revolution never ends.  What would they have to live for if they weren't continually --

Lane Rettig: I've never thought about it in those terms, but wow, that's a powerful idea!

Peter McCormack: I mean, you've just described the opposite of every reason I like Bitcoin, the simplicity of it.

Nic Carter: Well, that's the beauty of it is now we can really compare the two; they're so different.

Lane Rettig: I was thinking on the way over here that I think you guys would probably agree if I said Ethereum's on the order of ten times more complicated than Bitcoin, if you figure for smart contracts and EVM. 

Peter McCormack: Way more?

Lane Rettig: So, wait for it.  So, this is old Ethereum, so now we have two Ethereums: we have the execution layer and the consensus layer, so that's doubled again.  So now we're at 20X or 30X.  Then, on top of that, you now get to add MEV, which we haven't even gotten into, and I think MEV is another order of magnitude of complexity here.

Peter McCormack: Yeah, I've seen some conversations about that, that it can be gamed and it means you can front-run things.

Lane Rettig: So we're getting into -- keeping up with Ethereum today now feels like being a doctor.  You know how you can't be an expert in medicine, right; you couldn't be an expert cardiologist, you have to have a narrow speciality, because the field of medicine advances too quickly.  And even within a field like cardiology, I think you probably have to be a specific type of cardiologist today to keep up with the science as it advances.  So, I'm just trying to lay the foundation here; this is the degree to which Ethereum has become complicated.  And guess what?  That also makes it feel more like legacy stuff, whereas Bitcoin is still Bitcoin, it's still simple.  You can explain Bitcoin to someone thoroughly in an hour.

Peter McCormack: Yeah, and it works and it doesn't seem to have a lot of the issues that, say, Ethereum has with things.  Well, let's be fair, it doesn't seem to have as large an attack surface. 

Lane Rettig: For sure.

Peter McCormack: And I'm far from a technical person, but I feel comfortable where I am with Bitcoin, I've never felt comfortable with Ethereum and I feel even less comfortable with it now.

Lane Rettig: You should feel less comfortable today; that's my point!

Peter McCormack: Yeah, I just can't see -- it feels about as safe as keeping my money in pound coins.  Okay, right.  So, why did they do this?

Lane Rettig: Who is "they"; and what's the "this"?

Peter McCormack: Vitalik and his mates, why did they do this?  What was the reason to do this, the whole thing, this entire roadmap?  Is it because Ethereum 1.0 just could not scale?

Lane Rettig: I think the one-sentence answer to your question is, it's a better Bitcoin; that's always been Vitalik's vision since the beginning.  And I think it's important to note that the fundamental outlines of this roadmap have not changed since 2013/2014, it hasn't changed.  The details have changed, but the fundamental --

Nic Carter: The white paper --

Lane Rettig: It was even before the white paper, yeah.

Nic Carter: -- it was forecasted, Vitalik's view is that proof of stake gives you more configurability, a greater design space.

Lane Rettig: More security.

Nic Carter: Yeah, they think it's cheaper.  I certainly would dispute that.

Peter McCormack: Do you think he believes that it's a better Bitcoin, or a different cryptocurrency?

Lane Rettig: The way I've heard Vitalik describe Ethereum versus Bitcoin and other single-purpose chains is that Ethereum is the general-purpose platform.  It's like the smartphone to Bitcoin's Swiss Army Knife.  Each individual chain that arose, the Colored Coins and the Namecoin, and all this kind of stuff, they were each adding a feature to the Swiss Army Knife, whereas Ethereum is just this general-purpose thing that can do everything.

At least in one specific computer science sense, which is the fact that it's a Turing complete virtual machine which you can run anything on, at least in that respect it is strictly better than Bitcoin.  Again, I'm talking about this one dimension.  Of course, there's a cost here in terms of complexity and security and things.

Peter McCormack: Have all Ethereans been brought along with this and been supportive, or have people been lost along the way?

Lane Rettig: The vast, vast majority.  I mean, I was lost along the way.

Nic Carter: But you're one of the very few.

Lane Rettig: Yeah, one of the very few conscientious dissenters who really isn't a huge fan of proof of stake.

Nic Carter: Yeah, not many.  I mean, the miners I know didn't like it obviously.

Lane Rettig: Yeah, but no one cares about the miners.

Nic Carter: Yeah, they were hated.  I mean, for most of Ethereans, it makes sense to go along with the roadmap; why not?

Lane Rettig: I think by being an Etherean in the first place, you are almost implicitly subscribing to the roadmap, drinking the Kool Aid.

Nic Carter: You're subscribing to the roadmap, yeah, so you believe in it.

Peter McCormack: So, you said you specifically don't like proof of stake?

Lane Rettig: We did a whole episode on it, didn't we?!

Peter McCormack: I know, not everyone will have listened to that one.  So, let's get back into it.  Why is it you don't like proof of stake; what are its flaws, comparing it to Bitcoin?

Lane Rettig: So, I definitely suggest people check that out for a much more in-depth analysis than we can do here, but I will give you certainly the one-sentence version actually.  Someone phrased this this way recently and I really agree with it, "You can describe proof of stake in two words: shareholders' vote", and guess what; that is who the world works already.  And for my part, the whole reason I got into this space five years ago, or whatever it was, was to do something different. 

I want to build a system that at least has the potential to be democratising and moves towards decentralisation, censorship resistance, these properties that we care so much about.  And I think proof of stake is a huge step in the wrong direction, so that's the really short version.

Peter McCormack: So, what do they get to vote on; and how do they vote?

Lane Rettig: So, here's the crazy thing.  They vote, they being again the validators, the stakeholders, and they're the same, they're one and the same group in proof of stake, which they're not in proof of work; this is something else Nic and I talked about, and we should zoom in on this because it's a really important point.  There's two separate classes of actors in proof of work, whereas in proof of stake they really are one and the same.  They vote not only on which transactions which to admit and the order, so that's just the block construction piece; but here's the key thing, they also vote on the next set of validators, so there's this kind of circularity to it.

Peter McCormack: Okay, so they vote what's in the block and the order.  How can that be corrupted?  How many validators are there?  Does it come through collusion?  I mean, what is the risk here?  We know with Bitcoin that the miners are essentially financially driven, they will just pick up the best transactions and build the blocks and move on.  And yes, there are sometimes requirements, we have seen that with OFAC --

Nic Carter: Well, yeah, it's more complicated than Bitcoin.  You have to address pools and you have to address these nexuses of centralisation.  There's layers on both stacks, proof-of-work stack and the proof-of-stake stack, so we can't be fully utopian about Bitcoin either.

Peter McCormack: No, but let's talk about them both.  So, let's talk about how Bitcoin does it first then.

Lane Rettig: I think that's a good idea, because it's simpler.

Peter McCormack: Yeah, how does Bitcoin do it?

Nic Carter: Well, in my view you have different layers.  So, one layer is the literal physical infrastructure and that's physical ASICs and then energy, and then other ancillary infrastructure.  Those are organised within corporations and many of them are publicly traded.  So, there are definitely points of leverage and centralisation there.  They then submit those transactions to pools, which do the block templating and the block construction.

If you were looking for points of centralisation or government influence, it could be at either one of those layers, and I'd say those are really the two key layers; I don't know if you would identify more?

Lane Rettig: Yeah, and I think to be fair, especially with respect to the first layer, Ethereum has had a leg up here, which is because of the fact that ASIC manufacturing is much more centralised than GPUs --

Nic Carter: Historically, yeah.

Lane Rettig: -- and now, to run an Ethereum validator, you don't need any specialised hardware at all; and also, with respect to energy consumption, this is actually one of the very few arguments in favour of proof of stake that I do agree with, Bitcoin miners, proof-of-work miners, have a very large energy footprint, whereas proof-of-stake validators, you could spin these things up as VMs anywhere, you could move them across the world, there's no energy signature, so that is one benefit.

Nic Carter: So they're more identifiable and they're less mobile.

Peter McCormack: But what is the benefit to proof of stake, because if you haven't got the energy cost, you haven't got the input cost to create the money?  As Nick Szabo says, everyone knows unforgeable costliness; you don't have that.

Nic Carter: I totally disagree with that actually.

Peter McCormack: You disagree with that?

Nic Carter: Yeah, so I think proof of stake is costly; I think capital is a cost. 

Lane Rettig: It's the opportunity cost of the capital that sits locked.

Nic Carter: Yeah, so money has a cost; it's called interest.  So, there is a real cost to locking up, let's say $20 billion on Ethereum.  That could have been deployed to anything else, and I would compare it to government debt basically.  So, think of Ethereum staking as the blockchain equivalent of T-bills.  In the real world when interest rates get really high, sovereign interest rates get high, it crowds out private sector spending.  This is a very well-documented thing.

Lane Rettig: It's kind of what's happening now or starting to, right?

Nic Carter: Precisely what's happening now.  It means there's less activity in the real economy, because everybody's just parking their money with the government and getting paid for that.  The same thing in Ethereum.  Ethereum, the protocol, pays you to park money with them.  That means that money could have been doing something else, anything productive, whether it's in the blockchain context or in the real world.  So, you have to understand that that's basically a cost because it's an opportunity cost.  The capital could have been deployed to build nuclear powerplants or windmills or something.

So, as a capital allocator, I assure you capital has a cost; it's a real resource and there's a finite amount of it.  It's not as obviously evident as electricity or silicon, but it's still a costly good.

Lane Rettig: I agree with that very strongly, so thank you for making that point.  I do think there's still a difference to highlight.  I'm going to keep quoting people who are smarter than me and more eloquent than me today because it's helpful.  So, Lopp said this recently on Twitter; he said, "Proof of stake is rent-seeking; proof of work is meritocracy".  There's some nuance there and we could pick that apart.  But I think the basic idea, and I say this as someone who has been doing this and has done both forms of mining, proof of stake is kind of "set it and forget it".  You spin up these validators, there's some very minor degree of maintenance required, you have to instal patches and make sure your keys are secure and things like this; but relative to the cost of proof of work, the ongoing maintenance cost, it's low.

