Kevin Zhou, co-founder of Galois Capital, comes to talk about the possibility of a Proof of Work chain on Ethereum after the Merge, the LUNA death spiral, how he plans to play the Merge, and much more…
- how Kevin got started in crypto
- what Galois Capital is and what its investment thesis is
- why Kevin was more vocal than most about the possibility of the LUNA death spiral
- whether Kevin made money out of the Terra collapse and what was his strategy
- what the difficulty bomb in Ethereum is
- the potential scenarios that could arise after the Merge
- whether the public is not considering the risks of the Merge
- how the fact that everybody was telling the same narrative about ETH made Kevin suspicious
- how Chandler’s statement about forking Ethereum made it a lot more likely that it would happen
- the groups behind the encouragement of a proof-of-work Ethereum chain
- whether there is a value proposition for a Proof of Work chain
- how Kevin used The Cryptopians to remember how the DAO fork went
- what replay protection is and why it is important when forking a chain
- why anyone would want to keep the difficulty bomb in a potential proof of work chain
- Kevin’s predictions about the market cap of the potential Ethereum forks
- how a proof of work chain of Ethereum would function without the biggest stablecoins like USDT and USDC
- whether Tether is going to support Ethereum 2
- why Kevin writes using metaphors related to history and gaming and how those analogies relate to Ethereum
- how Kevin wanted to “stick it” to the Ethereum Foundation by offering his services
- whether Vitalik trolled Kevin on Twitter
- whether Kevin will apply the same strategy he used with ETC after the DAO fork
Thank you to our sponsors!
What is the Merge?: https://ethereum.org/en/upgrades/merge/
Proof of Work Chain
Kevin’s analogy: https://twitter.com/Galois_Capital/status/1554053321165512705?s=20
Haseeb’s answer to Kevin’s arguments: https://twitter.com/hosseeb/status/1554163977806000128?s=20
Chandler Guo’s proposal: https://decrypt.co/106409/prominent-chinese-ethereum-miner-wants-to-resist-merge-create-fork
Kevin’s consulting offer: https://twitter.com/Galois_Capital/status/1553090706708856832?s=20
BitMEX researchers on the possibility of an Ethereum PoW chain: https://blog.bitmex.com/ethpow-vs-eth2/
Poloniex’s announcement: https://twitter.com/poloniex/status/1555085757450272768?s=21&t=jkjNGieNXdY5SgT2e9xhoQ
Justin Sun’s support of ETHW: https://twitter.com/justinsuntron/status/1555112296006922240?s=21&t=jkjNGieNXdY5SgT2e9xhoQ
Hi, everyone. Just a quick heads up that I originally recorded this interview with Kevin Zhou of Galois Capital to release next Tuesday, but since news was moving quickly on Ethereum’s proof of work chain, I decided to release it this Friday, so today we’ll feature a long interview, no weekly recap, although I do provide some further updates on proof of work Ethereum at the end. We’ll run a short interview with a recap on Tuesday, and now, enjoy this incredibly interesting and illuminating interview with Kevin.
1inch is a top DEX aggregator that finds the best rates across multiple networks. Why use a single DEX when you can use them all? Get 1inch on your phone now or swap on 1inch.io.
With the Crypto.com app, you can buy, earn and spend crypto in one place. Download and get 25 dollars with the code LAURA. Link in the description.
Today’s guest is Kevin Zhou, co-founder of Galois Capital. Welcome, Kevin.
Hey. How’s it going? Thanks for having me back on.
Right now, you’re known for being an Ethereum gadfly, and before that, you were the most vocal voice projecting the death spiral of the Terra LUNA ecosystem. Both of these things have made you pretty well known, but before we get into all that, I would like to actually just start with your history in crypto. You’re definitely an OG, as far as I can tell. You’ve been in the crypto space for nine years. Can you tell us a little bit about how you got started and how you came to be where you are today?
Yeah. Happy to talk about that, so I’ve actually been in crypto for 11 years, you know, got started in 2011. I was mostly just a lurker on the forums and I didn’t really join industry until two years later. You know, I think, you know, I just found Bitcoin…there was only really Bitcoin back then. I mean, there were some weird forks and alts, but it was mostly Bitcoin, and you know, I was just really fascinated by it.
And you know, at some point decided to join industry where, you know, in 2013 I joined this small startup called Buttercoin and I worked there for, you know, two years. It was an early crypto exchange, didn’t make it through the winter of 2013, and among other reasons was ultimately, you know, closed down, but you know, through that experience I was able to get a job at Kraken, worked there for two years, and then decided to go set up shop for myself, and this was in, you know, I think this was like end of Q1 2017. You know, it took us a while to get started, but you know, finally launched in, you know, 2018, beginning of the year, and I’ve been working, you know, at Galois since then.
And in your role as head of trading at Kraken, what did you do?
I was mostly doing OTC trading. So, there was an OTC desk, and you know, back in those days, you know, there was sort of more of a use case and need, I guess, for a white glove service. So, anytime people wanted to move a large block, there’d be pretty significant slippage and execution costs, and we would be there to basically execute on their behalf, and then, you know, provide them with the price to get these large blocks done. You know, this was around the time that, you know, there was, I guess there was itBit, there was like DRW with Cumberland, and then there was Circle. There was also Octagon. There were a couple players, but it wasn’t really that big at that time.
And I should disclose that Kraken is a former sponsor of my shows.
So, now what does Galois Capital do? Is it just you managing your own money?
So, I don’t want to say too much about the structure of it, but it’s basically a trading desk, and we primarily focus on market neutral strategies, and so far have been doing pretty well.
And what are your assets under management?
I can’t talk about that. Yeah. There’s general solicitation rules where I’m not allowed to talk about certain things.
Well, what’s your trading or investment thesis when it comes to Galois?
Well, generally the idea is that we try and take fairly low risk. You know, we’re involved with OTC trading, basis trades, yield farming, you know, we do a bit of discretion on long-short, we do a bit of special sits, and some market making as well.
Let’s now talk about Terra LUNA. When it comes to what happened there, why do you think that you were more comfortable being vocal about the likelihood of the death spiral than other people who also, you know, kind of felt like it was probably going to go that way but really didn’t speak up as much?
Yeah. You know, I think really a lot of it is that, you know, from my private conversations with a lot of people at the time, there was actually plenty of people who didn’t think that it would work, that the whole thing was doomed to implode, but I think the reason that most people didn’t speak out is because I think there’s a lot of political considerations within crypto. You know, for the most part, a lot of the money managers, a lot of, you know, the company founders, CEOs, exchanges, you know, people high up there, having grown up in this industry together, a lot of people know each other, and I guess there’s always the sense of, you know, they don’t want to talk badly about somebody else’s bags, right, because there could be, you know, real money at stake over there, so for the most part, I think people are very polite and they’re very politically correct and very diplomatic about things.
And I think at that point, I think, you know, to some degree, I think that’s okay. You know, I think it’s important to be civil, for everybody to get along, and you know, I think that does foster, you know, good, positive outcomes, but I think with LUNA, I think it got a little bit too far, and you know, it’s one of those things where you know, there’s multiple incentives. Some of it is consideration for their friend’s bags, some of it is consideration for, well, you know, if they say any bad thing about any company, that might reduce the deal flow that they get, you know, to invest into new allocations, into new companies. So, I think all of those things played into it quite a lot.
