FIRE ON THE MOUNTAIN RUN BOYS RUN! Where to even begin??? I feel like the events over the past few weeks are literally the perfect setup for this newsletter. Let’s dive in.
ETH POW (proof of work)
As discussed last time, ETH currently functions very similarly to bitcoin. Its blockchain operates in a POW (proof of work) manner. ETH miners mine ETH tokens with computer hardware and include transactions into the blockchain for an ETH token + fee reward. Nodes verify the transactions are legit and it’s pretty decentralized as a whole…the initial coin sale of 60-70% of all ETH to insiders notwithstanding, where Vitalik and his buddies gave themselves a bunch of tokens. Kinda cringe.
That’s why most people think Ethereum is a “security” like a stock and should be treated as such legally. Bitcoin is classified as a commodity formally because there was no token sale. I think we’ll get a more formal ruling on ETH in the coming years.
ETH POS (proof of stake). Aka ETH 2.0
I think it’s important I discuss ETH’s transition to POS early in this newsletter so that when I say POS you know what the heck I’m even talking about. Keep in mind this is all crazy complicated. I know a lot, but hardly anything on a grander scale. Full disclosure.
Sometime in September as it stands now, ETH will “merge” 2 blockchains into one and transition fully into a POS blockchain. The current POW blockchain is operating now and a separate “beacon chain” is running in parallel ready for the “merge”.
I put “merge” in quotes because this is ALL you will hear about in crypto for the next few months…so now you’re in the know. This will even make CNN headlines, guaranteed. THE MERGE!!!!!
POS is exactly how it sounds. You “stake” your tokens to prove your support of the network. With ETH, you need to have 32 ETH tokens to become a “validator” of blockchain blocks. As a validator, you are paid in ETH tokens plus any fees for processing/attesting these blocks. The more ETH you stake, the more opportunities you are awarded to validate blocks and collect the ETH subsidy and fees.
Side note - is it just me or does that sound just like the Cantillion effect (rich get richer)?? I think so at least.
Validating could be very lucrative. It also takes special computer hardware and technical skills. No, you’re not doing this on any old laptop, and your primary skills of email, MS Word, MS PPT, and YouTube videos aren’t going to cut it.
On top of that, established validators can preclude new validators from joining the POS system. How fair is that??? Nobody can stop you from purchasing a mining rig and mining BTC or ETH right now. Once ETH goes to POS, you play by the rules of the elite.
If you are dishonest or attempt any shenanigans, your stake can get “slashed” by social consensus and you will lose valuable ETH (because other validators are checking your work). Nobody wants that so presumably this will prevent fraud. Notice what is in bold there. Nobody really knows. Whose gonna slash Coinbase or Binance when the time comes? Or JP Morgan or Blackrock?
Importantly - there are NO MORE MINERS when ETH moves to POS. Mining operations cease to exist and are only left to bitcoin and some very other small POW blockchains (BCash, Litecoin, etc.) that are irrelevant. POS requires no significant real-world resources or any mining hardware to claim new ETH tokens. You just stake tokens and earn yield for validating new blocks. The yield for staking is what draws many in - something like ~4% annually. That’s because we all have “fiat brain” and are conditioned to seek out yield at all costs because fiat loses value by a guaranteed 2% every year (9% this year, but who’s counting). This yield offsets the inflation of ETH’s monetary policy since there is no cap on supply, unlike bitcoin’s 21 million. ETH’s supply cap is infinity. Just like the dollar. However, POS may make it “deflationary” and thus a potential store of value (see below for explanation). There are a ton of complexities with POS (and we’ll discuss some below) but that’s the bulk of it for what I think most people care to know.
Why is ETH transitioning to POS?
ETH POW problems
“Energy use” narrative - I am going to keep this brief but I kid you not I could spend 1000 hours talking about how DUMB this is. I wrote a whole article about it prior and hardly scratched the surface compared to what I know now. Regardless, the concern that POW uses too much energy and is bad for the environment is out there. ETH is capitalizing on this and switching to POS which will decrease its energy usage by like 99%. They will then tout this to infinity and proclaim their righteousness compared to bitcoin and its “wastefulness”. I’m literally getting triggered just writing this.