Whereas, with proof of work, as you guys know, the miner hardware, the ASICs, depreciate very quickly.  I don't know what the full lifespan is.

Nic Carter: Well today, it would be five-ish years, you would say.

Lane Rettig: Yeah, and better hardware comes along and you have to constantly chase the cheapest source of power.  I guess that's probably the larger cost.

Peter McCormack: Well, there's a point in that as well, there's the competitive nature of Bitcoin mining.  What does that give you that proof of stake doesn't; what's the benefit of the competition within the mining?

Nic Carter: Well, it's a very powerful benefit because it means first of all, it's a very free market, open, competitive space.  There's no way to get a strong, enduring advantage as a miner.

Lane Rettig: Someone could come in tomorrow, and this has happened historically, and just build a better ASIC that's 10X better, or something, and capture the market, as they deserve to.  That is not possible in proof of stake.

Nic Carter: Well, it's not even about the ASICs.  The ASICs are pretty commoditised, there's actually a bunch of suppliers now, I'm not as worried about that.  I would just say historically, there's been no miner that has super-dominated, there's no one that's that dominant.  In fact, there's a ton of churn.  So, I would put that a point in favour of proof of work.

Peter McCormack: We did have one, didn't we, like eight, nine years ago, someone was approaching 51%.

Lane Rettig: I remember that.  They walked it back, didn't they?

Peter McCormack: Yeah.

Nic Carter: That was GHash, that was a pool.

Peter McCormack: They walked it back, didn't they.

Nic Carter: The difference between the miner and the pool -- yeah.  I mean, the pool is something that people have historically pointed to in terms of these nexuses of centralisation.  But on the miner level themselves, the biggest miner in the world is probably GDA.  They don't have that much hashrate.  The biggest miner publicly traded in the US is probably Core Scientific.  Again, if you look at their share of all the exahashes, it's not that much.

Peter McCormack: And is it getting lower; is it getting more decentralised?

Nic Carter: I think it will get more distributed over time.  It will be concentrating now for a little bit, because there's consolidation, miners going bust, there'll be some M&A activity.  But over time, there's very significant diseconomies of scale once you get to a certain size, because there's political constraints to how big you can grow; there's just not that many huge energy resources that are freely available; energy is a very globally distributed thing in terms of cheap energy; so it's just very hard to become enormously large as a miner.

Lane Rettig: I think this is a key point that people totally misunderstand about proof of work versus proof of stake, so I'm really happy you've brought this up, and specifically that you mentioned the diseconomies of scale, because one of the arguments I hear above almost everything else on the Ethereum side in favour of proof of stake is the mistaken belief that there is a large economy of scale in proof-of-work mining and that this is not the case in proof-of-stake mining.  I actually think the opposite is true.

Nic Carter: Well, it's a discontinuous, whatever, I can't even pronounce that word!  It's a non-monotonous relationship because yes, as you're getting to a certain scale, you probably have economies of scale in terms of amortising the cost of a data centre.  But as you get super-big, now you're running into political constraints.  You start getting banned in certain countries, you run out of this cheap electricity, there's a finite amount of that available, a very finite amount.

On the proof of stake side, I would say there are definitely economies of scale at an arbitrary size.

Lane Rettig: It's blazingly obvious to me, and I don't understand, this feels very disingenuous on the part of Ethereum folks who have been arguing the opposite point.  Again, I can tell you as someone who runs this infrastructure, I'll just make one very simple point.  In order to run a validator in Ethereum, you need, as I said, two pieces of infrastructure.  You need this EL and CL thing, Execution Layer and Consensus Layer. 

The Execution Layer thing is very heavy.  This is validating the entire Ethereum blockchain that has been running since genesis, and there's hundreds of gigabytes and you need a fairly powerful system and high bandwidth, etc.  However, here's the key thing.  The consensus side is very lightweight, and you can run an arbitrary number of validators, as many as you want hooked up to a single piece of infrastructure that does that Execution Layer side.  So you're amortising, and this is just economics 101; you're amortising the cost of that Execution Layer client over potentially dozens or even hundreds of validators.  That is the definition of economy of scale.

Nic Carter: I mean, the other more abstract version --

Peter McCormack: Hold on, why would they want to deny that is an economy of scale?

Lane Rettig: They will say that the rewards you earn are directly proportional to the number of validators you're running, which is to say to your stake price.  So, if you double your stake you earn double the rewards.

Peter McCormack: Right, okay.

Lane Rettig: And that is technically true, but that is only looking at the capital piece that Nic spoke about, it's not looking at the operational cost.

Peter McCormack: But why is an economy of scale negative?

Lane Rettig: It leads to centralisation.

Nic Carter: It's bad because over time, you'd have a few large entities doing all the validation.

Lane Rettig: Economy of scale, by the way, is just the rich get richer.

Peter McCormack: Yeah, I know, but what you're saying is they will push out other validators?

Nic Carter: Yeah, so obviously it's bad if there's a tiny handful of validators, whether it's proof of work or proof of stake.  Empirically, we know that proof of work has not concentrated with a small handful of validators; there's a large number of validators, public, private, globally distributed, all over the place.

Lane Rettig: What, miners?

Nic Carter: Miners, yeah.  In proof of stake, in the long-term at equilibrium, and we'll see what happens here, if you look at the coins on exchanges, it only ever really grows as a share of the network.  These blockchains, the assets get more custodial over time.  And who really wealds the most power when it comes to staking?  It's the asset managers, the banks, the exchanges.

Lane Rettig: I think we should talk about this because this is a key thing.

Peter McCormack: We never finished though, what are the risks here with the validators building blocks, arranging the order of blocks, arranging the transactions; what can they actually do?  Like you say, an individual miner, or a pool who closes a block -- actually, you'll have to correct that, does the pool create the block?

Lane Rettig: This is an interesting point, we're talking about this too.

Nic Carter: You've struck on the key, key point here and we should talk about this in both proof of work and proof of stake.

Peter McCormack: Because the ASIC builds it --

Nic Carter: No, it's really the pools that construct the block.

Lane Rettig: The ASIC is just searching for the nonce.

Peter McCormack: Okay, so the ASIC builds the block, okay -- sorry, the pool.

Nic Carter: The ASICs, they literally just grind away looking for the nonce.

Peter McCormack: And then the pool builds the block.

Nic Carter: It's currently happening at the pool level.

Peter McCormack: Of course, because then the pool gets the coinbase and distributes it.

Nic Carter: But this is a problem because now it does mean that the pools have a degree of influence and the pools could, in theory, comply with OFAC or something like that.

Peter McCormack: Okay, we will come back to that.  But how does the centralisation within Ethereum with the validators there, what can they do; what are the shitty things they can do?

Lane Rettig: I think this is multifaceted and I think that there is a political, economic component to this, which again you and I spoke about last time we talked, about the Cantillon effect and stuff, which we can talk about more today if it's interesting; it is interesting.  But I do think the most salient example really is the censorship question.  So, I think I would say the shortest answer to your question is, what they can do is they can censor transactions and they could halt the chain theoretically. 

There are a few more pernicious things they could do, such as a long-range attack, so these are things that are only possible in proof of stake, not in proof of work; or a simulation attack, where for example a validator, who is no longer a validator, we talked earlier about exiting; so they can say, "Mic drop, I'm done, I don't want to validate".  They have to get into this exit queue, it takes them a number of days or weeks of something to exit, and that's so that they can still be penalised for some period of time for bad behaviour.  But once they're done and they're gone --

Peter McCormack: What, exiting is bad behaviour?

Lane Rettig: No, I'm saying that if they were to commit bad behaviour before exiting, you still need a window during which you can punish them, but that window has to end.  Eventually they have to be able to withdraw their funds and walk away.  Once they've done that, they could then still do bad things, like sell their keys to bad actors.  And if a bunch of validators do this, then you could have bad actors who buy up these keys from exited validators, who can no longer be punished because they exited, and that can be used to carry out some pretty severe attacks, like these long-range attacks.  That's not possible in proof of work.

Nic Carter: But that's all fairly hypothetical, I would say.

Lane Rettig: Yes.

Peter McCormack: But what are these attacks?

Lane Rettig: The thing to understand is that in proof of work, every block you add to the chain, there's a provable cost to doing that, a thermodynamic cost associated with the proof of work.  So, if you wanted to add 100 or 1,000 or 10,000 blocks to the Bitcoin blockchain, you can't simulate that without actually doing the proof of work, it cannot be forged; that's the key fact.

In proof of stake, simulation is costless, there's no proof of work.  So assuming you have the keys that I spoke about a moment ago, you could build a chain of arbitrary length instantly, just like that.

Peter McCormack: Right, of empty blocks?

Lane Rettig: It's called the Fork Choice Rule.  So, if a node that was offline, that hasn't been following the chain, if it's presented with these two chains, there's no way for it to differentiate.  It can't tell inherently which of them is the longest chain, again unlike in proof of work.  In proof of work, they can immediately tell which one has the most accumulated proof of work.  So, these are key challenges that have had to be considered in designing proof of stake.  But as Nic said, and I agree with this, they're very hypothetical attacks; I'm not aware of this ever having been done in practice.  But I will say, if the stakes get high enough…

Nic Carter: Yeah, it's something to be mindful of.  But the real bad stuff that validators can do is censoring, which is happening today, and MEV, which is just an inherent feature of the blockchain.

Lane Rettig: These are the two big --

Nic Carter: Big baddies.

Peter McCormack: Let's do MEV first and then we'll come back to censorship, because there's a lot more to that I want to get into, because there are risks with censorship within Bitcoin because, I mean who was it; was it Marathon who signalled that they were OFAC compliant at one point?