And so, why were you more emboldened to speak up about it rather than to try to be polite?
Yeah. I mean, honestly, I think most of it has to do with our situation, which is that we’re fairly market neutral anyway, so we’re not really carrying heavy bags, long or short, so it makes it a little bit easier incentive wise, I think, to speak out. I think part of it is just my own character. I mean, I just felt like, you know, I thought that that was something that everybody needed to know. I mean, for the most part, we’re usually pretty quiet. Like, you know, we can just make money ourselves. You know, we don’t need to do any of those types of things, but I think for this thing in particular, I thought, you know, it was worthwhile for the entire space to know, and it affected so much and there was so much at stake that, you know, I wanted to do a bit of public service there.
But I think, you know, it’s a combination of those two reasons. I don’t think it’s just purely me being altruistic. I also think that I didn’t have the same kinds of vested interests and that made it easier for me to do.
And ultimately, did you end up making money off the Terra LUNA collapse?
Yeah. We made money. That was good money.
And can you talk a little bit about how you traded it?
Yeah, so basically, I forget exactly which day of the week it was, but it was…at some point UST had started to depeg to about 0.998, and at this point the liquidity on the curve pools was starting to dry up, and also, I think liquidity on some of the centralized exchanges was getting a little bit more on the shallower side. So, we were farming Anchor at the time. Basically, we farmed Anchor up until the last day, and so then basically we dumped all of our UST and then put on short positions for LUNA and for UST.
On that, intermittently, as basically throughout the next couple of days the price of both started tanking, there were actually points in time we were actually long LUNA and long UST intermittently, just because we thought at least in the very, very short term, it was oversold, but for the most part, almost all of it was on the short side, and then also, there were cases where we wanted some LUNA to facilitate…I think we basically bonded the LUNA, as it was going through hyperinflation or near that time, to facilitate a lot of liquidations on Anchor.
So, in some ways we actually supported the protocol indirectly, through trying to make money, because the liquidations were very juicy, so we actually had to be long LUNA. I mean, I think we did hedge also. Some of it we didn’t even hedge. we just went long LUNA just so that we could facilitate those liquidations.
Wow. Oh, that’s so fascinating. Wait, and then when you liquidate, then what are you getting out of that?
Well, I mean, you know, Anchor is a borrow and lending platform, so you know, people post up collateral like bLUNA and they’re able to borrow UST, right? So, basically we’re the ones cleaning up on that when people are blowing through their collateral, right? And then, like, you know, LUNA’s price is dropping, they get margin called on their bLUNA, somebody needs to go buy that UST back up, right. so then that’s basically what we’re doing, but you know, heavy discounts, of course, so that was also pretty lucrative. So, it was mostly on the shorting side as well as playing some of these liquidations. That’s the main bulk of it. There were some smaller plays, but that’s basically the main bulk of it.
Okay, and then, I’m sorry, so at one point in there you said that you were long also for periods of it, but that was just to do the liquidations. and when you say for periods, you’re talking about literally from probably that Saturday when the peg started to get wobbly, and then by the next Thursday when it had crashed, so you mean within this five-day period or whatever it was.
Yeah. Yeah. Within that five-day period, and usually the holding times were extremely short. We would try to get rid of it as quickly as we could. We’d just do the liquidation, just get rid of everything, do the liquidation, get rid of everything, try to recycle capital as much as possible.
And then there were also periods of time where we were just actually long LUNA, and it was just that we thought it was just very, very short-term oversold. Like, we would have periods of time of like a couple minutes where we were just long LUNA, just because we thought it was oversold. I mean, we did think that it would death spiral to zero, but you know, there were periods where it was just really, I felt like undervalued in minutes kinds of timeframes.
Wow, and did those bets turn out well for you?
It went pretty well, yeah, actually. Yeah.
Wow. Yeah, because in my head, it just seemed to, you know, go straight down while the supply was ballooning. but yeah, probably…
There were some tiny wiggles in there. There were some tiny wiggles up in there, even though if you zoom out and looks like it fell off a cliff, but there were tiny wiggles in there.
Okay. Okay. No, I believe you, because oftentimes when I look at, for instance, the price of like ETH or BTC, I’ll remember, oh, back in 2015, like this and that happened, you know, whatever, but then now, because everything, the price is so much greater, like you know, on the scale now, it just looks like it was all flat.
But anyway, okay, so I know what you mean, and do you mind revealing how much you made off of your trades in Terra?
I can’t say. I can’t say. Yeah. That’s proprietary.
Okay, so now let’s discuss the Merge. This is, you know, what’s been filling your Twitter feed and a bunch of other people’s, and I should let people know that we’re recording on Monday, August 1, because I expect there might be further developments on this issue between now and when this comes out, so if you’re wondering why we didn’t discuss these developments, that’s the reason.
I did notice that not only, obviously, have you been tweeting a lot about potential different scenarios that could play out with the merge, but then also, already crypto miner Chandler Guo said that he plans to create a hard fork of Ethereum’s proof of work chain with the difficulty bomb removed.
And for those people who aren’t aware, the difficulty bomb is a mechanism in Ethereum that was sort of like this deadline imposed where the difficulty would just increase in a really challenging way, and it was to sort of essentially give Ethereum a deadline to try to force it to move to proof of stake. In the end, they just kept delaying it and delaying it and delaying it, so whether or not it really ever did anything is, well, you can decide what you think about that.
But anyway, Kevin, so why don’t you walk us through, what do you see as all the potential scenarios that could happen when the Merge occurs?
Yeah, so just, you know, going off of what you were saying about this whole delay thing, you know, I’ve made this joke in one of my blog posts, it’s a little bit off color, but I think what I said was, you know, I’ve been waiting for this thing for seven years. You know, I don’t even know if it’s ever going to happen. I mean, what’s the likelihood that proof of stake happens first or Hal Finney’s frozen body gets resurrected? You know, a little bit off color.
But in any case, you know, I think that, yeah, you know, with this Merge, I think really what my point that I’m trying to get across is that I think there’s a lot of risks that the public aren’t thinking about, and a lot of that is because everything is kind of hidden by this “very bullish and optimistic narrative” that the merge is going to go through.
I don’t want to say that these are problems that the Ethereum developers and Ethereum Foundation haven’t thought about, because I’m actually pretty sure they have thought about a lot of these problems, because they went through, a lot of them have lived through the fork with ETH Classic, and you know, they’ve had so much time too.
So, what I think is that really the issue is that a lot of these things are kind of being hand waved away. I think almost kind of maybe what they believe is for, like, the benefit of, you know, just the normal, average, everyday Ethereum holder, and I think that’s a bit dangerous, and I also do think that there are some concerns there that maybe even they have not thought of.
So, you know, that’s I think really what the thing is, and you know, this idea about having this new kind of like fork with like what I call Eth 1, which is going to be like a proof of work fork with the difficulty bomb removed, you know, as opposed to just a smooth merge into Eth 2, which is the proof of stake side of things, you know, that was something that I’ve been thinking about for many years now too, because I always figured that the miners wouldn’t just go quietly into the night, that they would try and fight for their claim and their stake in the future of Ethereum, and not just, you know, peacefully kind of just go mine other chains or go to ETH Classic, which I mean, I think some of them would.