Needless to say, I vehemently disagree with this narrative and by moving to POS from POW I think ETH is selling its soul (we’ll discuss later why). POW is the invention that will go down in history (like the wheel, printing press, phone, internet, etc.). POS is fiat reincarnated - been there done that. POW will usher in an energy revolution that will advance civilization like no other. Don’t fall for the media narrative. Do the work and learn why and how POW is such a monumental discovery. Yes POS decreases energy usage, cool. It doesn’t solve the problem of decentralized money though, only POW does.
Scaling - ETH in its current form is difficult to scale to global wide adoption. The ETH blockchain is faster than bitcoin but can only process about 15-30 transactions per second. If more than that builds up, the network gets congested and fees get really high (like a $200 fee for a $10 transaction). Contrast that with a network like Visa which can handle something like 65,000 transactions per second. Quite different. What’s even worse is that currently you can pay a transaction fee on ETH but if you don’t pay enough, the transaction won’t go through and you lose your money. It’s a total
if you ask me, and basically is a playground for the super rich or super degenerate trying to flip jpeg monkey NFTs and participate in Defi ponzi schemes. There are solutions to scaling, however, discussed later.
Security - Currently ETH miners need to sell their ETH in order to pay for mining hardware and electricity, etc. That’s why it’s called POW, they are doing physical actual work in real life with real costs to earn something. Sounds legit right? If they are savvy miners they can make a profit and grow their operation. From a blockchain security perspective, the fear is that with POW it is easier to “attack” the blockchain and render it corrupted, compared to POS. For starters, with POS there is no “physical” thing to attack. There are no more mining operations, so no one can bomb or attack a physical ETH mining operation under a POS system. Second, there is less fear of the 51% attack in POS, compared to if you control 51% of the miners in POW, you technically control the network. Thus, if you have unlimited money you could buy all the mining hardware in existence and maliciously attack the ETH POW blockchain to destroy it (same with Bitcoin). Compare that with POS where you need nearly 2/3 of the stake (ETH tokens) to corrupt the blockchain which is technically harder (although that’s debatable IMO). That’s also why ETH wants/needs the price to go up. Higher the price the harder it is for someone to attack the chain (costs more money).
My take - this is basically a bunch of theoretical nonsense. It would be nearly impossible at this juncture to buy all the mining hardware necessary to control 51% of the hash power for ETH or BTC, and it’s getting more challenging literally by the day. In addition, it would take years to do this while it would be plainly obvious to everyone (who couldn’t buy miners because one person was buying them all) what was going on. Given POW relies heavily on game theory, other miners who are invested in POW succeeding would step in to make sure their business didn’t get wiped out by a bad actor. It’s a bunch of malarkey that folks like to pontificate over. It’s pure FUD.
NGU (number go up) - What this refers to is the price of ETH. NGU baby. That’s what everyone is here for, right?!? Who cares about anything else? Let’s all get rich, and quickly! Woooo!
Simmer down. Remember, ETH has a market cap of ~250 B-B-B-BILLION! All based on speculation currently. That’s a bigger market cap than Adobe…you know that thing on your computer basically everyone in the world uses every day. Just sayin’.
Without a doubt, the Ethereum merge to POS is to make NGU at all costs - they call it the “triple halvening” for a reason. It likely/inevitably will, but for a price that will ultimately destroy it long term (IMO). Here’s why NGU:
Issuance - The ETH merge to POS will decrease the issuance of ETH tokens by a significant amount. ~90% of the current ETH daily supply will vanish once ETH merges to a POS blockchain. The reason for this is that under POS, there is no mining anymore. Mining as discussed above is very expensive and requires miners to sell their ETH to stay profitable, just like with Bitcoin. Under POS, since there are hardly any costs given that mining is eliminated, less ETH tokens need to be distributed daily and sold by the miners for profit. Less ETH on the market = less supply = equals NGU if demand stays equal.