Nic Carter: They tried to create an OFAC-compliant pool.  But I will say, if bitcoiners are hanging their hat on the non-existence of OFAC pools, they're going to be disappointed, because there will be OFAC-compliant pools in the future.

Peter McCormack: Okay, we'll come to that.  I think I reluctantly agree with you.

Nic Carter: They're under development!

Peter McCormack: Yeah, I mean I just reluctantly agree it's going to happen.

Nic Carter: I don't think it's a dealbreaker, but it will exist for sure.

Peter McCormack: Okay, so let's talk about MEVs; explain to me what it is.

Lane Rettig: All right, let's do this.  I'll go first, and fill in things that I miss here.

Nic Carter: I'll give Lane the floor here.

Lane Rettig: This is a complicated topic.  I've been following it loosely, it's only been a thing for two or three years, and I finally had the chance to begin deep-diving on it recently, so I'm really excited to talk about it because it's so interesting.

I think if I had to boil it down to the most fundamental form, we were chatting about this earlier as well, it really is an information asymmetry, which is to say you have different actors in these networks, in these information networks, that have different views on information.  So, certain privileged actors have certain privileged views on information.  And I'm just saying this because I know this is very abstract, I have a background in HFT actually, I worked in traditional finance.  I worked at a quant hedge fund for a few years; that's where I started my career.

This is not a new idea.  This idea has been around forever, as long as there have been markets, certainly as long as there have been electronic stock exchanges, probably further back than that, and it's a fundamental idea and it's not going away any time soon.  It's basically arbitrage, so it's that you have again these privileged classes of actors who have access to information that other actors don't.  And as with everything else in blockchain, we've invented a new name for it, MEV, which originally stood for Minor Extractable Value; it's been rebranded to Maximum Extractable Value, because it applies not just in proof of work but proof of stake.  But really again, it's just arbitraging the fact that you have this privileged access to information.

The classic example of this is front running and again, this goes back to old-school finance.  It used to be the case, I think a lot of people did this, that if you had a stockbroker back in the day, the client would phone them up and say, "Buy me 100 shares of IBM, don't spend more than $100 on it", or something, and it's called front running because these orders, you'd have the brokers who would take the orders on one side of the trading floor, and they'd have to run those orders over to the other side where the trading happened on the stock exchange.

Peter McCormack: Are we going to get into the world of these trading companies who wanted to get the fastest internet speed, they want to build the -- is that MEV2?

Nic Carter: That's where we're going, yeah.

Peter McCormack: And what Citadel were doing?

Nic Carter: Yeah.  I mean effectively they're in TradFi MEV.

Peter McCormack: Yeah, and buying the data from --

Nic Carter: We're going to get there in blockchains too, it's going to all about latency and collocation and stuff like that.

Lane Rettig: Let's be very explicit about this, this is actually something the fund I used to work for did.  We would literally, physically attempt to collocate our infrastructure, our physical machines, as close to the various exchanges as possible so that we could transact with them in less milliseconds than the competition for exactly this reason, because speed is key, you want to be able to get those orders in faster.

Peter McCormack: Okay.  So how is this abused in terms of Ethereum?

Lane Rettig: So, let's fast-forward to crypto, let me just get to that part of the story.  So, some smart people figured out that this was happening around 2020, so it's not that the phenomenon is recent, but I think it's been articulated recently.  So, Phil Daian and some of these really smart folks, there was a paper called Flash Boys 2.0 that introduced this concept and talked about how there were different strategies.  So I think largely this grew out of DeFi, the DeFi summer was 2020, and specifically things like decentralised exchanges.  So historically and even today, the majority of MEV on Ethereum is happening in places like Uniswap.

The most common example of this is called a sandwich trade.  So, if I'm a miner, and we talked about privileged actors, I'm a miner or a validator and I can see the mempool, the contents of the mempool, and I see buy orders coming in for one leg of a particular pair, which is how these decentralised exchanges work, I can insert my own buy order, buy the thing first, and then let the other orders execute, so they will push the price up, and then I sell.  That's called a sandwich order; it's a form of front running.

Peter McCormack: Yeah, and that seems entirely logical, especially if you can see massive orders coming in.

Lane Rettig: And it's even worse if you're also an exchange, which we should talk about.

Peter McCormack: And I guess if you're a validator, you're not necessarily going to be the validator who closes the block, or is everything pooled?

Lane Rettig: You may be part of a pool, or you may be a solo validator; both things happen.

Peter McCormack: But you could probably also automate what you're looking for within the mempool?

Lane Rettig: Okay, so let's talk about how MEV works, I think this is how we arrive at an answer to your question.  So, the problem was identified -- I just want to emphasise again, it's just so important to make this point when you talk about MEV; people tend to talk about MEV in terms of fairness and they say, "There's a clear ethical line of behaviour".  There was some CoinDesk article, I think, arguing people who are engaging in MEV are profiting from it, or is somehow evil or something.

Nic Carter: Oh yeah, I think it was described as, "The institutionalisation of theft".  I remember that exact article.

Lane Rettig: I disagree with this in the strongest terms, because MEV is fundamental, it's not going away; there will always be these information asymmetries.  In particular, this is the whole way that Ethereum is constructed.  When we talk about trustlessness and economic incentives and things, we want actors to profit from doing behaviours that are constructive and assembling transactions and things like this.  So MEV's not going away any time soon.

Peter McCormack: But how does it warp the system; how does it warp incentives?

Lane Rettig: It could, in the extreme, do things like destabilise consensus.  You could in theory have situations where miners or validators are incentivised to, for example, censor transactions that they don't like or something, or, I don't know, I'm trying to think.  A really extreme example here would be like -- okay, I'll give you a very concrete example.  This would be in Bitcoin as well.

Let's say that a block was just confirmed, but that block contained a transaction in it that some powerful, wealthy actor didn't like for some reason.  Maybe it was a fat-finger mistake or something, and this has happened before.  Then they could try to bribe the network by offering a transaction with a very, very large fee, like be in the order of millions or hundreds of millions of dollars or something, and try and get miners to effectively do a reorg and ignore the block that was just created and reorg away from that towards this other block that includes this transaction; it would only be valid as part of a reorg.  That's been theorised that could happen.  That could lead to consensus instability, is what I'm saying, to a fork.

Nic Carter: I've a simpler answer.  I think the existence of MEV, it sets the validators at odds with the users of the blockchain.  The users, they just want to use the blockchain, do commerce and not be perturbed too much, they don't want to have rent extracted from them.  Now, there's the possibility to extract very meaningful amounts of rent from their ordinary transactions, and that profits the validators.  So, it is like everyday users get punished for doing what they want to do, and it is to the economic gain of the validators.  So, it sets those two stakeholder groups against each other.  But I think it's an inescapable feature of these kinds of blockchains though, so it's also just a fact of life.

Lane Rettig: The naïve response is, "Well, let's add fair transaction ordering", you've probably seen this, and there are a number of projects that have tried to do this.  And there's some notion that, "If we could just have fairness restored and have, I don't know, first come, first served, something like this".  This doesn't work in practice.

Peter McCormack: Because you want to be able to bid for block space?

Lane Rettig: That's one reason.

Nic Carter: Because it's an open auction for block space, right.

Lane Rettig: But even more fundamentally, these are complex distributed systems and there is no simple way to order transactions.

Nic Carter: There's no canonical ordering.

Lane Rettig: There's no canonical fair ordering, just like there's no canonical consensus mechanism.

Nic Carter: Because the speed of light exists!

Lane Rettig: Exactly!

Peter McCormack: Hold on, let me jump around here.

Lane Rettig: In fact, the fairest ordering is exactly you take the highest bid first; that is economically efficient, as close as you can get to it.

Peter McCormack: Could sharding partly solve this, in that you don't know what's happening in every other shard?

Nic Carter: I think it makes it worse.

Lane Rettig: It makes it worse, because now you have what's called cross-domain MEV.  We can get into that.

Nic Carter: We didn't rehearse that, but I'm glad we agree on that!

Peter McCormack: Right, okay.  Well, it feels very antithetical to what Bitcoin is solving, which is just to be good money.  But if you don't think of Ethereum as money, you just think of it as a system, a protocol for moving different types of value around, then I consider it slightly different.  But if that could happen in Bitcoin, that would be something that would be very antithetical to being good money.

Nic Carter: I think Bitcoin's going to have to grapple with it eventually.

Peter McCormack: What are the scenarios where it would happen?

Nic Carter: In the case where Bitcoin gains rich statefulness, which is a Vitalik word the bitcoiners don't like.  But basically, if Bitcoin has more stuff that looks like decentralised exchanges or interesting, more complex transaction types, there will be economic value to be gained by being strategic in terms of the ordering of those transactions.  So MEV, in my view, is an inescapable feature of a situation where it's a principal agent, the miner orders things and they're controlling value owned by someone else.  It will exist if Bitcoin gains complexity.

Peter McCormack: Okay.

Lane Rettig: You can say it's almost a good problem to have maybe for Bitcoin, because it's means it's more useful to more people.

Nic Carter: Well, right, it shows that it's becoming more of a marketplace for all kinds of different things.  Maybe Bitcoin won't go that way.  There's obviously the school of thought that Bitcoin should do one thing, which is manage the UTXO set and that's it.

Peter McCormack: I kind of like that.

Nic Carter: Yeah, that's the dominant philosophy, but maybe if Lightning and Taro and other asset issuance takes off; maybe if you see more sidechains, more of these smart contract platforms that are based on Bitcoin, which is happening; maybe if Taproot causes more complex smart contract-type things like that, then you will grapple with this eventually.

Lane Rettig: Even just relatively simple things, like introducing stablecoins, which might be nice, that would introduce MEV as well, because you need to be able to swap them back and forth.

Nic Carter: Well, there is a form of MEV on Bitcoin, it's just called 51% attacks.  I'm not saying those are a feature of Bitcoin, they don't happen really ever, but that basically is under the banner of MEV, because MEV is an advantage to be gained by reordering transactions, and a 51% attack is reordering blocks, so it is MEV basically.