So, you know, that’s something that I’ve always been thinking about for a while, but it only recently kind of came to mind, you know, kind of refreshed in my memory when, you know, as I’m talking to other people in this space, everybody seems to have the same mantra and the same kind of talking points. They’re all super long Eth, and they all believe that the merge will just go smoothly, right? I mean, at the end of the day, the merge is really a fork, right, but you know, I think even the nomenclature is very interesting, right? I can understand why they do it, but I find it pretty interesting the words that they chose there.
So, I think that gave me a bit of pause, right, because normally when everybody believes something, there is a lot of fragility in the system, right, because if everybody is already long, then like, at any sign of trouble, there’s a lot of asymmetric downside because all those longs close out and the shorts pile in, right? And also, on top of that, if everything goes well, well then some things have become derisked, new money may come in, maybe price goes up a little bit, right, but generally, there’s a lot of asymmetric payoffs when everybody is super crowded into the same position.
So that’s, you know, the first thought, and then the second thought is that, why is everybody just saying the same narrative? You know, like, couldn’t there be like a proof of work fork? Wouldn’t the miners try and do something like that?
So, you know, I started thinking about this maybe a couple weeks ago, four or five weeks ago, and then, you know, at some point Chandler Guo says, oh, we’re going to fork Ethereum, and I kind of know Chandler from back in the day. We had a dinner one time in Palo Alto in 2014. It was us, Chandler was there, Leon who’s the founder of Huobi was there, Ben Davenport, founder of BitGo, was there, bunch of other people were there, and you know, I know Chandler because he’s sort of, you know, one of the very early kind of pioneers in mining in China and he knows all the miners super well, and he’s formerly a butcher, actually, I think he was a butcher. and then his wife got into crypto or somehow, and then he got super involved, and then, you know, did tons of mining deals and knows tons of the miners in China. So, when I saw that it was Chandler doing this work, I thought, well, this looks actually pretty serious, you know? Before it was just a hypothetical, I did think that it was going to happen, but now it’s starting to look a little bit more serious, you know, and then also, you know, he put together this WeChat group, you know, tons of people in that WeChat group, certainly a lot of the miners are in there themselves, maybe even some of the, you know, Asia crowd from like exchanges or funds or whatever. I didn’t take a close look at it.
Wait, but are you a member of it?
I’m not a member of it, no, but I know some people that are in there and they’ve been telling me what’s going on?
It’s for people who want to mine Ethereum as a proof of work chain after the Merge.
It’s basically generally supporters of that cause. I don’t know if they actually all are miners, but generally the supporters of that cause. You know, so it just definitely made it more real for me. You know, before, I didn’t want to hypothesize on a thing that, you know, may not happen, right? Even now, it’s uncertain if it happens, it’s just more likely. You know, I didn’t want to just stake my reputation on, you know, things like that.
But you know, after Chandler made that post publicly, and it’s not just, you know, private chat within a WeChat group, but publicly he came out on Twitter, he staked his own reputation on it, that it was going to happen, and then I thought, you know, this thing, it’s a lot more likely than people think it is, at least here in the West, so I might as well say something, and if it is going to happen, there’s so much work to do between now and then if those things are not yet prepared for. Right.
You mean on either side, both sides.
On either side, I would say. I think on either side, to be fair, and I think that there’s a lot of considerations to be had. It’s not just the execution of the work, but also the ideation of all the different edge cases and all the possible failure cases and what could go wrong, or not even what could go wrong, but how do things even play out, you know, so I think there’s a lot to be said on that point.
Okay, so let’s actually…so we’re going to walk through kind of all these scenarios. We’ll just start, I’ll just kind of probably quickly explain, at least in my estimation, why it is that so much of the Ethereum community for a long time just felt the Merge will probably go through pretty seamlessly.
I did mention this in my book, but you know, I feel like, you know, there’s two kinds of hard forks in Ethereum. There’s a very common one that occurs quite regularly where…so, a hard fork in general is where the system makes a non-backwards compatible change, meaning that if anyone continues to mine the version that’s not upgraded, then suddenly they’ll be on a different blockchain, basically, and those, you know, they’re very carefully planned, the whole community is notified, given, you know, in fact, lots of advance notice, and a lot of the developers will, you know, prepare for that, and I think I described in my book as like them preparing basically for something as big an undertaking as like a shuttle launch.
You could sort of argue that this is one of those, right, but you’re right that what’s different is that now we have a constituency that feels that it’s going to sort of lose out. These are people who’ve invested a lot of money, you know, basically just into their miners, the GPU miners to mine Ethereum, which is, like, you know, just solving the puzzle that enables them to add new blocks to the blockchain, and so their investment sort of goes poof, and so this is what you’re arguing, is that they’re motivated to keep doing that to try to earn this money.
But I guess what I’m curious about is, do you see any other group besides the miners interested in doing this? Because I’m just wondering, what do you think the value is of a fork of Ethereum, you know, that continues to mine proof of work if it does not have the same amount of developers? If it doesn’t have, for instance, you know, just all these DeFi protocols on it with all their developers, even the stable coins, perhaps the NFTs, there’s a bunch of oracles on Ethereum, you know, this whole, like, a composable system of DeFi on top of Ethereum now, if that doesn’t continue, then what really is the value proposition for other entities in Ethereum to try to keep this proof of work chain going?
Yeah, so I think there’s really two classes of incentives. The first is pure grift, right? So, if somebody can just make a fork, they know it’s probably not going to work, they don’t plan to support it, there’s going to get some free coins, all sorts of different copies of coins as well as the base coin, Ethereum fork ABCD, whatever, and then just dump it, right?
So then, it’s not just a quick trade? Like, they trade it once and make a killing and then move on? Or…
I don’t even know if they can make a killing, but I think that, you know, there must be some money there as long as some exchange lists it. Maybe there’s going to be some shady exchange that’s willing to list it, you know, and then somebody inadvertently bids for it, somebody clueless, you know, hasn’t followed through with things, hasn’t looked at things too closely bids for this thing confusing it with ETH, you know, all sorts of other things, you know, maybe they could just dump it on them, right? So, I think that’s the first class, and that’s the more sort of nefarious class.
This is sort of the position of the Eth maximalists in Eth 2 about what Eth 1 is, right, which is the proof of work chain. I don’t entirely agree. I think some of it is that, but I don’t think all of it is.
And then on top of that, there’s going to be other forks, probably, right, where like Kadena probably is going to go do their own fork, and also there could be just a proof of work fork with the difficulty bomb still intact, and there’s all sorts of weird games that you can play with that and all sorts of weird grifts that can happen there. So, I think it’s not just limited to two forks, it could be multiple forks. Some of those forks probably are grifts. Some of them may not be grifts.
I think on the may not be grift side, I think it’s the idea that, let’s say you have what you have today, which is Ethereum, but you don’t have any of the developers or any of the projects who created the project supporting the projects that they did, right? You don’t have oracles and you don’t have any stablecoins or non-duplicable assets like WBTC. You don’t have bridges and you don’t have NFTs, or at least very few NFTs, right. Is that still valuable?