Staking - with POS, ETH token holders can choose to “stake” their ETH with a validator. Validators are the new miners in a POS system. Validators propose and “validate” blocks - makes sense, right? In order to be a validator, you need to have 32 ETH and run some sophisticated hardware. If you don’t have 32 ETH you can join a staking pool. Staking locks up tokens so they aren’t available on the market to sell. Less supply = NGU with equal demand.
Fee burn - this relates to the EIP-1559 hard fork where basically a certain amount of fees used in every transaction are “burnt” and thus that decreases ETH total supply over time. You get the picture right? Less supply = NGU with equal demand.
These 3 things in total create deflationary pressure on the ETH token which should make its price go up. I agree with that thesis and think it will (but don’t know for sure).
Of note - ETH futures contracts will be available on the CME for trading on September 12th. This is around the time of the merge. Bitcoin had a massive rally before its futures contracts became available. This is all going to plan…
What happens after ETH merges to POS?
Speed stays the same! No improvement in transactions per second (TPS). However, transitioning to POS will allow for ETH to scale to a greater degree in the future using “sharding” and “danksharding” techniques. I know this sounds crazy but I’m just the messenger. It’s real. Sharding basically is data broken up into many smaller databases for easier storage and computation. It basically splits up the load so there is less bloat on one blockchain and things can move faster and cost less. Reportedly by adding sharding, ETH can increase TPS up to like 100,000.
It’s important to point out though that ETH doesn’t NEED POS to scale. They are already doing so by building layer 2 “rollups”. This is basically the technology that allows for transactions to be executed outside the ETH base layer chain and then “rolling all those transactions up into a bundle” to settle on the main chain. This saves the base layer chain from expensive computation and fees/bloat. It’s just like what Lightning is doing for Bitcoin. However, it preserves the base layer chain for assuring “trust” that the rollups did the work correctly. Examples of rollups are Arbitrum and Optimism. ETH can also scale using sidechains like Polygon (Matic token). There are quite a few options actually and the technology is getting better quickly. There are lots of tradeoffs like everything in life though with rollups. I won’t be going into those here.
Fees stay the same! ETH is still expensive as hell to use on the base layer. To buy NFTs or use Defi you’d be best served using the rollups discussed above or sidechains like Polygon for lower fees. Fees might come down once sharding is introduced years down the road. Complete unknown though.
The MEV monster. MEV stands for maximal extractable value. I can’t even begin to understand or get into the complexity of this, but basically, the whole point of ETH validators in POS is to find ways to rip off people making transactions on the network. Let me repeat. THE WHOLE POINT IS TO RIP YOU OFF. Of course, no one will say that publically and will deny it if mentioned, but dig deeper! Validators basically look at all the transactions in the pool and with highly sophisticated “bots” make up ideal blockchain blocks that benefit them. They can see what trades are about to be processed and front run them and do all sorts of stuff to earn “maximal profits”. The need this because the issuance of ETH itself is going down under the POS model. They can even collude with their validator buddies and extract even more profits in this new system.
I’m sorry, but are you serious???
MEV is actually encouraged and is being claimed as transparent and democratic so that all can benefit from it. GIVE ME A BREAK. Do you know what MEV is? It’s fiat/banking reincarnated again! No thanks. I’m not using a system that is designed to maximally extract value from me so some ETH whale that knew Vitalik and got in on the initial coin sale and holds millions of ETH tokens can make money off me.
We already have that - it’s called a bank. They say there are ways to mitigate it and improve it. I’ll believe it when I see it.
Just for clarity, there is no real MEV on bitcoin. That’s because it’s a simple monetary protocol and not full of defi and smart contracts. It’s a feature folks, not a bug. Bitcoin is just trying to be money, nothing else. Bravo.
So basically, after the merge, the big thing that is changing is ETH’s monetary policy. ETH is looking for NGU at all costs. They want it to become a deflationary asset so that it attracts capital and all those early founders get stupid rich. They already are, but this will take it to new heights. They hope you participate and go along for the ride and earn a few bucks too because you know, they’re so generous.