Peter McCormack: Okay, but it's a more imminent issue with Ethereum?

Nic Carter: I mean, yeah, it's hundreds of millions of dollars.

Peter McCormack: But what is the concern?  You're accepting it, but what is the concern; what does it warp?

Lane Rettig: Let's get into this.

Nic Carter: We haven't got to --

Lane Rettig: The fun part!

Nic Carter: Yeah, let's go to the good part!

Lane Rettig: So, I think it helps sometimes to put things in specific terms.  So, I think we're looking at, as of today, according to the main source of information, which is Flashbots, about $680 million of MEV have been extracted from Ethereum since early-2020.

Nic Carter: But that's an undercount.

Lane Rettig: So it's probably a lot more.

Peter McCormack: How's it calculated; give me examples?

Lane Rettig: Okay, so there is a project, it's also a company, called Flashbots, which is one of the main teams of people working on this, both building products around it, but also doing research on it in the Ethereum ecosystem.  So broadly speaking, the approach Ethereum has taken is that MEV is unavoidable, as we both agreed, and as a result, the best thing we can do is drag it into the light and democratise access to it, make it so that any validator, anyone producing blocks, can at least benefit from it; and also, try to decentralise it as much as possible, so you have multiple --

So, "searchers" is the term that's usually used to refer to the people actually doing the arbitrage work and actually assembling these transactions and ordering them.  And then, have an open marketplace so that they can bid and offer these bundles of transactions, or these full blocks, to the block producers.  So, this gets into an area called Proposer/Builder Separation, which is a proposal in Ethereum to address some of the censorship concerns.

Risks?  So, the most obvious one is that, what are the numbers, we were just looking at this?  Something on the order of 30%, 35%, maybe as many as 40% of the blocks being produced in Ethereum today are censoring transactions, full stop.  And that is because of infrastructure like Flashbots, which is compliant, it's OFAC compliant.

Nic Carter: So, what changed post-merge is it became institutionalised, this MEV concept.  Flashbots is the main actor there, most validators use them to sell the right to third parties to arrange transactions.

Lane Rettig: About 50%.

Peter McCormack: Who are they selling it to; and who is paying to have transactions censored?

Nic Carter: These searchers.  I don't have to call them that anymore, but yeah.

Lane Rettig: So, searchers are paying.  Basically they offer, sometimes they're called bundles of transactions, let's call them blocks.  So they assemble a block with transactions in a particular order that they like, and actually people pay them as well.  You can also pay them to get, for example, front-running protection.  If I, as an individual trader, want to make sure that I don't get sandwich attacked, I can pay the searcher to insert my transaction at the front of the block, something like this.  So, it's a whole complex ecosystem.

Then those searchers put those blocks onto a marketplace with a bribe or a bid attached to them, and so they're paying the proposers to take these blocks, and proposers are just ordinary people who are running these validators, or they could be the large actors.

Nic Carter: I mean, think about it.  You're a validator, let's say you're Lane, running your validator over here.  You don't have the time or the energy to look at Uniswap and decide how to arrange transactions so you can extract maximum value.

Lane Rettig: That's a very complicated thing to do.

Peter McCormack: But what's the value they're extracting; what's the additional value they're extracting?

Lane Rettig: This is MEV, this is what we're talking about here.

Peter McCormack: Yeah, but what is the actual --

Lane Rettig: Front running, things like this.  There's many other flavours.

Nic Carter: The main thing would be giving end users worse execution on their transactions.  So they want to buy X amount of -- they want to do a swap on Uniswap.  Maybe instead of having 5 basis points of slippage, it's 30.

Peter McCormack: Right, okay.

Nic Carter: So the searchers and the validators capture that.

Lane Rettig: We have a term for this in traditional finance, it's called "picking off the retail investors".

Nic Carter: This is pure rent extraction.

Peter McCormack: And was this what was essentially happening when Citadel were buying retail data?

Nic Carter: I would say it's very similar, yeah, very similar.  And also, the similarity is that it's only very sophisticated large firms that do it well.

Lane Rettig: By the way, if you've ever used an app like Robinhood, I mean you know Robinhood's business model.  This is Robinhood's business model.

Nic Carter: The sell the rights.

Peter McCormack: They sell front running.

Nic Carter: Yeah.

Lane Rettig: It's so institutionalised, it's like the water we all swim in, in traditional finance --

Nic Carter: And no one complains about it.

Lane Rettig: Yeah, because they get to use Robinhood for free.

Nic Carter: So the problem is, now there's basically one entity in the Ethereum ecosystem that's super-sophisticated about MEV, which is Flashbots, and they are the big aggregator in the marketplace where everybody comes.  The problem is, they happen to be, I believe, a US company, and they've decided to basically comply with OFAC, in my opinion over-comply.  And so, if you're using Flashbots, for the most part the blocks themselves are excluding OFAC transactions.

Peter McCormack: But you said that's 40% of transactions?

Nic Carter: Currently roughly that, yeah.

Peter McCormack: Why; what are these transactions that OFAC are requiring to be censored?

Lane Rettig: Well, Tornado Cash is the most obvious one, but basically there are a hard-coded set of addresses.  So there's first and second order.  So the first order is the actual set of addresses that OFAC has specifically designated and added to their SDN list, and this includes Tornado, but it also includes addresses associated with SDN, the specifically designated people on the sanctions list.  But it's more complicated than that, because it's also people who have transacted with them, so there's the second-order effect, and that's where players like TRM Labs come in and Chainalysis, folks who come in and offer this as a service and let people check an address and see if it's on this list or not.

Peter McCormack: I'm just amazed that that many transactions would make it onto a --

Lane Rettig: No, we're not talking about transactions, we're talking about blocks.

Peter McCormack: Oh, the block?

Nic Carter: Yeah.

Lane Rettig: It's not 40% of transactions.

Nic Carter: There's not really a lot of transactions that are actually interacting with Tornado Cash.

Lane Rettig: For now!

Nic Carter: I mean, Tornado Cash usage has just fallen off a cliff really.  But these are blocks where you can tell that they are explicitly not engaging with the sanctions list.

Peter McCormack: So, it's specific transactions within a block; so 40% of blocks feature some form of censorship within it?

Lane Rettig: Yeah, it's what's not there, not what's there.  So the point is, they would be specifically producing compliant blocks that would not include any transactions that touch any of the sanctioned addresses.  I want to just quickly mention, I don't know if you're aware of this, it's a really hard thing to do in Ethereum, because of the way the EVM works.  In fact, censorship itself is a denial of service vector.  This goes back to what happened after the DoS attack.

The really short version is that you can very easily censor a transaction that directly touches or interacts with a sanctioned address.  But there's all sorts of forms of indirect interaction that are actually very expensive and complicated to detect and they actually couldn't be censored in the first place effectively.  It's a very hard problem also.

Nic Carter: I will say that the Ethereum community is very aware of this, so it's not like this is happening and they don't think it's a problem or something.  I mean, I would say opinions are split, but there are attempts to remediate this.

Peter McCormack: But Robinhood users are getting a trade here.  Okay, they're getting front run, but they're getting to make free trades, so there's a trade-off.

Lane Rettig: Well, they're not actually free, that's the point.  They just don't understand that the cost is baked into the price they're paying.  You know what it's like?  It's like if you shop at an airport and you want to do a currency exchange and they're like, "Commission-free trading!"  But of course, there's a spread baked in that you can't see.

Peter McCormack: No, I get that, but what I'm saying is there is a trade-off there.  But within what you're saying here, within Ethereum blocks, there is no trade-off, you are just at a disadvantage.

Nic Carter: Well, the main problem we're identifying here is not the existence of MEV, which we think is inherent, but it's because MEV creates this centralisation vector that is now used for censorship.

Peter McCormack: That's what I'm saying.  It's not like, because I'm not front running, I get free gas.

Lane Rettig: No, you're right, there is a disadvantage to the validators -- actually, it's interesting.  There's a disadvantage to the validators who censor, because they're missing juicy fees from those transactions, and so there's actually an advantage to being censorship-resistant here, which is quite interesting.  At least that is working in our favour.

Nic Carter: Well, theoretically there's an economic advantage, but there might be a political disadvantage.

Lane Rettig: Right, exactly.  There's no free lunch, no arbitrage.

Peter McCormack: So, how bad could this censorship get?  It sounds to me like in some ways, Ethereum is approaching being fully captured.

Lane Rettig: This is the question; Ethereum's on a slippery slope.  I think it's a very slippery slope, other people don't think it's such a slippery slope.  So for example, Vitalik has said, "It's not a big deal if some subset, even some double-digit percentage of validators, or pools, or whatever are censoring as long as there are still a few who don't censor".  I disagree with that in very strong terms.

Peter McCormack: How many pools are there?

Nic Carter: Well, that's that problem.  It's kind of a shrinking number.  There are pools that are dominant, and then there are individual pools of capital that are dominant.

Lane Rettig: There's Binance, Kraken and Coinbase.  The three of them together is, I think, over 50%.

Peter McCormack: But they will all be compliant?

Nic Carter: Most likely.

Lane Rettig: Well, Coinbase says they won't.

Peter McCormack: Really?

Lane Rettig: Brian said on Twitter.

Nic Carter: So, it's an interest question about compliance.  So, whether or not you have to, as a validator, exclude OFAC transactions is an open question, I would say, so they're all kind of over-complying, they're trying to intuit what they think the government wants them to do.

Lane Rettig: They're doing what companies do, they're listening to their lawyers and their lawyers are super-conservative, that's what you pay lawyers to do.

Peter McCormack: But at the same time, if the US Government knocks on the door of Coinbase or knocks on the door of Kraken, I mean Kraken might leave the US; but what I'm saying, if they knock on the door and they tell them, "You have to do this", they're going to roll over.