Well, you could make an argument that it is, because once it’s been hollowed out, and let’s say there’s some crazy DeFi liquidations on that chain because the oracles don’t work, because the price of, you know, Eth 1 or whatever is super low compared to everything else. But once everything has been hollowed out, all the liquidations are done, and there’s still some final resting price for Eth 1, which is not zero, which I don’t actually think it will be zero, then, like, this chain still has some value. There’s a lot of infrastructure that’s already built out, nobody operating it, but there’s a lot of infrastructure still there, right. Is that better than other L1s and is that better than ETH Classic? I think you can make a good argument that it is.
Interesting, but if you don’t have all the developers to maintain it, then I mean, like, it just feels like it would be a big undertaking to attract the sheer number of developers to maintain all those systems, right?
Sure. I think for some of the projects you would just find developers who are not the original developers of it but understand the protocol, and they can just kind of take over. You know, maybe there’s some…like, whoever scoops up all the liquidations of, let’s say, Compound token on this, you know, Compound 1 on Eth 1, now they control the governance of Compound or a collection of them do. They create a new dev pool or something, or you know, something like that, give it to these new developers so they can maintain it.
And then the other thing too is that not all of these protocols need maintaining. Like for example, Uniswap V2 doesn’t really need maintaining, because we’re already on Uniswap V3, right? So it’s like, if they’re okay with Uniswap V3 how it is and Uniswap V2, which is already fine, then nothing even needs to be maintained, it just operates itself, right? They may not get an upgrade to Uniswap V4, but you know, they have something there at least.
Right. I mean, but I just wonder, like, how many liquidity providers are they going to have on that, and even, you know for what you mentioned earlier, so why would anybody want to be part of a Compound in which, like, one entity really controls it? You know, it’s just…
Sure. Sure, or maybe it’s like multiple entities like. I don’t know. All I’m saying is that I think it’s worth considering because given the state of some L1s out there, and I don’t want to name any names, some of these are real ghost chains and it has exactly the same problems of this, let’s say bad scenario for Eth 1, and yet still trade at very high market caps, and still have some users on it. I mean, I wouldn’t be there. I mean, I don’t know why they would be there, but they’re there, you know, and they do use it, and there’s money to be made, and there is money for, you know, people to engage in liquidation, to engage in market making, to engage in borrow lending.
I think we can only look empirically to say that it’s not unreasonable for this proof of work chain to be something like 5 billion, 10 billion, 20 billion, yeah, even 50 billion. Like, who knows, right? I mean, the market will determine that.
I think also, as a side note, not to just plug your book, but I have actually been reading your book, and I really appreciated all the detail, particularly about the ETC fork episode. I had lived through that, but there was a lot of stuff that I’d forgotten and also a lot of details that I didn’t even know about, especially within the Ethereum Foundation, so I thought that was a super interesting read, and also to refresh my memory too.
But yeah, basically when that happened, nobody thought that ETC, or very few people thought that ETC would survive as a chain. They thought that at some point nobody would mine it, it would just die off, no exchange would list it, you know, so on and so forth, but it turns out…and you know, I think what’s reflected in this belief is that they did not implement replay protection, right, because they didn’t even think it was going to exist, right?
But then eventually, at some point it started trading OTC a little bit on Reddit, across the OTC desk, on Bitsquare which I think got renamed to Bisq, and then eventually Polo listed it in the dead of night, and I think according to the book it was Saturday. I remember it as a Wednesday, but my memory was actually wrong. I think it was actually Saturday. So, it got listed on Polo in the dead of night on Saturday, and then the price just started skyrocketing.
And also, because there was no replay protection, there was all sorts of crazy things that had happened, right, because like, I think Coinbase got drained for a ton of ETH or Eth Classic, I forget which one, just from all the replay attacks that happened, and then people really quickly scrambled to create like Prism contracts to do the splitting of the coins, you know, this, this, and that.
And then also, a lot of the other exchanges, the margin trading exchanges also had a huge headache to deal with because you know, with Polo, Bitfinex and Kraken, they had these margin positions, but they’re all handled…they were all constructed a little bit differently. Like, certain ones of them, you actually do the physical borrow before you can use the capital, like with the borrow lending book like Polo and Bitfinex, and then Kraken, it’s just, like, implied in the leverage when you trade. So first of all, they’re constructed differently, the margin trading, and then second of all, the way that it was eventually handled was also different. For all three exchanges it was different, and it basically came down to who owed this token or who was supposed to get this, like you know, periphery kind of token, this ETC, and I think between the three of them, between the long shorts, borrowers, and lenders, one of those demographics got screwed by each of the exchanges, and all three were different.
So, I think there’s first of all a lot to talk about even on dealing with contracts on exchanges that are not physical Ether, right, because the physical Ether here, you know, splits, but how the contract settles could be very exchange dependent, right? But also, it just goes to show that there’s a lot of unforeseen consequences for things when we think that something can’t happen or don’t even think about it because it’s so far gone, right? Like, the possibility is so far gone in our minds that the idea never even gets generated. I think that’s when things are the most dangerous.
Yeah, and just for people who may be familiar with the term replay protection, it refers to when you have these two…or sorry, when you have a blockchain and then it forks. Immediately after, unless you create the fork in such a way that they truly get split, the addresses will be the same on both chains, so if you suddenly now own both ETH and ETC, it’s very likely, unless you use a splitter or you can, you know, build in replay protection yourself, that when you, for instance, sell the ETC that you no longer want, you will also sell the ETH at the same time. Both coins will be sent out, so this is what caused a lot of pandemonium at the time of the DAO hard fork, because yeah, people were scared of losing money that they didn’t want to lose when they got rid of the coin that they didn’t want, or you know, vice versa. There were just so many shenanigans, and yeah, that whole incident is well documented in my book if you’re excited to check it out.
Everybody, buy Laura’s book. Yeah.
Yeah. I mean, my mind was blown when I was researching all this because there was so much I was not aware of at the time.
Yeah, and maybe just also to just jump in and talk about the replay attacks., I actually remember now with Coinbase what had happened, which is that they didn’t recognize ETC originally, so what ended up happening is that, like, let’s say they have a million ETH and a million ETC, right? So like, I have like 100 ETH on Coinbase, I withdraw it, and then I replay that withdrawal transaction because that transaction is also valid on the other chain, so I replay it, so now I get 100 ETC from Coinbase. Now, I redeposit my 100 ETH and Coinbase recognizes it, and then I withdraw it again, so now I have back my 100 ETH, but I can replay that second transaction to get now an extra 100 ETC.
So, pretty soon I can just start draining Coinbase of ETC 100 at a time by just moving back and forth this ETH, you know, into their exchange. So, that’s kind of how they got drained of a whole bunch of Eth Classic, and you know, I think to their credit, they made everybody whole after all that, but you know, it was just one of those things wherein, you know, there’s like leaked Skype logs of this stuff when all the exchange owners are talking with the ETH devs, and basically it was just pandemonium. I mean, it was just like, okay, you guys can stop trading now, and everybody stops trading. Okay, you guys can start trading again. Okay, stop trading again.
No. They didn’t allow the stopping of the trading. They were really…
Oh. That’s right. That’s right.