At some point in the future scaling TPS and lower fees will come, but not now. For now, it’s all about the money baby and NGU. Get rich or die tryin’.
The Tornado Cash Saga
I’ll finish up the ETH discussion with a few comments about the Tornado Cash drama that happened this week. It literally cements everything I thought I knew and believed about ETH…that it’s a centralized digital security, and is a sexier new version of today’s fintech apps. It’s not money, never could be money, and never will be money. Maybe it can be a cool fintech 2.0 “thing”, but I’m not sure you need a token for that yet.
Tornado Cash (TC) is a “decentralized” app that runs on Ethereum. It basically is a “mixer” app where you send funds to it and it mixes your funds with other people’s funds and spits out new funds to you of the same nominal value. This is desired so that governments can’t trace your funds because they are mixed with others. It’s designed to provide anonymity.
The problem with that is that OFAC (office of foreign assets control), which is an office of the US Dept. of the Treasury, got wind of this and shut it down. They had beliefs that North Korea was using it for money laundering and other illegal activities so they sanctioned the Defi app so that it was BASICALLY unusable, and if you did use it you’d risk going to jail. Suboptimal.
HUH???? I thought this was “defi” on Ethereum. Unstoppable finance. No rules, code is law, free and open to all!
Weellllll, the US Treasury doesn’t think so and played its hand. What they did was “blacklist” all USDC stablecoins that had interacted with Tornado Cash (because USDC is a centralized and regulated US company they have to listen to Uncle Sam). Thus any USDC that ever went into TC is now tainted and can’t be used on the ETH blockchain. In addition, basically all of ETH is run on centralized servers like Amazon and Microsoft, etc. (that also must listen to Uncle Sam). There are also only a few “nodes”, like Infura, that users basically all use to access these Defi apps via their Metamask wallet (don’t worry if that sounds like Spanish to you). OFAC also told these servers/nodes to
and prevent anyone from accessing TC. On top of it all, they literally had Microsoft TAKE DOWN the web page of the open source code for TC AND the developer of TC GOT ARRESTED in Amsterdam!!!!!!!!!
LIKE HOLY SH*%!!
Decentralized my ass!!!
There is NOTHING, and I mean NOTHING decentralized about this. This is complete government/company control at its finest and to think otherwise is foolish. The government wanted it shut down, they snapped their fingers, and now it is. Done. Finished.
The cherry on top is that it’s only going to GET WORSE. On a POW blockchain, ETH has options to get around sanctions like this, just like bitcoin does. OFAC has sanctioned certain BTC addresses before, but POW miners ARE NOT REQUIRED to add them to the blockchain. They simply ignore them and miss out on the fees, but they don’t go to jail, which is nice.
Given that POW mining is location agnostic, there are plenty of jurisdictions around the world that will GLADLY include OFAC sanctioned transactions for high fees. Some POW miner in Uganda could win the block reward and have no government sanction fear and include the transaction. This is what makes POW so special in that it allows global uncensorable money. Bitcoin isn’t beholden to any centralized government authority or pressure. It can’t be shut down or corrupted in its current state.
This has become CRYSTAL clear these past few weeks.
Once ETH merges to POS, it’s a different ballgame and it’s going to get FUGLY. If a USDC blacklisted address transaction is proposed to a validator, that validator MUST INCLUDE the transaction or risk being “slashed”. They CAN NOT exclude the transaction as they can in POW. This means big time validators like Coinbase, Binance, Lido, etc. are going to have to make some tough decisions. And with a TON of user money on the line. For instance, if you are staking your ETH with Coinbase right now, and they choose NOT to validate a blacklisted address because they don’t want to go to jail and be prosecuted by OFAC, YOUR stake gets slashed. YOU lose money because of it. How’s that gonna go over? FUGLY.