Lane Rettig: What Brian Armstrong said, this is one person, he is the CEO, he said, "We would shut down our validators before we would comply".

Nic Carter: That seems preposterous to me.

Lane Rettig: I don't know if they could.  I think it would be pretty irresponsible for a board --

Nic Carter: I think he'd be fired by the board if he did that.

Lane Rettig: Exactly, a breach of fiduciary duty. 

Nic Carter: His duty is to his shareholders and its corporate value, and that means running a validation business.

Lane Rettig: Because we're talking about a huge amount of income.

Nic Carter: That might be the bulk of their revenue.

Peter McCormack: And your fiduciary trumps your duty to a network.

Nic Carter: To the Ethereum community, yeah.

Lane Rettig: Yeah, your fuzzy sense of warm, ethical benevolence towards Ethereum.

Peter McCormack: This fiduciary duty, who enforces it and how is it enforced, because there will be many times that people go --

Nic Carter: Shareholders.

Peter McCormack: But that would require the shareholders to enforce it.

Nic Carter: The board acts for the shareholders.  They would probably fire him.  If they had a $10 billion a year business line --

Peter McCormack: But what if the whole board agreed it?

Nic Carter: It becomes an interesting corporate governance question.  Would the board prioritise the value to the Ethereum community over maximalising shareholder value?  My guess is it's the latter.

Lane Rettig: Obviously I'm not a lawyer, but this topic has come up on Crypto Twitter a few times recently.  It's interesting how few people in our community are even aware of what fiduciary duty means and why it matters.  I was looking for precedent and there's very little, there's vanishingly little of it, even in Delaware Corporate Law.

Nic Carter: Well, once example would be like Exxon.  So, Exxon recently had a shareholder revolt, where the board installed these pro-ESG activists, and so they deliberately made their business worse to be more environmentally conscious.  So, that would be an analogy, I would say, where you actually deliberately reduce your revenue in order to maximise a different value.

Lane Rettig: I agree, that's similar.

Nic Carter: So that's like stakeholder capitalism.

Lane Rettig: I think the real question here, we could probably agree is, is it appropriate for companies that are registered, known entities, publicly exposed entities, to have such a strong influence over these networks that we want and desire to somehow be outside of all these politics in the first place?  That's the real question.

Peter McCormack: Of course we don't.

Lane Rettig: In this respect, you could say Ethereum's been captured, or is rapidly moving towards being captured by the state.

Nic Carter: Yeah, and are we even doing anything new if we have de facto surrendered governance of these networks to large financial institutions?

Lane Rettig: And it's only going to get worse from here.

Peter McCormack: Yeah, I was going to say, do we have any data yet that is highlighting that it is centralising even more since the merge?

Nic Carter: Well, it was pretty decentralised pre-merge; it was a bunch of miners.

Peter McCormack: No, but post-merge, we have the pools, we have the large pools.  Is there any evidence to show --

Lane Rettig: Oh, like how has the composition changed since?

Peter McCormack: Yeah.

Lane Rettig: It's only been three weeks, I think it's too soon to tell.  I think what Nic said is very true.  I think that over time, the stake in these exchanges specifically only tends to go up.

Nic Carter: Well, here's one reason, it's because there's regulatory barriers to entry to being an exchange.  Now, if you're going to start a Coinbase competitor, you would need at least $100 million in start-up capital.

Lane Rettig: It's strong economies of scale that are getting stronger.

Nic Carter: Right, and the government are going to make it very hard to be a very large, regulated crypto exchange in any jurisdiction.  The EU just passed all this complicated regulation; I'm sure it will happen here.  There's not going to be that many large crypto exchanges.  It's in the government's interest to have a small number that they can control.

Peter McCormack: But you can independently be a validator yourself?

Nic Carter: Sure, yes.  Unfortunately, there's not a lot of independent validators out there.

Lane Rettig: So, this is actually interesting.  When people naively look at that famous pie chart, from Dune Analytics, or whatever, the breakdown, and we should include a link in the show notes because it's really interesting for people to see it --

Peter McCormack: Can you find it, Danny?

Danny Knowles: What am I looking for?

Nic Carter: Pull it up behind Liz!

Lane Rettig: So, "Ethereum proof-of-stake validator breakdown" probably would be sufficient.  And if you include Dune Analytics, or something, you'll find it on Crypto Twitter as well.

Peter McCormack: She's nicely positioned.  When we bring up a hilarious article, she's just joining us in --

Nic Carter: She looks so happy; I don't think she's that happy.  That was in the "before" times!

Peter McCormack: Yeah, that was before the political merge!

Lane Rettig: So, well people glance at this pie chart, which hopefully Danny will kindly throw up on his screen in a sec, you see this very strong, what is it called, this long-tail effect where you have these three or four coloured squares here, exactly.  So, this is perfect, thank you, this is really, really good.  So you'll see, if you just add up the top three or four, whatever, I mean you can even see visually the top two, you're already at almost 50%.

Peter McCormack: Hold on, is "Unlabelled" the name of a pool, or something that's not labelled?

Lane Rettig: That would be a great toll!

Nic Carter: No, just other.

Lane Rettig: Yeah.  But the main point I want to make is that Lido Finance is decentralised, this is actually not a single actor. 

Nic Carter: That's true.

Lane Rettig: I don't even know if Lido itself as an entity has any censorship control whatsoever; I think they may not.  So actually, everything in this blue, this is actually a bunch of home validators.

Peter McCormack: So, Coinbase, Kraken, Binance is worth, what, about 30%, 32%?

Nic Carter: Remember another thing, and yes, we have to be fair to Lido Finance, because it is composed of many smaller validators.

Lane Rettig: People misunderstand, there's been a lot of FUD around this.  Is this the most recent, because I'm not sure --

Nic Carter: That may not be.

Lane Rettig: I'm not sure this is totally up to date.

Nic Carter: But the thing to think about is the trajectory that Ethereum's on.  Is it going to get easier to run a validator as an individual, or is it going to get harder?  As we get into sharding, my anticipation is, it will get harder.

Lane Rettig: It just gets harder.

Nic Carter: And slashing means, I don't have a strong incentive to run a validator as a normal person because I might screw it up and get slashed.  So, I'm probably just going to do it with a large institution, like a Coinbase.

Lane Rettig: It would be fun, by the way, to put the Bitcoin mining pool breakdown up here, and you could do a "fair side-by-side comparison".

Nic Carter: I think we should be fair because right now in Bitcoin, the blocks are being constructed by the pools.  So, if Bitcoin wants to have the moral high ground, we need to remand the block construction back to the miners themselves; that's not currently the case.

Peter McCormack: Wasn't there a proposal by Matt Corallo to do that?

Nic Carter: Yeah.

Danny Knowles: This is more recent.

Lane Rettig: Ah, yeah, I mean you see how big that Lido slice is.

Peter McCormack: But is Lido not --

Lane Rettig: I wonder who Daniel Wong is?  You should get Daniel in here.

Nic Carter: I mean, Lido is accountable to the US in some ways, but it is a constellation of different validators.

Peter McCormack: But does the pool itself as well, like Bitcoin when we talked about it, does the pool construct the block?

Lane Rettig: I think some pools yes, some pools no.  There's multiple pools, okay, there's Rocket Pool as well.

Peter McCormack: But what I'm saying, does Lido construct the block?

Lane Rettig: My understanding is no; my understanding is it doesn't.

Nic Carter: Well, yeah, now we have the proposer/builder separation in ETH, so the validators aren't even really doing it, but they still have a ton of influence.  In Bitcoin, to answer your question, Peter, there's a proposal to basically have the miners template the blocks.  And the difference with Bitcoin is, there isn't MEV right now, so it doesn't really matter which transactions you include, so it is something that anybody could still do.  Until there's MEV, it will be something that's relatively easy for anyone, so it would still be more decentralised.

Peter McCormack: And is there a slight different issue in that, how would you front run Bitcoin?  You would front run based on massive buys and sells, but they tend to happen on the exchange anyway.

Nic Carter: Yeah, so that's the thing, there just isn't a lot of MEV on Bitcoin, because there aren't big, decentralised exchanges.

Peter McCormack: Yeah, but a growth in decentralised exchanges would raise that risk?

Nic Carter: It would create MEV, yeah.  There's a school of thought that if you want Bitcoin to succeed, you want it to be more stateful, you want there to be more richness behind the transactions, not just moving UTXOs around, but maybe doing other stuff.

Lane Rettig: In fact, I think people would argue, like Bitcoin maximalists would say, "We don't want this stuff running on Ethereum, we want it running on Bitcoin".  I think we all agree that would be great, but then you get MEV.  You can't have a free lunch!

Nic Carter: It's something to be aware of.

Peter McCormack: But if that happens on Lightning, would that change it?

Nic Carter: Lightning would still be exposed to it, because Lightning transactions are Bitcoin transactions.

Lane Rettig: Less, I think, because Lightning transactions are not in the mempool, they're not on layer 1.

Nic Carter: There's more privacy.

Lane Rettig: But powerful actors would be running channels that are popular, and they would have access to privileged -- it would end up being the same thing.

Nic Carter: As long as you have a public mempool and you have miners that have influence over the construction of the block, you're going to have MEV.

Peter McCormack: Is there no way to mask what a transaction is in the mempool, and it's only revealed once the block is built?

Nic Carter: Great question.

Lane Rettig: So, some of this is actually happening in Ethereum, there's plans to do some of this stuff.

Nic Carter: And other blockchains too.  I mean, there's now private smart contract blockchains.  Part of the idea is to solve MEV.  I don't think it solves MEV.

Peter McCormack: Why not?

Nic Carter: Because there are techniques you can use to try and ascertain what a transaction is, even if you can't see clearly what it is.

Lane Rettig: Yeah, you shared this fascinating symbolic MEV puzzle.