…basically pissed that the Ethereum foundation was asking them to do that. They were mad and they refused.
They were very pissed. I remember they were very pissed.
All right, so in a moment we’re going to talk a little bit more about the different scenarios that could play out, but first, a quick word from the sponsors who make this show possible.
Join over 10 million people using Crypto.com, the easiest place to buy, earn and spend over 150 cryptocurrencies. Spend your crypto anywhere using the Crypto.com Visa card. Get up to 8% cash back instantly plus 100% rebates for your Netflix, Spotify and Amazon Prime subscriptions. Download the Crypto.com app now and get 25 dollars with the code LAURA. Link in the description.
To swap crypto, the user has to choose among hundreds of DEXes on multiple networks, all offering different rates and fees. Do you want to avoid that hassle? Hop on 1inch, a top DEX aggregator built to get you better rates than any single DEX. Enjoy unlimited liquidity across multiple networks and top-level security. Get 1inch on your phone now or swap on 1inch.io.
Back to my conversation with Kevin. So, just really quickly, because you’ve said this a couple times and it just makes no sense to me, why is it that you are saying that it is a possibility that some group will want the proof of work chain but they won’t want to remove the difficulty bomb, they will keep it? I have zero understanding of why anyone would want that.
Yeah, so you know, what I was thinking about is that are there very weird grifts that can be done with this, and I think that the answer is yes, which is that if there are certain exchanges, which for example may be insolvent, right, like for example, I think HitBTC is probably insolvent, right, I think they’ve been insolvent for a long time and just hiding it, but my personal opinion, I can’t verify it, you know, just rumors and my thoughts…
Okay. I probably will not also be able to verify this before this goes out, so…
Yeah, but in any case, some exchange, it might be HitBTC or some other exchange, decides to then just go short their own instruments, let’s they have futures or they have perps, they have some kind of margin trading there, they short their own instruments, short their own derivatives, and then later recognize the original ETH with the difficulty bomb, with proof of work in place, as what the contract settles to, right? In that case, the price is going to plummet, they can make tons of money from the short, hopefully dig themselves out of the insolvency hole, right? Like, because at the end of the day, what do they even have to lose, right? They’re already insolvent, right? Maybe this is a way…they’re going to piss off the customers, right, but in this way, maybe they can just, like, kind of make themselves more whole or something like that, right?
Now, there might be a play there, right, because you could also then just go to some of these exchanges who might do this and you could just go short these instruments themselves, but then the risk there is that now you’re putting…the more likely this is to happen, the more also likely that the exchange is insolvent to begin with, so do you really even want to put your money in an exchange that probably isn’t solvent for them to even try some crazy like this, right?
So, you know, that might be a reason for them to do it, is to play like contract shenanigans and derivatives, right, so that that might be one reason.
You know, another reason is just like maybe by accident, maybe someone is running some really out of date software, right, and then they’re just like completely, their node is completely on the wrong fork or whatever, right, like I don’t know, it just doesn’t upgrade correctly, it doesn’t go to move on to one of the more main forks, you know? So like, through error or through grift, I think there are games to be played on why people might want to keep the proof of work with the difficulty bomb. You can even have frivolous lawsuits, for example, right? You go to like the stablecoin and…
Okay, before I say this, I want to say that I’ve been accused of speaking things into existence, right, but by no means am I recommending that this is a good thing to do or that it should be done, and I personally don’t think that I speak things into existence because I think some of these guys, the people that would do things like this probably are already scheming about these things and probably have already thought about it, and if they haven’t, they’ll come to it anyway, right? So, I don’t personally think that I’m speaking these things into existence, and I’m certainly not recommending this as a good thing to do or that it should be done. It absolutely should not be done, but it might be done, and I think that’s worth considering.
Out of curiosity, so we’ve looked at a number of these possible edge cases that you think might happen, but leaving those aside, which scenario do you think is actually the most likely?
I think the most likely case is that there will be at least three forks, with the difficulty bomb, without the difficulty bomb, and proof of stake. I think that the proof of work chain, the main one without the difficulty bomb, does not go to zero, and I think maintains a decent amount of market cap. My current prediction, you know, don’t hold me to this, this is completely finger to the wind, is something like 2 to 10% of Ethereum 2’s market count for the final kind of resting place for Eth 1’s market cap.
Now that being said, in the very beginning, during what I call the pandemonium era or the pandemonium blocks, there’s going to be a lot of liquidations and craziness that happens definitely on Eth 1, possibly also on Eth 2, and a lot of the Eth 2 holders are just going to dump their Eth 1, a lot of their supporters are just going to dump it, so there could be massive amounts of selling pressure just from this kind of thing happening. But I think as long as there’s some expectation that Eth 1 does have some future value, there will always be some bids that are willing to buy this kind of falling knife at some price, it may not be a very high price, but it may be some price, and then once all of that selling pressure ends, then there can be some kind of equilibrium price, some kind of long-term price representing, I guess, more fundamental value for the coin. So, I think at least at least those things will happen.
So in a way, it almost sounds like you’re saying the proof of work chain with a difficulty bomb will be kind of what you explained, where it’s maybe some exchange that’s in trouble that’s kind of trying to use this to dig themselves out of a hole, that for the one with the difficulty bomb removed, that would almost in a way be like another version of Ethereum Classic, like a quasi-ghost chain, some activity, nowhere near as kind of healthy and vibrant as actual Ethereum, but like has ideological support and like some development activity. Is that kind of it? And then…
Well, what I would say is I think on the pessimistic side, I would say that it’s probably a bit worse than Eth Classic. I think on the more optimistic side, I think it could be many times better than Eth Classic. So, I think it’s really hard to say. I don’t think it’s necessarily a ghost chain.
And it would be better because it already has all this other stuff built on top that Eth Classic doesn’t have?
Yeah, and I think there’s the token distribution too, right? It’s just like you’re literally forking over balances. It’s like almost like a vampire attack in that way, right, where you already have the demographic of users who already use all of these products and know how they work because it works exactly the same on one chain versus the other chain, so you know, you don’t need to teach them anything new.
You know, it’s just like, for example, if you brought over the Eth Classic users to Ethereum, that demographic is not as great because they are not as used to using a lot of the apps that are on Ethereum, right, but when you actually fork the balances and I guess the state right now, all the users are exactly the people who are currently using Ethereum, right, in its current state.
I’m not even sure that it will be a ghost chain, and I think all of these scenarios need to be considered, right? It’s like there’s kind of like this branching worlds kind of thing, right? Each step of the way there is like a different branch. Now, what I’m suggesting is I think we should inspect every little branch on every other branching tip and just, like, look at each of the different possible cases. It’s extremely tedious. Most likely, you know, all but one branch will play out, right, so you’re wasting tons of effort and time, but is it really wasted to exactly then figure out how to respond to the correct branch, right, doing all this preparatory work, because when it actually happens, it’s going to be all-out chaos, and there’s no time to figure out anything, so to just do all the preparatory work, yeah, maybe 99% of the work that you do is going to be wasted, but that 1% is going to be so valuable, that by the time the fork happens, you already know what to do and you don’t have to spend the brain cycles to go think through all of these different steps when you already have a game plan laid out for all the different thousand…you know, not thousand, but let’s say like 50 different possible weird, you know, sub-scenarios that could happen.
