GM web3 explorers!
We're interrupting Kyle's scheduled Deep Dive to bring you some breaking insights from DevCon Bogota—the largest blockchain developer conference in the world.
Don't worry, though! Kyle's got part three of his NFT Business Model series all wrapped and ready for Halloween.
No tricks, we promise! 🎃
But in today's episode, Sam Andrew, one of our community members, was gracious enough to share his takes on the vital topics discussed at DevCon.
In this de-brief, he shares his thoughts on:
👀 The next crypto frontier🤝 Whether trust has a place in web3📈 Ethereum's "illiquidity premium"
And much, much more.
Let's go! 👇
DevCon Download With Sam Andrew
I attended DevCon VI (Ethereum’s developer conference) in Bogota, Colombia from October 11-14. It was a special one considering it was the first since Osaka in 2019 thanks to Covid.
All up, 6,000 people attended from 113 countries with 200 hours of programming across the four days from 444 speakers.
It was held in Bogota to support Ethereum’s Latin American community since emerging markets are the highest-growth markets for the blockchain. In fact, two-thirds of children today are born in these areas.
Censorship resistance and low-cost instantaneous transaction settlement are needed there more than anywhere, making Ethereum's use cases exceptionally strong in developing nations.
But right now, let's dive into the highlights from DevCon.
Here's the tl;dr:
- Highest quality conference
- Energized vibe
- Ethereum (intentionally) has no vision
- Privacy is the next frontier
- Privacy’s intended and unintended consequences
- To trust is human
- ETH doesn’t have an “illiquidity” premium
- MEV is clear as mud
- Communication breakdown
- Colombian crypto is cooler
I’ve got some controversial thoughts; particularly on Ethereum’s vision, privacy, trust, and ETH’s “illiquidity” premium.
1. DevCon Is the Best Blockchain Conference
DevCon is the highest quality conference I have attended. Attendees are nearly all developers with computer science, mathematics, cryptography, or academic backgrounds, ensuring the conference has no shortage of brilliant people.
There are few “financial” types there. There is no shilling and no nauseating “crypto bro culture.” The programming is educational, the speakers have deep domain expertise, and the audience asks challenging questions.
On the other hand, attendees are approachable. They are there to learn, meet, and collaborate which creates an inviting atmosphere.
Crypto gets a bad rap for UX; DevCon was anything but. It was beautifully designed in an inviting space with a light festival vibe. The opening and closing ceremonies also included engaging videos and colorful performances by Colombian artists.
👉 Check out the DevCon Bogota opening.
2. DevCon = Vibes
DevCon was buzzing with energy for four days and people were at the conference grounds from 9 am to 11 pm.
Enthusiasts hustled all over Bogota to side events. Attendees mostly talked about the projects they are building. Crypto winter was mentioned in passing. Prices were an afterthought. The shared belief that what is being built is revolutionary was palpable.
It’s the largest global group of committed people I have witnessed. with most attendees sharing a genuine desire to build a better future on Ethereum.
3. Ethereum (Intentionally) Has No Vision
Businesses, governments, nonprofits, and social clubs all have defined visions while Ethereum intentionally does not. Not having one is unconventional. It makes it harder for people to understand what Ethereum is building.
But asking Ethereum what its vision is, is like asking the internet what its vision is.
Who do you even ask?
Ethereum does not have an overarching vision of what it is bringing to the world. What is created is left up to the ecosystem and there are many visions for Ethereum held by different parts of the ecosystem.
Ethereum is simply the substrate upon which applications are developed. As such, it needs to be credibly neutral. It purposely does not have a central authority driving its vision.
4. Privacy Is the Next Frontier
Privacy is the next blockchain frontier and DevCon had an entire track devoted to zero-knowledge proofs.
ZK proof is a methodology that allows one party to prove to another that a given statement is accurate without conveying any compromising information. ZK-rollups play a crucial role in Ethereum’s scaling roadmap (read Ethereum can’t scale…or can it?) with Aztec and Sismo pioneering privacy on the chain.