Nic Carter: Yeah, there's a good talk from Georgios Konstantopoulos, great name, fellow Greek, and basically his point is, you can probably still figure out what a transaction is doing, even if you can't directly see the transaction.

Peter McCormack: How though?

Lane Rettig: This proposal takes ideas from software security.  So, when you're testing software, poking holes, and this is kind of similar to what I do in my day job, there's different techniques you can use.  There's what's called white-box, black-box, grey-box.  So, white-box is, "I fully understand what's happening inside the box"; black-box is, "I abstract it completely, I have no idea what the code is, I can't see it but I can still try sending it things and seeing how it responds".  So, you can still do this black-box testing, you can do it with something called fuzz testing, where you send millions or billions of different types of random data into a thing, whether that thing is a smart contract or an application or an API or something, and try to break it in different ways.  So, these are techniques you can still use.

Nic Carter: I'm glad that you read the slides, because I wouldn't have been able to explain that.

Peter McCormack: Okay, right.  So, there is a heightened risk of censorship and OFAC-compliant censored addresses.  That's one scenario, but what about one scenario whereby -- I think what I'm trying to get to is the slippery slope where there's things that are being censored by the government, for example like what we had with truckers, like the control of money; it's the control of money.

Lane Rettig: I think this is the really pernicious and really dangerous thing, you get this overreaction.  So, what we saw in the wake of Tornado Cash is not simply companies, let's just use the word "companies", stepping in and explicitly censoring transactions that explicitly touched the explicit addresses on the OFAC list.  What you get instead is this simping behaviour, I don't know what to call this, rolling-over behaviour, I would say.

Nic Carter: Chilling effect, I would say.

Lane Rettig: This chilling effect where you see both companies going way above and beyond what OFAC has specifically restricted, in order to just be as compliant as possible.  We saw this in DeFi, again we saw these lists published by companies like TRM Labs and front ends just banning access to anyone who even touched Tornado, or touched something that touched Tornado.  There was this dusting attack thing that happened, and all these important influential people, their accounts got put on this blacklist as a result.  That was brilliant, by the way.

But another chilling effect, which I really want to touch upon, is it's chilling the development of privacy.  I have a lot of friends, people who I love and care deeply about, who are working in this space and they're fucking terrified.

Peter McCormack: Because of what happened with Tornado Cash?

Lane Rettig: Because they put one of the developers in prison in The Netherlands. 

Nic Carter: With no trial.

Lane Rettig: Can we talk about this?  What the hell is going on?

Peter McCormack: We can talk about this.

Lane Rettig: This is insane.

Nic Carter: He sold his stuff.

Lane Rettig: And won't let his wife talk to him; what is actually going on?  This is terrifying.

Peter McCormack: Do we know the status of his legal case?

Nic Carter: Unclear, but it's remarkable that The Netherlands, an ostensibly free country, is doing this.

Lane Rettig: It blows my mind, it blows my mind, also that more people aren't talking about this.

Peter McCormack: Well, so that was one of the things, I think it might have been Miles who came out with a good thread; he said, "Bitcoiners should really care".

Nic Carter: They should care about it.

Lane Rettig: Sit up and pay attention to this, right.

Peter McCormack: I think a lot of them do.  I think the ones who don't haven't really thought through the hypocrisy of their own position; I just don't think they've thought it through.

Nic Carter: I mean, bitcoiners should be impressed that Ethereans are now stepping up and being more cypherpunk-y, because for a while they weren't.  Now the Ethereans are actually in the firing line.  So, bitcoiners thought that they were the hardcore ones.  There's some Ethereans that are now really sticking, if you like, sticking to their guns.

Lane Rettig: Some are, and some have stopped working on privacy stuff entirely.  I can tell you this from conversations I've had with friends in the past few weeks.  People are really scared, even US citizens.

Peter McCormack: Yeah, look, there were a certain number of lawsuits over the last couple of years that have had a chilling effect on Bitcoin developers.  We saw a number of people step back, we saw Pieter Wuille step back, Jonas Schnelli step back, we saw a number of people, it happens.  And if you've got a fear for -- I mean, there's being fearful of having a lawsuit, but going to jail's an entirely different proposition.

Nic Carter: Yeah, like Virgil Griffith, what happened to him.  All he did was give a talk in North Korea, I'm not an apologist for that.

Lane Rettig: He made a transaction, apparently.

Nic Carter: Oh, did he?  Okay.

Lane Rettig: I think that's actually where they got him.

Nic Carter: Look, it wasn't wise.

Lane Rettig: He transacted with North Korea.

Peter McCormack: There's building privacy technology and then there's going to North Korea and giving a presentation.

Nic Carter: It wasn't smart what he did.

Lane Rettig: Well, he also did advertise the fact that he was going.  He invited me on the trip, by the way, and a bunch of other people.

Nic Carter: I'm glad you didn't go.

Peter McCormack: Was he being paid?

Lane Rettig: I don't think so.

Nic Carter: Did he deserve X many years in federal prison for that?  I don't think so.

Peter McCormack: No, of course not.  But at the same time, I don't think Ross Ulbricht deserved his entire time in prison.

Lane Rettig: Two life sentences.

Peter McCormack: Two life sentences plus 40 years.  I don't think he should have been tried like El Chapo, but at the same time, when he did it he knew the risk he was taking.  He knew if he got caught, he's going to be arrested and he's going to be charged with something.  What I'm saying, I think Virgil must have known he was taking some risk.  But this guy, what's his name?

Lane Rettig: Roman something.

Peter McCormack: Yeah, he's building privacy technology.

Lane Rettig: He did a thing which at least, again I can't speak to Dutch law, or whatever; he did a thing which is constitutionally protected here under Free Speech, and we fought this war in the 1990s, we fought this in the Crypto Wars.

Nic Carter: They don't have the First Amendment over there in Europe.

Lane Rettig: Good to be American.

Nic Carter: Yeah, seriously.

Peter McCormack: Yeah, I can personally vouch for that.  But has he been arrested under pressure from US Government; does it come from there, or is it just the Dutch Government?

Lane Rettig: That's a good question, I think.  We don't know.

Nic Carter: The whole sanctions edifice is a US political tool, and SWIFT is normally a Belgian entity, but they enforce US policy.  The US has its tendrils all over the place.  This is part of the dominant institutional regime they operate.

Peter McCormack: Apple has gradually provided more and more privacy tools for your phone or your laptop; they've made privacy a competitive feature within the operating system.

Lane Rettig: I hate when people say that Apple is good at privacy; it's not.

Peter McCormack: No, I didn't say it was good; did I say it was good?  I said they've --

Lane Rettig: You said they've offered tools, but they've also undermined privacy in other ways.

Peter McCormack: Of course.  But what I'm saying is, they've offered tools, they've worked on privacy.  How is that different from somebody working on a different type of financial privacy?

Nic Carter: I mean, this is the US's one last remaining weapon of war; sanctions.  It's all they have.  They don't want to go to war with tanks, so it's their last tool.  It's becoming blunt, it's becoming extremely blunt with overuse.  Everyone hates it, the fact that they use sanctions so aggressively, but they don't want to give that up, so they will fight until the last breath.

Lane Rettig: Look at, I think it was sanctions, right, the freezing of Russia's sovereign funds.  I mean, I think you spoke about this, about how unprecedented that was, and how you could only get to do that once or something, right?

Nic Carter: Well, they froze Afghanistan's sovereign debt to Venezuela.

Peter McCormack: We've got that; we've got the Venezuela gold in the UK, yeah.

Nic Carter: But I mean Russia, a G20 nation, I thought the sanctions wouldn't work, I don't think they've worked.  But the US, it's all they have now.

Peter McCormack: So is the difference here, it's not that he was providing a privacy tool, he provided a privacy tool that was used in contravention of OFAC requirement?

Nic Carter: We know that North Korea was using Tornado Cash, materially.

Peter McCormack: Right, okay.

Lane Rettig: And they made up some substantial portion, we don't know the exact number, but some double-digit percentage of all the funds flowing through it.

Nic Carter: A good fraction.

Lane Rettig: I've heard 40%, or something.  It's a large number.

Peter McCormack: Of the transactions or from North Korea?

Nic Carter: A lot of the withdrawal was illicit, whether North Korea or other hacks.

Lane Rettig: And that's probably why it happened and why it happened relatively quickly and why it was Tornado Cash and not other mixers.

Peter McCormack: Right, okay.

Lane Rettig: And let me be very clear, I don't think any of us are arguing that we want to facilitate North Korea or any of these other nefarious state actors to do these things, but we have to balance this against the fact that privacy is fundamental and it's a human right.

Peter McCormack: But could Tornado Cash have blocked those North Korean transactions, or is there no way they could have known?

Lane Rettig: They couldn't have blocked them --

Peter McCormack: Censored them.

Lane Rettig: -- because Tornado Cash, just to be clear, it's uncensorable.  The actual smart contract is still running, you can still interact with it, you can do various things on the front end and they actually had some feature baked in, or something, where you could generate a receipt to prove that the funds that flowed in were not illicit, or something.

Nic Carter: You could prove the licitness of your --

Lane Rettig: Correct, and people kind of lied over this in a lot of the commentary.  So, there actually were efforts made.

Nic Carter: Tornado Cash was deployed and then the admin key was burned.  There were many pools actually, but so the admins had no residual control over the contract.

Peter McCormack: Right, okay.  So, even if he'd exited the project, he still could have been arrested, because he was still benefiting from it?

Lane Rettig: Look, I think we have to wait and see, we have no choice.  I think that there's things going on here that we're not aware of, and I hope it all comes to light eventually.

Nic Carter: There was a token, so that might be the angle they use, that he was financially benefiting from the usage.

Lane Rettig: Right, he was actually personally profiting from it, although I heard that the fees hadn't been turned on, or something, it's very complicated.

Peter McCormack: Right.  Are we at the point where we should now compare a lot of this back to Bitcoin, or is there anything else you still wanted to add?