Like, basically Ethereum and many chains right now are highly dependent on stablecoins, and at least Tether has stated publicly that they will support Eth 2, and I imagine USDC will be the same, those are the two biggest stablecoins, so how would a proof of work chain of Ethereum continue without having these massively important stablecoins?
Yeah, so what my thought there is that with almost certainty, and this also brings back another thing I wanted to talk about, which are some weird grifts with the original chain, but with almost certainty, I think Circle and WBTC are just going to choose entirely Eth 2 as the chain where those coins can actually be redeemed by dollars in the bank account or BTC tied up somewhere, right, pegged somewhere. I think with Tether, I think it’s most likely that they’ll go with the proof of stake chain, Eth 2.
Yeah. I mean, they already said that.
Well, I mean, I think the language that they used was very ambiguous because I think Paolo doesn’t want to make any commitments that he needs to walk back, right? So, the language that he said is he said we will support Eth 2, right? But once again, like reading the…
Yeah. I can read the exact quote. He said, support of Eth 2 will be seamless. Stablecoins should act responsibly and avoid disruption for users. Especially for DeFi, it’s really delicate.
When he says that support for Eth 2, it will be seamless, either what he’s saying is…and this is sort of like the maximalist’s reading, right? Like, two people can read the same thing and interpret it differently, right? But the Eth maximalist reading of this is that we support Eth 2, we do not support each one, right? Integration with Eth 2 will be seamless, but we will not integrate with Eth 1.
But a literal interpretation might be that they will support Eth 2 and they will support Eth 1. There will be USDT on both chains, but still opens the question to where it will be redeemed, where the resting balance at the pre-fork block, those USDT, where will it be redeemed, and most likely Eth 2, but there is some possibility that, let’s say, you know, Tether just decides, well, I’ll tell you what? We’re going to let people decide where they want to transport their USDT. We can’t duplicate it, but maybe for this account or for this protocol and whoever controls the private keys, you can signal to our contract you want to port it over to Eth 1, you want to port it over to Eth 2. Let’s say 5% of people ported over to Eth 1, 95% of the people ported to Eth 2. Well then, in that case you’ve not duplicated the money, you’ve allowed people the choice. Maybe if people don’t make a choice, you defaulted it to Eth 2, but that is a possibility.
Now, I’m not advocating for that. You know, I’m going to get a lot of hate for even suggesting that as a possibility. That’s not what I’m advocating. What I’m saying is merely that we should consider that as a possibility, because when we consider Tether’s incentives, they have multiple incentives, right?
The first incentive is to not lose the money, right, so that it actually doesn’t get duplicated, right, so you can’t just, like, get drained, right, and do some kind of, like manual kind of draining attack on it by redeeming too many coins. So, they can’t duplicate the coins. You’ve got to make sure of that, right?
They also have to make sure that the consensus mechanism is working correctly, right? So, probably proof of stake Ethereum works. I mean, they have, you know, seven tests that merged already. I’m inclined to believe that probably there won’t be consensus failures, but who knows, right? We already know that proof of work Eth works, so there’s just not going to be consensus failures. Proof of stake, probably not, but there’s a small chance, right, so maybe they just kind of wait, they just kind of wait and see. You know, they don’t announce beforehand, which I think is a mistake. I think they should announce beforehand, but maybe they just wait and see, and you know, maybe, okay, proof of stake, one in a million chance something just goes wrong. Okay, fine. Well then, let’s just say that USDT converts to proof of work 1,
But the other thing too is that maybe they also don’t want to get blamed politically for playing favorites and they say, well, you know, I’ve got a lot of business in China, I’ve got a lot of business in Asia. You know, all these miners, they trade on Bitfinex. I don’t want to piss them off, so I’ll tell you what. I’ll let people choose. The default goes to proof of state 2, Eth 2, but if some people want, you know, Eth 1, you know, so be it, you know?
And then the other consideration is that they don’t want to anger the Eth 2 people, right? Because even if they allow a single dollar to be redeemed in Eth 2, you know, it’s going to be hell. It’s going to hell. Right? They’re going to get an earful. There’s going to be rage everywhere from the Eth 2 crowd, some of them swearing that they will never use Tether again. I don’t buy that argument, right? I think a lot of them would stop, I bet a lot of them would switch to USTC. You know, Tether has a lot of liquidity. They have a lot at stake, right?
So, I’m saying that all of these things are possible. Why is nobody talking about this stuff? My issue isn’t about people disagreeing, you know, saying that my ideas are wrong. It’s just that I feel that I am being censored by the very mention of these kinds of ideas, and if these ideas are not talked about and something crazy happens, then this will be just very devastating for people, you know, with…you know, there’s a lot at stake. A lot of people have a lot of money to lose, you know?
Let’s now talk a little bit more about ETC, because you seem to, you know, imply this is not going to be as in demand, but I’m curious about that because you probably saw that Antpool announced an investment of $10 million into Ethereum Classic, and that’s going to continue to be mined by proof of work, and I just wondered, you know, how you thought Ethereum Classic might be affected with all that’s going on. I don’t know if you think proof of work miners will want to just switch over to Ethereum Classic. I can’t imagine this, but maybe would developers want to go over there? You know, we haven’t seen much development activity there, but I just wondered kind of what you thought all of the fallout of this would be for Ethereum Classic.
I think if developers wanted to go, that they would have gone there already. I just don’t see that really happening, but I do think that there is some possibilities for Eth Classic 2, right, which is that if it can absorb a lot of this fallout of hashing rate from this merge, this fork, then you know, there’s greater security to the chain, and there must be some value to that.
Now, there is always some kind of argument here that there’s some level of security which is necessary and anything beyond that is in excess, right? So, it’s a lot driven by demand, right? As demand increases, then the need for security also increases, right? So, I think that there’s some thought that Eth Classic can’t absorb all of the mining capacity of Eth right now, and I think that’s kind of true. I think there are diminishing returns to excess security budget, right?
Wait, because there’s not enough transactions?
Yeah, because what are you securing against? You know, you just have like a security budget of like, you know, 10 billion and then people are trading like a dollar a day. People are moving a dollar a day. You know, you don’t need that much security budget, you know. So, I think that, like, beyond a certain point, the security budget, you know, has super diminishing returns, so there’s no need for that, but I do think that, like, if a lot of the mining power does stay on Eth 1, then at least the capacity for demand, to absorb demand is pretty high with that security budget, right?
And then also there’s another consideration, which is that, what exactly is the security budget of proof of stake, right? There’s an argument to be made that it’s all of the staked Ether, right? There’s another argument to be made that it’s the opportunity cost of the staked Ether, that comparing liquid Ether to staked Ether, you give up a certain opportunity cost, which is the optionality of selling it, right, and if that’s the case, then you know, that’s a different way of considering security budget, right?
So, if things were purely based on security budget concerns and not demand focused, then you know, we need to do some very careful calculations and analysis on what the actual security budgets are, you know, especially given the, you know, decrease in inflation on Eth 2, right, as they put that into place, right, the 99% reduction, or I forget, whatever much reduction it is, right? So first of all, what is the security budget, and second, how much slack is there, right? Because like, excess security budget doesn’t even matter anyway, right? So then, it’s all about demand side, right, and considering how much usage there might actually be. Now initially, there’s probably going be a lot of usage on Eth 1 just from people doing all the MEV and all of the liquidations, you know, all that stuff, right?