Aztec (a privacy-first Layer 2 ZK-rollup) facilitates transactions on Ethereum without revealing private information.
This is necessary since ETH is a public blockchain. Historical account transactions, amounts, and counterparties as well as wallet asset value, and type are visible for all to see. A wallet address can be linked to a person and voila your entire financial history is exposed.
That’s a major problem. However, Aztec facilitates transactions without revealing compromising information (read Fully Confidential Ethereum Transactions: Aztec Network’s Privacy Architecture).
On the other hand, Sismo provides ZK-badges for private reputation portability. A ZK badge is a verified attestation that what is claimed to be true is in fact true, without revealing what substantiates the claim to be true (read Sismo docs).
Imagine you have two wallets. One is a public wallet; yourname.eth. The other is a wallet with substantial assets. You have never linked the two wallets to protect your privacy. However, you’d like to benefit from something in your private wallet without revealing you’re the owner of said wallet.
For example, an NFT in your private wallet gets you access to an event or your assets qualify you for a loan. A ZK badge can prove that you own said asset in your private wallet so that you can benefit from it in your public wallet, without revealing what the asset actually is or what wallet it’s in.
5. Privacy Has Both Intended and Unintended Consequences
Ethereum privacy is a game changer. Privacy’s intended consequence is increased adoption. Its unintended consequence will be a regulatory ordeal and a consequential societal tradeoff.
Verifiable private transactions on Ethereum will spawn its mass adoption.
The privacy primitives being developed allow users to control their digital assets, history, and identity. They allow users to reveal verified aspects of themselves, such as financial, medical, social, professional, and personal, without revealing everything or even who they are.
Privacy will power new Ethereum use cases. It will enable users to interact with Ethereum without compromising their identity and security.
However, Ethereum’s privacy will create a regulatory nightmare. If you thought crypto securities regulation was a challenge, it’s about to get more complicated.
Other than securities regulators, crypto has not been the ire of regulators. Blockchain transactions are visible and auditable. Nefarious actors transacting on-chain are easy to catch so governments haven’t bothered much with crypto.
That’s about to change.
Today, authorities can get a subpoena for financial, communication, location, and medical records for suspected criminals.
But if that data moves on-chain protected by privacy primitives controlled by smart contracts, there is no way for authorities to access it. There is no organization to subpoena to get the records ss they remain privately locked. The individual gains unparalleled privacy at the expense of the nation losing sovereignty—regulators will have a field day.
Society will have to decide on a trade-off between personal privacy and the common good.
🟣 EXTRA CREDIT
Learn About The State of Regulation In Crypto and Web3 In 2022
If we want web3 to go mainstream, we need concrete regulations so that businesses know what they can and can't do. But regulating an emerging technology is easier said than done.
👉 Learn About The State of Regulation In Crypto and Web3 In 2022
6. To Trust Is Human
Some crypto enthusiasts believe that no organization or individual can be trusted. They proclaim everything on-chain needs to be trustless and decentralized.
I disagree. Trust is a good thing.
Humans are inherently trusting and the brain is wired to trust. Infants develop a predisposition to trust others because they cannot survive on their own. Nature and nurture combine to make us trust. Technology is not going to rewire that. Nor should it.
Society is a collection of humans trusting each other to varying degrees. On any given day, we make thousands of subconscious trusting assumptions.
I trust that:
- The people at the power plant do their job so that when I wake up I can turn a light on and my electronics are charged
- The subway conductor is alert and can safely get me to work
- My nephew’s school teachers are qualified
- Everyone on the freeway is paying attention and not going to cause an accident
- My plumber to fix the water leak in my apartment
We make so many trust assumptions that we don't even realize it.
Capitalism is an extension of trust. Credit is the “killer app” of capitalism. Credit is the creation of new money that powers economic expansion and prosperity.