Lane Rettig: I think my two key things were censorship and MEV; I think we've covered them pretty well.

Peter McCormack: MEV, I mean we've covered that.  Look, it's possible and it will become --

Lane Rettig: Oh, look, one point.

Peter McCormack: Yeah.

Lane Rettig: So, we didn't actually ask that question, "What can be done about it?"  We established that it exists, we established that this censorship is happening, so it might be worth just taking a minute or two to just talk about the Ethereum approach, and then maybe we'll transition back to Bitcoin.

So, in defence of Flashbots whom we spoke about earlier, they seem to recognise, and some folks have been very vocal on Twitter and some other places, the effect that this is having and the fact that the number of blocks being produced that are censoring is going up and that they're responsible for this in some fashion.  So, their approach is educate, democratise, open source, and they're doing that, which is exciting.

I was actually playing with this, just sometimes it's good to have hands-on experience, like what does it mean to spin up their software, called MEV-Boost, and connect your validator to it; and what you do is you connect to one or more relays.  The relay is the way in which your validator gets the block, so this is how the builder or the searcher hands the block to the proposer, which is a validator, and submits it to the network.  And you get these blocks in exchange for fees, like we talked about.

So the software, this MEV-Boost thing that you connect to your validator, there's no default relay.  So there is a Flashbots relay and it is censoring and they have been vocal about that, they haven't tried to hide that fact, but there are others.  There's bloXroute, it's another; I don't know if it's a company or organisation, or something, and they offer I think three options, one of which is a compliant relay and one which is not, one which is called Max profit, which is cool.  And so that includes, like we spoke about earlier, it would be more profitable to include all the transactions, and that's a good thing. 

The idea is that if we encourage this ecosystem, if we make this research public, if we open-source the software, then other actors can step up, other actors who are not exposed or maybe they're pseudonymous, or maybe they're in other regimes, or something, other jurisdictions.  So, that's the best possible outcome for Ethereum, that more decentralisation happens, that we move more towards proposer/builder separation, which ultimately will land in the Ethereum protocol itself, which also may address some of these issues that we're seeing right now.  That is actually on the roadmap as well.  That's a snapshot of where we're going on the Ethereum side.

Nic Carter: The way I'd compare it back to Bitcoin is, "Okay, well how does this matter for Bitcoin?"

Peter McCormack: Well, can I just say an observation?  One of the observations I have about Ethereum, my limited understanding of it and not being technical, is it kind of reminds me of the British economy right now; you pull one lever and you have to fix something elsewhere, so you have to create a new sticking plaster for what that's created, and once that's created there'll be a new sticking plaster.  We have that in the British economy right now, because we have tax cuts and then the pound crashes, so they raise the interest rates, which means houses become unaffordable, which means we have a housing crash.  We're seeing this economic tug of war.

Lane Rettig: We talked previously about the difference in values, so bitcoiners value security at all costs and Ethereum folks value innovation and they don't mind the complexity.  So I agree with you; I think that there's complexity on top of complexity, which we talked about, and to address that complexity, you need to add more complexity.  So I agree, that's what's happening here.  And if you look at the actual proposals for things like proposer/builder separation, or censorship resistance, we were talking about this idea of CR lists and this fallback mechanism so we can make sure there's always a way -- they're wicked complicated, very complicated.

Peter McCormack: Yeah, and how many holes does that leave; how much does that increase the attack surface?

Lane Rettig: Every time you add complexity, it increases the attack surface, no question.

Nic Carter: I think it's incontrovertible that the merge has increased complexity, which in turn has made it easier to censor Ethereum; I think that's undeniable.  Maybe they can address it, they are aware of it, but Ethereum has become more censored since the merge.

Peter McCormack: Okay, so bringing it back to Bitcoin, we've talked about MEV, it's not a huge issue right now, but it's something that may, depends how it develops; but with regards to censorship, that's the area I'm super-interested in, because I know Marathon attempted to create --

Nic Carter: Others will, I can assure you of that.  And Bitcoin's not 100% pure up on its pedestal, because we're still relying on pools to construct the blocks.  Can we get away from that?  Maybe.  There's attempts to create Stratum V2, other ideas, which would give miners more control over the block construction.  Then, your pie chart doesn't look like three big pools, it looks like a zillion miners.

Peter McCormack: And the pool will purely be there to share the revenue.

Nic Carter: Right, it would be there to minimise the variance of your mining.  So, the pool would have much less political power.  It is worth saying that pools can lose hashrate in real time, which is kind of not the case for validation in proof of stake.  For instance, recently, what was the pool that was insolvent; was it Poolin?

Peter McCormack: Yes.

Nic Carter: Poolin, they were insolvent, they lost tons of hashrate almost instantly.  We've seen this happen before, so the pools don't have that much power in real life.

Peter McCormack: How does a pool end up insolvent?

Nic Carter: I don't know.

Lane Rettig: It's not a very profitable business.

Nic Carter: That is another thing about pools, which is good.

Lane Rettig: Which is why there aren't more of them and they're not larger.

Nic Carter: Yeah, it's good for our purposes actually, in terms of avoiding the large points of centralisation.  Running a pool, you basically lose money doing it.

Lane Rettig: Which by the way, maybe you could explain this, it's interesting because it strikes me that it's a great example of economies of scale.  You have a piece of software, you have a marketing budget, you get people to sign up and for every additional miner who joins, aren't you just taking 1% off the top, or whatever?

Nic Carter: Well, it's just super-competitive, so that can press the margins.

Lane Rettig: Oh, right, it's a race to the bottom.

Peter McCormack: And there's no real differentiation.

Nic Carter: Yeah, and some miners often misbehave and screw over the pools in a certain way, depending on how they pay out rewards.

Lane Rettig: The incentives are kind of misaligned, yeah.

Nic Carter: You get so complex actually --

Lane Rettig: By the way, as a miner who's part of a pool, even someone who kind of understands how this stuff works, it's crazy complicated.  How do you audit that the pool is doing what they're supposed to do?  It's almost impossible.

Nic Carter: Yeah, that's actually a great unsolved problem, and there's like pay-per-share…  Anyway, we don't have to get into that.

Lane Rettig: Maybe we need better pools; that should be an active area of R&D.

Nic Carter: I agree, but there will be US entities that create OFAC-compliant pools.  The question is, "What do we do then?"

Peter McCormack: Why though, why will they?  Just because they want to --

Nic Carter: For the same reason that any other entity in Ethereum is complying with OFAC.

Peter McCormack: Because they don't want to take risk.

Lane Rettig: Because they don't want to go to jail, like we talked about!

Nic Carter: They don't want to go to excessive risk, because the c-suite is personally liable for any of strict liability for OFAC.

Peter McCormack: So, why aren't they already?

Nic Carter: Good question.  They might be actually.  There's ways to measure whether pools are selectively excluding transactions.  We don't think they are censoring right now, it's hard to measure directly.

Lane Rettig: It's hard to find a thing that doesn't exist, because by definition, like we talked about earlier, the act of censoring is not including a thing.  It's easier to point at a thing and say, "You did that".  It's very hard to point at a thing and say, "You didn't do something you were supposed to do".  There's an asymmetry there.

Nic Carter: It's hard to find proof that they're deliberately excluding OFAC transactions.  It looks like they are including them right now at the normal rate, not that there's a ton on Bitcoin.

Lane Rettig: I think something we didn't touch upon, which could also be interesting, is that Paradigm opinion piece about how this layer 1 infrastructure work should be considered neutral, should be no different than operating a telephone network, or acting as an ISP.  In other words, ISPs are not today liable for the packets they transmit, if one of their users is sending child pornography or something; that's absurd.

Nic Carter: They're common carriers.

Lane Rettig: They're common carriers.  You could probably explain better what that means, but they're not expected to do some form of deep packet inspection or something.  So, why can't it be the same if you're simply assembling transactions in the blocks and publishing them?  You're not facilitating, in some meaningful way, transactions with these sanctioned entities.

Peter McCormack: Because, Lane, ISPs aren't an existential threat to the revenue stream of the government.

Nic Carter: I mean, governments have an incentive to control the internet, like certain governments do.

Lane Rettig: And it's getting worse.

Nic Carter: And the US Government, maybe they want to change this model.

Peter McCormack: Yeah, but with Bitcoin, we route around the government.

Nic Carter: Well, there's the US entities that manage key points of the infrastructure and they want to play nice.  So, I do think Bitcoin will face the same issue as Ethereum eventually.  It probably won't be as bad, because it maybe isn't a thing for now, so we won't have these super-sophisticated, highly centralised entities that are doing this block construction work, but we will be confronted with this.

Peter McCormack: But OFAC compliance is one of those things that people may reluctantly accept.  It's that next leap that you fear, say with Ethereum, what Coinbase or Kraken might censor when somebody knocks on the door or turns the screw on them.

Lane Rettig: That's exactly it, it's a slippery slope.

Nic Carter: OFAC is very minor in the grand scheme.

Peter McCormack: But when you look at miners in Bitcoin, they may become OFAC-compliant, what is the different scenario for Bitcoin when the slippery slope hits, when it's something beyond OFAC compliance?  I mean, can those miners say no, or they can't say no, or can they be extracted from the system; is there a different structure that means there's less risk?  Or is it a case of, in reality, how much hashrate's in the US?  If it's 10%, does that mean, okay, you might miss one block, you'll be in the one after, and that's not --

Lane Rettig: 10% is not so bad, but that's why I keep saying it's a slippery slope, because where would you draw the line; what amount is safe?  When people say it's okay, I turn it around and say, "Where would you draw the line?  If 10% is okay, what about 20%?

Nic Carter: We have like 35% to 40% in the US.

Peter McCormack: Okay.  So worst case, you're going to wait an extra couple of blocks.

