Navigating the Cryptocurrency Chessboard
with Lyn Alden, Dylan LeClair, and Checkmate
Host Brad Mills invites Bitcoin experts, Lyn Alden, Dylan LeClair, and Checkmate onto the show to discuss in technical detail, censorship resistance, steel-manning the case for Ethereum 2.0’s merge, and the potential impact it has on the world of cryptocurrency. Brad’s been vacationing on beautiful Cape Breton Island and has not had reliable internet access due to Starlink bottlenecks.
Lyn, Dylan, and Checkmate fill him in on the recent occurrences in the Bitcoin space as well as having an in depth discussion about censorship resistance and the hypothetical “what if Bitcoin didn’t exist? This launches the group towards a critical point in the debate about proof of work systems vs proof of stake systems, and how it stands to impact Ethereum and the rest of the Cryptocurrency space.
What if Bitcoin didn’t exist?
To kick things off, Brad asks his three guests about the nature of censorship resistance in cryptocurrency and if Ethereum 2.0 will be able to accomplish that better or worse than Bitcoin. Checkmate starts the discussion off by stating that since this is a room full of Bitcoin maximalists, the best thing to do to put their bias aside is running under the assumption that Bitcoin does not exist and the group has to assume that Ethereum 2.0 exists among the best possible market conditions. Both Lyn and Checkmate agree that a significant proponent of censorship resistance is the proof-of-work (PoW) system in contrast against the proof-of-stake (PoS) system. Lyn also mentions that part of being censorship resistant is the simplicity with which a node is run. In the case of Ethereum, it is harder to run a node compared to Bitcoin.
Dylan remarks that the DeFi infrastructure was empowered to take off like it did off of a strong bedrock position from stablecoins. Stablecoins are a key centralization element which acts against the DeFi brand, as stablecoins centralize finance, not decentralize it. Whoever controls the stablecoins, controls DeFi systems which do not lend themselves to censorship resistance. Checkmate and Brad continue discussion, concluding that market cap is the best measurement tool to judge at a glance, what good a given currency is doing. Under a PoS system, the stakers continue to get richer as the network expands creating what Brad describes as a free rider problem, or in the case of Bitcoin, free rider fallacy. To highlight how deeply PoS systems centralize, Dylan points out the supply concentration of Lido (LDL) has 95% of tokens held by the top 1% of addresses, all the same group of investors.
This rate of centralization creates an effect Dylan calls “decentralization theatre”. Continuing the discussion, Checkmate brings up the fact that 2/3rds of ETH holders are small time holders, compared to early adopters and institutional investors in ETH representing the other 1/3rd. With a PoS system, those investors and early adopters with the technical know-how could leverage their concentration of the currency against the other 2/3rds and force them into unfavourable economic positions. Such a case would make the network unresistant to censorship.
Speculation on the Ethereum 2.0 Merge
As the discussion continues, Checkmate brings up the possible differences to censorship resistance that Ethereum 2.0 will bring with it. To make this comparison, he weighs the benefits a PoW system has that a PoS does not and vice-versa. Jurisdictional risk is not a frequent topic of conversation in a large number of cryptocurrency circles, but PoS systems suffer more from jurisdictional risk than PoW systems do. If mining is regulated or otherwise censored in one country, then the mining systems required for a PoW system can move. This isn’t the case for PoS systems, since stakers always own their currency no matter where it is. As well, miners remain largely anonymous while doing their work, so jurisdictional risk is mitigated by the combined anonymity and global spread of miners.
An important factor to consider in the face of the Ethereum 2.0 merge was the number of miners that chose to leave Ethereum early in order to go mine Bitcoin or other crypto instead, upon hearing the news that their long term investment in mining equipment will not be able to be used on Ethereum after the update. This lent mining power towards Bitcoin and other PoW currencies. This adds to the blunder that is the Ethereum 2.0 merge that Brad mentions in the show. With the NFT boom, if Ethereum mining had still been seen as a long term option, there would have been more miners contributing to the network, overall making it more valuable.
Links to Mentions in the Show
Why the Ethereum Merge is a Blunder