So, you know, all of this stuff is hard to say. What I’m saying is that we should just start asking these questions. I think that it’s just a little bit irresponsible not to talk about these kinds of things, right? Because like, at the end of the day, Ethereum Foundation, all the Eth devs, Vitalik, they’re very smart guys, you know, and they’ve already done all sorts of tests and war games about adversarial environments within the closed on-chain ecosystem, right? But what about adversarial behavior and environments from outside of the on-chain ecosystem, the off-chain world, right, the meatspace, right? I feel like a lot of that has not yet been talked about and not yet been war gamed out. It is worthwhile to talk about those things.
And I want to finally get back to one last thing that I was saying about another possibility, which I don’t want to speak into existence, but you know, I don’t think that’s what’s happening, is that there could be litigation where somebody keeps going and gets a whole bunch of USDT or even USDC, right, or even WBTC, right, some of these non-duplicable assets, on the proof of work chain without the difficulty bomb defused, right, so with the difficulty bomb intact, saying that initially the claims of, you know, these tokens were issued against this original chain, right, and therefore they should be able to redeem it, and therefore they’re just going to, you know, do some kind of frivolous lawsuit. I do happen to think it’s frivolous. They’re probably lose, but you know, that’s something that somebody might try, right?
And for them, the reason they might try that is because it’s such a cheap option. If you can buy USDT on this chain at 0.001 cent, right, then like, you know, for them it’s such a cheap option. They just have to pay, you know, legal fees or whatever, right? So, it’s like there’s tons of reasons why, you know, these edge cases, on why certain things like this can happen, right, and yet nobody is talking about it.
Okay. Yeah. I mean, I take your point. Like, you know, as I mentioned in the book, it was very clear that the developers thought about the world one way. They, you know. viewed Ethereum kind of through their lens, and they really didn’t understand how the trading community viewed Ethereum, and that was what resulted in ETC being created after the DAO hard fork. I think you’re right, that, you know, that is a possibility that that could happen or is happening at the moment.
One thing I did want to ask about was you said that people will be motivated to, like, right after the hard fork, just do simple things like liquidations on the proof of work chain. So, are you saying there that because a number of users will have abandoned the proof of work chain, that they’ll have certain positions in DeFi or whatever that get liquidated, and so other people can profit from those? Is that what you’re saying?
Yeah, so the idea is that, you know on a chain where, let’s say Eth 1, let’s say its value is like 5% of Eth’s value, right, and that is being used as collateral to borrow certain other types of assets or other types of assets are used to borrow that, then like, all of a sudden the prices are completely different than the pre-fork block, so then one side just gets liquidated, right, because there’s not enough margin collateral, right? So, there’s like stuff like that.
There’s also stuff that you can do where it’s like, if it’s sure that all these stablecoins and WBTC go to Eth 2, then all of that stuff is completely worthless on Eth 1, so everybody just dumps everything that they have on that side for the native token or for some other types of governance tokens, Compound 1, or Aave 1 or whatever, all these other types of tokens which actually maybe have some value rather than these tokens which absolutely have no value, right?
So, I think there’s going to be a lot of that, and probably a lot of that just goes into, you know, maybe some of the larger stuff you could probably just do manually, you know, gas prices probably sky high, but you know the bots are probably just going to try and scoop up as much of that as possible, so the first couple blocks are just going to be filled to the brim with all sorts of crazy like that, basically just people just trying to give away nothing for something, basically. So, I think that’s basically what’s going to happen.
I still feel that most of what you’ve said shows like a short-term benefit to doing all these things, but I don’t know if I’ve really heard a case for, you know, some kind of long-term value in a proof of work Ethereum chain?
Yeah, so what I think there is that I think this is basically the current line and where the Overton Window has shifted with the Eth maxis, is that, you know, originally it’s that Eth 1 won’t exist, and then now it’s that Eth 1 will exist, but it’ll plummet to zero, and what I’m saying is that I want to push that even further and say, but it’s possible that it’s not zero, right? Like, why don’t you even just consider that possibility, right? And let’s say some people on the in that camp find some people, some devs to run some of these projects, and for other of these projects, don’t run them at all, everything just gets completely in pandemonium, crazy liquidations, people dumping all sorts of non-duplicable assets, tons of selling pressure on Eth 1, and then what, right? And then what, you know? Like, maybe some value still, right? Maybe having these contracts there, maybe having borrow lending pools.
I mean, arguably it’s just saying that like, when Eth right now is hollowed out, is it still better than other L1s? Maybe. You know, that’s possible, right? Like, I almost feel like it’s kind of a weird argument for the Eth 2 guys to make, because it’s almost like saying, well, if Eth is…because they’re in kind of a hard spot, right, because if they say, oh, this thing has no value, then you’re almost saying that, like, besides certain TVLs and certain non-duplicable assets here and not having pandemonium, that Eth right now wouldn’t be valuable. If they say that it does have value, then it almost gives credence to the other side on trying to do what they do.
I think really one of the biggest issues, I think, with the Eth 2 camp, is that they don’t have consideration beyond the world that they think they exist, besides the contained world that’s within their view, right? They don’t truly have considerations for the miners. They don’t really think about them as like real people. Like, if you ask them, are they real people, they’ll be yeah, but they don’t really like about it, like viscerally in that way, right, like as people with families, you know, they’ve got to pay the bills, you know, shit like that, right? Like, it’s just like some folks in a foreign land that do certain things that’s currently secure the network now. We’ve given them enough forewarning, they knew this was coming, they shouldn’t have invested into this hardware knowing that we would switch to proof of stake. Right?
So, I think it’s really this kind of mentality that I think is a little bit just dangerous, right, because then you’re not…if you don’t think of them as, like, “real people”, you don’t think of them as having, like, real incentives, right? You don’t think of them as…like, you almost like disregard their intelligence, right, and their self-interest and what they might do. You underestimate the lengths that they will go to try and protect their claim on what they think should be theirs, right? And I’m not the arbiter for that, right? It’s not up to me to decide who’s right or who’s wrong, right? I’m just saying that we should consider everybody’s perspective and everybody’s incentives.
Like you know, I’ll give you an example. On the lending desk there is a multi-pronged approach to whether or not forked claims need to be returned, right? So like, let’s say I borrow from you ABC, right ,and then in the time that I’m borrowing it from you there’s a fork, and now there’s XYZ, right? If XYZ is very, very small in value, I don’t actually have to return it to you, right? When time comes up, I just return to you ABC. But if XYZ has a lot of value, I do need to return it to you. So, how is that determined, right? It’s determined by like, there’s usually this multi-prong approach, it to do with like hash rate, it has to do with like exchanges and prices, it has to do with, you know, there’s some 5% threshold somewhere in there. I posted that on my Twitter, about all the different prongs. That’s an example. Some people do differently, some people do it similarly.
But I find one thing interesting, which is first of all…oh, two things interesting. First of all, one of the problems actually talks about hash rate, because the reason that that was written into the contract in the first place is because before we’ve only had proof of work and proof of work forks, right? Like, Eth Classic and Eth were both at the time proof of work. BHC, BTC, they were all proof of work. There are two proof of work chains, so it makes sense to compare hash rate, right?