Lane Rettig: I just want to mention there, which is not so terrible, but again it could get worse and I think it might get worse, there was an announcement a day or two ago that EU sanctions were stepped up on everyday Russian citizens, so not just in terms of custodial exchanges, but non-custodial wallets as well, or something.

Peter McCormack: No, isn't it custodial wallets?

Nic Carter: Yeah, I think it's service providers providing wallets to Russians.

Lane Rettig: But not just individually sanctioned individuals or entities, it's like all Russian residents and citizens.  And I'm just throwing this out there, because what is the worst-case scenario?  The worst-case scenario is Bitcoin tries to kick all Russians off the network, which sounds absurd today, but it might not sound absurd a few years from now if these trends continue.

Nic Carter: Yeah, so the question is, "How do we react if the government goes to pools or to miners and asks them to not transact with a certain group?"  I would hope that by that point, the miners would be more empowered relative to pools, so the pools wouldn't be such an obvious target.  We would need something like Stratum V2.

Peter McCormack: What's the hold on Stratum V2?

Nic Carter: It exists in the idea world, and it doesn't exist in code basically.

Peter McCormack: We need to make a show on that.

Lane Rettig: You do.

Nic Carter: You should talk to Steve Lee at Spiral.

Peter McCormack: Yeah, let's do that.  We'll message Steve afterwards.

Nic Carter: There's a few groups working on it.  So I'd say that's absolutely critical.  Then also, what's the physical reality of where the miners are?  They're distributed all globally, and they're not just in one place in the US, and we have states' rights in America.  So, America's not just this one big, homogenous thing.  So, I'm actually okay with the fact that there's a lot of miners in the US, because they're on all these different states, and they're in some states that probably if the federal government came in and said, "We're commandeering your miners", the states would be, "Screw you!"

Lane Rettig: Texas!

Nic Carter: Texas!

Peter McCormack: Yeah, good luck!

Nic Carter: Come on!

Lane Rettig: Come at me, bro!

Peter McCormack: Ted Cruz won't be having that!

Nic Carter: Bitcoin is a states' rights issue, okay, so maybe it will be the cause of the next civil war.  But yeah, so if all Bitcoin mining was in China still, yes, China is affectively like one legal place.  America is 50 different jurisdictions, so that's kind of why I'm less worried about it, but we still have to be mindful of this stuff.

Peter McCormack: I mean 51, we're really subservient of you over in the UK.

Nic Carter: Oh, would the UK --

Lane Rettig: You could add Canada to the mix too.

Peter McCormack: 52, yeah, as long as Trudeau's there.  Okay, right, before we start to wrap up, is there anything I've not asked you, or anything we've not covered here that we should have?  Really where I want to get to is, what has this taught us about the future direction of Bitcoin, what people should be focused on with Bitcoin, both in terms of the development of Bitcoin and the growth of Bitcoin as a code base; but also in terms of how the community should be thinking about what it does to protect people working in Bitcoin, and what is it to us?

Nic Carter: I would say there's not too much to worry about from a censorship perspective today.

Lane Rettig: In Bitcoin.

Nic Carter: In Bitcoin.  However, if Bitcoin becomes a richer environment with more on-chain transactions that are more complex than the ones we have today, I do think that introduces a significant centralisation vector in the form of MEV, which is a very specialised activity.  So, the more you insert layers into the stack which are super-specialised, which a small number of entities are doing, then you are more beholden to the government, because they only have to interface with a small number of entities.

The other thing to be worried about would be if exchanges start buying Bitcoin miners.  I think this will happen, because they may want to give their clients priority access to the blockchain.  So they'll recognise, "Maybe it will be a value-added service for us to manage our client experience, their interaction with the blockchain".  Exchanges now run validators, so they're basically doing this for their clients already on the proof-of-stake chains; why wouldn't they do it on proof of work?  I think this cycle, you'll see exchanges buying big miners, so they can guarantee access.

Lane Rettig: They're on sale right now.

Nic Carter: Exactly, they're going bankrupt.  So, that would be something to be nervous about actually.  It makes sense from a business perspective for an exchange, but at that point you do have the convergence of the large amounts of financial capital and the validation, which is the dangerous spot.  So, that's something which I don't see people talking about because it's not happening yet, which I actually would be nervous about if it does happen.

Lane Rettig: Yeah, I think it's a natural trend, as Nic was saying.  If I am an exchange, I can offer cheaper fees, fee discounts, free transactions, faster inclusion; I can offer front-running protection, things like this.  These have already happened, by the way.

Nic Carter: Guarantee inclusion, yeah.

Lane Rettig: Exactly, which I can't do if I don't have that infrastructure.  So, that is another inherent centralisation vector.  I think we should take these centralisation vectors very seriously.

Nic Carter: Because it's very obvious, there's only going to be a handful of global exchanges in the future.  They already all have staking businesses.  What if they then also move into mining, once they realise Bitcoin's not going away?  The big exchanges basically don't care about Bitcoin, they think it might just be an anachronism.  If they realise it's sticking around, they start buying miners because they want the same thing they have in proof-of-stake world, which is priority access to the blockchain, I'd be nervous about that.

Peter McCormack: And we should be, what, encouraging miners to be considering distributing their operations a little bit more globally?

Nic Carter: I think it happens naturally because of where energy is, because the ASIC supply chain is less controlled now, but really because cheap energy is available sparsely through the globe, so that is a very helpful state of affairs.  It's kind of the same with gold.  The number one country for gold mining is China, I think, with 11%.  Gold is very well distributed in the Earth's crust, so it happens all over the place.  There's no one place where all the gold is.  Think of Bitcoin and energy the same way.  There are lots of little hotspots of cheap energy globally, whether it's flared gas here, or a hydra mine there, nuclear plant that's underutilised there.  So, that's one of the things that gives me great cause for optimism; the literal, physical infrastructure of Bitcoin mining is getting more distributed by the day.

Lane Rettig: This incidentally is not true in proof of stake, but we've already covered that!

Peter McCormack: Very useful.  I'll be interested to see the YouTube comments.  There'll probably be lots of little, tiny clips that they've put together that have got nothing to do with what we said.

Lane Rettig: Taken totally out of context.

Nic Carter: People are going to complain that you did an Ethereum episode.

Peter McCormack: Well, I've done -- how many have we done in the past?

Danny Knowles: Three or four.

Peter McCormack: Well, we've done three or four with Lane!  No, we've done two with Lane, we've done two with Vitalik.

Nic Carter: Have you really?

Peter McCormack: Yeah, we did one with Vitalik and Samson Mow, and then I did another one with Paddy, Vitalik and Andrew Poelstra.

Nic Carter: I remember that one, that was great.

Peter McCormack: I couldn't work out how I wanted it to -- I actually agreed with Vitalik to do a third one, but only on Bitcoin, just me and him talking about Bitcoin.

Lane Rettig: That would be fun.

Nic Carter: I think he's going to evolve his views on Bitcoin actually.  I think he'll come to see it as a very useful kind of bulwark.

Peter McCormack: I'd love to have that conversation with him, so hopefully one day, but he closed down his email address so I can't get hold of him.  But yeah, it is called What Bitcoin Did, but in making a show about Bitcoin, you sometimes have to understand other things, what lessons have been learned from other projects.

Lane Rettig: There's a lot of lessons to be learned here.

Peter McCormack: Of course.

Lane Rettig: I mean, you have to look at the context, and I said this a couple of times but just to reemphasise it; the transition on Ethereum's part to proof of stake makes them move even further apart.  Ethereum has its roots in Bitcoin in many ways, right, and it's now maturing and it's the child, going off on its own way and growing into a totally different person than its parent.  And I think this is actually really good for Bitcoin, because it just offers this really strong counterpoint.

Peter McCormack: Yeah, I mean it's just interesting to understand and to learn about.  We made kind of a half Monero show, we made a show about privacy, understanding that.  This is still fundamentally a Bitcoin show, and that's what we cover.  But this is useful for me to see and understand.  I'm sure there'll be people out there complain, the same people who complain about every episode I make.

Lane Rettig: If they're not complaining, you're doing something wrong.

Peter McCormack: The bigger pool of knowledge you tap into, the more educated you become, and also it's just good to see my friends.

Lane Rettig: Can I get a final word in?

Peter McCormack: Yeah, of course, as long as you're not shilling us some shitcoin!  What are we going to call this show?  A Tale of Two Shitcoiners!

Lane Rettig: That's pretty good actually.

Nic Carter: I can't believe I'm a shitcoiner now, because I just did one thing wrong!

Lane Rettig: If you care about privacy and censorship, which you should, you should really sit up and pay attention to what's going on here, because this is a big fucking deal, that's all I wanted to say.  Ethereum's killer feature is composability, we talked about that, I think.  We'd probably agree Bitcoin's killer feature is things like censorship resistance.  And it's kind of okay today, as Nic said, but the warning bells are sounding and we're seeing this stuff happening in Ethereum and it is a slippery slope.  So, sit up and pay attention and figure out how you can contribute to making the network more decentralised, period.

Peter McCormack: Completely agree.  Any closing thoughts, Nic?

Nic Carter: No, fully agree.  I think probably the number one thing that regular bitcoiners can do would be to advocate for Stratum V2 or a variance of that idea, basically decentralising block templating in Bitcoin; that's the number one thing.

Peter McCormack: Yeah.  We will get in touch with Steve Lee.  I mean, we're up that way soon, so hopefully we can speak to him about that.  Like I say, I know Matt Corallo talked about it before.  Was it his proposal, or was that a different proposal?  That was hash something; he had a proposal for something.  But yeah, anyway, we will cover that.  But look, appreciate you both coming.  It's the third interview of the day, I'm a bit tired.  We're going to have to edit that bit out where I couldn't even construct a block!  Yeah, all right, guys, good to see you, man.

Lane Rettig: Likewise.

Peter McCormack: Good to see you both and thank you.

Nic Carter: Thanks, Peter.