A bank makes a loan to a business by trusting the business will repay that loan. For example, a business gets a $100 loan by pledging $40 of assets. $60 of new money is created to fund the businesses’ expansion. That new money is created based on trust.
Relationships, society, and capitalism are all built on trust.
At the root layer of Ethereum, its consensus layer, trust is paramount. Users need to trust that Ethereum is decentralized and censor resistant. Beyond the base layer, we should continue, as we have done in society and capitalism, to trust one another.
Trust scales. Centralization powers progress. Centralized actors, who users can choose whether or not to trust, building applications on a decentralized base layer is what will bring Ethereum to the masses. Doing away with trust throughout the Ethereum ecosystem goes against 300,000 years of human evolution.
Enshrine trust where it matters most, at the consensus layer. Beyond that, don’t fight human nature and nurture, users can choose which centralized players to trust.
What do you think web3 explorers?
🤔 Does trust have a place in web3?
👉 Let us know by replying yes or no to this email!
7. ETH Doesn’t Have an “Illiquidity” Premium
Bulls ascribe an “illiquidity” premium to eth. An illiquidity premium does not make sense. It confuses investors. It adds little to the Ethereum bull case. It should be scrapped.
The rationale of an ETH “illiquidity” premium is as follows. Roughly 20% of ETH today is tied up in staking and collateral. It’s illiquid.
Eventually, 80% of ETH could be tied up in illiquid activities. At that point, only 20% of ETH circulating will be liquid. Hence, in addition to an earnings multiple, ETH should also have an illiquidity multiple of 5x (1/20%).
Illiquidity premiums don’t exist. Assets have liquidity premiums, not illiquidity premiums.
Liquidity premiums are observed across asset classes. When a private company, whose stock is illiquid, IPOs its valuation increases.
Part of the increase in valuation is the liquidity premium. As a public freely traded security there are far more buyers and sellers. It’s more valuable.
Large-cap stocks trade at higher valuations than small-cap stocks because they are more liquid. More people can buy them.
Liquid credit trades at tighter bid/ask spreads than illiquid credit. Again, because more people can buy it. A home in New York City is more valuable than a home in rural New York State because more people want to buy it.
Liquidity increases value. Illiquidity reduces value. Illiquid assets are higher risk because they’re harder to sell—capital is locked up. To compensate for the higher risk, they trade at lower valuations.
Derivatives for staked and collateralized ETH exist. Similar to equity, commodity, and credit derivatives. In the case of TradFi assets, the derivative of the underlying asset can be more liquid than the actual asset.
I suspect the same will occur with ETH. In this case, tying up ETH in staking and collateral won’t affect the overall market liquidity. Liquidity will shift from the underlying asset to the derivative.
ETH could have a “scarcity” premium. Scarcity premiums do exist. They are afforded to assets like rare art and commodities in short supply. But using this criteria ETH does not have a scarcity premium.
ETH does not hold the attributes of rare art, like a Picasso piece. It is not one of a kind.
ETH, in the form of gas, could be construed as a commodity. However, for a commodity to have a scarcity premium, it must be in short supply. It must not be available at any price because it’s stuck in the ground.
ETH will never be in short supply. ETH will always be available to pay for gas. The price may be exorbitant, but it’s still available. Since ETH can’t be in short supply, it can’t have a scarcity premium.
Unlike commodities, there is no substitute for ETH. If ETH ever was in short supply, Ethereum would stop working entirely. In which case, ETH's value would be zero.
8. MEV Is Clear as Mud
Maximal Extractable Value (“MEV”) discussions proliferated at DevCon. MEV is a contentious unsolved topic. It is the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by altering or excluding transactions in a block.
MEV has some benefits. MEV extractors fix economic inefficiencies of DeFi protocols making them robust. They ensure price parity on DEXs and force liquidations.
MEV also results in a poorer experience for typical users. Gas fees and network congestion are higher. MEV incentivizes validators to reorganize blocks, which causes consensus instability.