There are SO MANY other fatal flaws with ETH switching over to POS I don’t know where to start. ETH has a chance to scale and remain decentralized and have a solid monetary policy if it stays on POW, but once the merge happens it’s game over. Yes, the number will go up most likely. But the cost will be its long-term success and its ultimate demise down the road IMO.
Without decentralization, ETH has NO MOAT. ZERO. ZILCH. NADDA. That’s what it hung its hat on this whole time. If it’s clearly centralized and USDC and the government and Coinbase control everything, why is it any better than Solana or Cardano? Because more developers build on ETH right now? Not for long! ETH is slower, has higher fees and its tech is old compared to newer blockchains. Without decentralization to proclaim, it will fade into oblivion and other chains will just iterate and scale faster over the ensuing years.
ETH has sold its soul to the devil in return for a short-term price increase. Hope it’s worth it.
When will be the downfall? No clue. It may never happen even and I’m wrong because big banks like JP Morgan have their hands all over ETH now in big stakes and they want their money. I’m not planning on selling anything until the next bull run likely in 2024/2025, but who knows. I think that will be my ETH exit because transitioning to POS will be a MASSIVE news event and catalyst for ETH over these next few years. However, ETH has shown its stripes and will be a pawn of the government and can in NO WAY be considered decentralized, trustless money/finance. Speaking of which…
DECENTRALIZATION IS THE WHOLE POINT OF BLOCKCHAINS! Blockchains are supposed to help create decentralization so trust is REMOVED.
Otherwise, if everything is centralized and requires trust - that’s called a ledger, aka Microsoft Excel. WE ALREADY HAVE THAT.
POS is fiat reincarnated. It’s all about trust and who knows who and who has the most money. We KNOW the issue with humans is that over time TRUST BREAKS DOWN WHEN IT COMES TO MONEY. People are greedy and fallible. It’s just our nature. POW is the invention that removes that human trust so that it can’t enter into the equation and cloud judgment. POW ties the physical world to the digital world through energy usage. POS is just funny money on a computer.
I’m not saying altcoins like ETH can serve no purpose and are not investable. There is a chance they can thrive being regulated fintech digital securities. I’ll even invest in some of them, and currently do.
But when it comes to fixing money, there is nothing, and I mean absolutely nothing comparable to bitcoin. That’s what this is all about and always has been.
Fix the money, fix the world.
The money (fiat) is broken. People are working 2 jobs and running as fast as they can on the inflation hamster wheel to keep up and they’re falling off. It’s because of the fiat system we were born into. It’s broken, and something has to change. Nobody you vote for in November is going to fix it either. They’re just going to make it worse via cutting taxes or spending money to protect their interests (getting voted in), and I don’t really blame them. The system sets them up to fail.
ETH is not that answer, clearly, after this week’s events. That I am now certain. Before this week I had some belief it could be. Not any longer.
Is it bitcoin? I think so, but nothing is guaranteed.
I wish ETH the best in its merge to POS and I hope to profit from it as well. Not gonna lie. But the ethos of Crypto Pulse is to educate as many people about the failing monetary system around us and shine a light on a bitcoin exit strategy.
As you can see I have a biased view of ETH at this point and I’m not ashamed of it. I’ve done the work and my conclusions are based on principles and facts. I might be wrong, but I also might be right. My biggest concern is making sure I do my part to educate those I know what is being sold to them. I know 99.9% of people won’t put in the work and will buy ETH because “it’s the next Bitcoin”, and “it uses less energy”, and “it can do more stuff like defi and NFTs”, and “bitcoin is slow and doesn’t do anything”. You’ll never hear about the stuff I just wrote about today though.
Buyer beware is all I’ll say. If it sounds too good to be true, it probably is.
To finish up, the devil has actually come for bitcoin too in the past, no joke (the blocksize wars)!
Bitcoin won though, and said, “devil, just come on back if you ever wanna try again, I done told you once you son of a bitch, I’m the best that’s ever been!”
FIRE ON THE MOUNTAIN RUN BOYS RUN!
Until next time…
THIS is Crypto Pulse
@cryptofordocs
(Chicken in a bread pan pickin’ out dough)