MEV could also cause validators to centralize. A large portion of solo stakers is necessary to ensure Ethereum’s security. As MEV has an increasing impact on validator earnings, it will force them to consolidate. They’ll benefit from economies of scale enabling them to extract more MEV.
But the result? Solo stakers will be marginalized and Ethereum’s security will be compromised.
MEV could also create private mempools. Traders may send transactions off-chain directly to validators. The validator includes the transaction in a block and shares the profit with the trader.
This process circumvents sending a potential MEV transaction to the public mempool. But private mempools diminish Ethereum’s permissionless and trustless nature. They are also a centralizing force as large validators could offer better execution privately to traders in exchange for profit.
Today MEV is primarily combated by MEV-boost. MEV-boost is software validators can run to maximize their staking rewards.
By making best-in-class MEV extraction software open source solo validators are competitive, reducing validator consolidation. MEV-boost can increase staking rewards by 60% and is currently used on roughly 60% of blocks.
The concern with MEV-boost is that Flashbots (funded by venture fund Paradigm), the creator of MEV-boost, now wields tremendous power in the Ethereum ecosystem. So far though, Flashbots has done a phenomenal good deed.
But we’ll see how it plays out.
Combating MEV is a core part of Ethereum research. Proposer-Builder Separation and Builder API are the two solutions proposed.
The MEV debate centers on should and can MEV be eliminated, and if so how?
MEV is not unique to Ethereum. MEV under a different name exists in TradFi. I don’t believe it can be eliminated. If it’s squashed in one place, it emerges in another.
It also serves a purpose. The consensus in the ecosystem seems to be in line with mine.
But the debate continues with how MEV should be allocated.
Should the welfare of users or the revenue of validators be optimized? User welfare is important for network success. Validator revenue is important for network security.
These are the critical questions MEV research needs to address. And solutions need to offset MEV centralizing forces.
9. Communication breakdown
Ethereum, and crypto in general, suffers from poor communication. There is a chasm between what is going on with Ethereum and the general understanding of Ethereum.
My writing aims to bridge that gap. Tremendous value and innovation are created in the Ethereum ecosystem. But if it’s not articulated to the masses, its potential will be thwarted.
My advice to the Ethereum community, which I also apply to myself, is to keep things simple. I sat in some DevCon lecturers thinking “this is way more confusing than it needs to be.” Stop speaking in theoretical mysticism.
Talks like “Abstraction in the Infinite Garden” are inaccessible. That kind of talk should be abstracted eliminated. Right there, that’s keeping it simple 😉
10. Colombian Crypto is Cooler
This sums it up.
We're Only Getting Started Folks
Right now, there are no clear answers as to where crypto and web3 will end up.
Will we choose the self-sovereign path of ultimate privacy? Or will we allow government regulation to seep into every aspect of web3?
There are still many wrinkles to iron out before web3 becomes mainstream. That's why it's up to everyone in the industry to get invovled and share their opinions.
I hope that sharing my personal experience and thoughts help to spark your own ideas about what web3 should look like.
If you have any, feel free to share them by replying to this email!
Thanks for reading, frens ✌️
ABOUT THE AUTHOR
Sam Andrew
Sam provides a seasoned investor's take on crypto. He channels his near decade of hedge fund investing ($22bn BlueMountain Capital alum) into research, writing, and investing in crypto.
Check out Sam's newsletter on Substack.
Find Sam: Twitter
🟣 FOR THE DOERS
LEARN
Take our FREE Web3 Rabbit Hole Course to get up-to-speed on the foundational components of Web3 so you can confidently build, work, or use the fastest growing technology in history.
COMMUNITY
Our Discord has opened back up. Join the community to discuss web3 news, questions arising from the podcast, and speak to Kyle and Jay directly. Can't wait to meet you ✌️
READ
Learn whether Web3 is Decentralized and Censorship-resistant.