Well, what about, like, when one goes to proof of stake and one goes to proof of work? Then the language of contract doesn’t quite make sense, right? Yet, that is actually the language, and maybe there is some viability in holding that in court, right? Like, maybe there’s some guy who just, like, doesn’t return part of it and just goes, hey, look, it’s based on the hash rate, it’s not based on, like, whatever, economic security or whatever, right?
So, there could be games that people are playing with these lenders themselves, and I think on top of that, there’s also a question of what is the fork, right? What it says is that airdrops and forks must be returned if they’re above a certain threshold, right? But then it begs the question, what is the original chain, right? What is the forked or airdropped asset, and what is the original asset, right? Now, I think with Bitcoin it was kind of obvious, right? Bitcoin was original asset. BCH, which made protocol changes, was the fork.
Over here, you can make an argument both ways. You could say that proof of work Ether is the original asset or you could say proof of stake Ether is the original asset, or you can even play the grift and say that proof of work with the difficulty bomb intact is the original asset, right? And this all has implications on how settlements and the borrowing lending will be done, which I think people will resolve, but I think people need to come out and say, okay, the Galaxy, you know, Genesis, all these guys need to come out and say, oh, well, this is how we’re just going to handle it, right? Or like, these are the considerations, here’s the new four-prong approach, everybody needs to resign contracts, you know something like that. You know, so I think there’s just a lot to be done.
Yeah. I mean, I agree with you on all that, that yeah, there could be a lot of messiness.
I did want to ask you about what I consider your highly entertaining tweets. They’re often written in the manner of ancient times, and they invoke terms from the video game StarCraft, or they invoke Romans, Carthage, et cetera. I’m just going to read some my favorites, which I think were the tweets that you published after the collapse of Terra. And it began, the sacking of crypto Carthage. I’m only going to do this victory lap once, so gather around. My name is Cato, Scipio by another name, breaker of pegs, master of strategy, distinguished orator, best larper of crypto Twitter, arbiter of justice, keeper of the autists, servant of Rome and humble farmer. We are here today at the end of a LUNAr era. I have said that Carthage must be destroyed and so it has come to pass. In victory, let us remember to bear it with grace. War is ugly and filled with many casualties (on both sides (mostly theirs)). And so on.
I often have to look up historical or video game references to even try to remotely understand your tweets. Why do you write in this manner?
Yeah, so I think it’s really for two reasons.
The first is that, you know, I think it’s just kind of fun to be a little bit bombastic and to reference certain things in histories or culture that I think are appropriate metaphors for the current situation. So, you know, I think with the whole LUNA thing, you know, going off of the Third Punic War, you know, there was this guy, their senator on the conservative faction in Rome who always said, and ended his speeches with, and therefore Carthage must be destroyed, right.
And basically the context of this is that Carthage, sometimes it wasn’t their fault, but they were always uprising, they were always rebelling against Rome. This is why this is the Third Punic War, right, and basically every time they would get wealthy, every time they would get powerful, they would try and take Rome.
So, what Cato was saying is that this will be forever a thorn on our side. This thing is just really bad for our great empire, and we must just completely destroy it once and for all, right? I think eventually he convinced the Senate, and that’s why, you know, Carthage was sacked, and I think that was actually the correct decision from a military and strategic standpoint. I think morally it was a little bit actually questionable, but I think from military and strategic standpoint it was correct.
I think that part of the analogy, I think doesn’t quite fit, because I actually do think morally LUNA should have been destroyed too, but the idea is that there is this cancer, that if we let it metastasize, it’s going to completely destroy the rest of us here in Rome, which is crypto, right? So, that’s kind of why I used that metaphor.
Now, the reason I use a lot of StarCraft metaphors for this one is because I don’t think the goal here is to destroy Ether. I actually kind of like Ether and I’m long Ether right now, like personally, not with the fund but my personal holdings.
But I think that there’s something very relevant about the analogy that I use, which is about the protoss, the protoss conclave, which is a race in StarCraft, and the majority of them are bound to something called the Khala. It’s basically a psionic bond, a telepathic bond with all of these other individuals within the conclave, right? And at some point some of them rejected this collectivism, right, this collective thought and this kind of, like, mind melding and decided to sever their psionic cords, which are these cords that are attached their heads that give them this ability to mind meld with everybody else, and to become and individual, right? And they were branded as heretics and they were cast out, and you know, basically exiled from their home world of Aiur to some other planet which was eventually the home world for these dark templar, the Nerazim, which is called Shakuras.
And I think that the reason that I wanted to use this analogy is because I think that this was a lot more relevant to what was happening today.
Wait, so just like fully connect the analogy to what’s happening in Eth 1 and Eth 2. By the way, these are your terms. Hopefully Ethereum people won’t be pissed at me for using those terms, because I’m not sure what they’re using, but yeah, proof of stake Ethereum versus proof of work Ethereum. So, explain the full analogy.
Yeah, so what I’m suggesting here is that the Eth 2 people, they’re like the Khalai protoss, which are the ones that are completely mind melded, because they’re completely mind melded into an echo chamber and they can’t see beyond their own world, right? And what I’m saying is that the reason that I’m like the dark templar is because I’m trying to think of all these things outside of their collective agreement and consensus about how things were going to be. I’m trying to think as far outside the box as possible, and because of this, I’m branded as a heretic and exiled, right? And that’s why I wanted to use that particular metaphor, and that’s why I thought it fit.
You know, I could have used some Roman metaphor too. I could use all sorts of random, you know, metaphors, rap metaphors. I would love to use some rap metaphors one day, but you know, that’s why I thought that this was very relevant.
And I think the second reason is because I wanted to show them that at the end of the day, I’m not really their enemy, that at the end of the day, both the dark templar and the protoss Khalai are our brethren, right? At the end of day, they’re part of the same group of people, and you know, even though they exiled me, that I’m not there to try and do them harm. and in the story of StarCraft, basically eventually they banded together, and you know, were able to cooperate, because what I’m saying is at the end of the day, I don’t see you guys as a cancer like I see LUNA, right? I don’t see you guys as Carthage. I see you guys as my fellow brethren, but I just have different thoughts, and I do not want to be a part of this collective groupthink, and the “narrative” and the narrative is what I call the Khala.
I guess what I’m saying is that hopefully more people, I think, start to question things and to start thinking through a lot of implications for things that may or may not happen, and I think that that’s healthy.
I think one of the biggest problems that I’ve always had with Ethereum, even though I’m long Eth, is that I feel like the brain trust that they’ve built has a lot of dogma, and you know, it comes from this engineer kind of Silicon Valley mindset, right? In Silicon Valley, there’s tons of dogma which most of the time is true, and that’s why it’s repeated and used, but every once in a while it’s false.
For example, growth at all costs, right? There’s few things that determines a startup’s success besides its growth rate. However, there are some pathological cases where you can have extremely high growth, but which is not monetizable at the end and becomes a bad business. For example, like the app Yo, where you can text, you basically Yo each other, Yo your friends, just text Yo to everybody. There’s like WeWork, right, which had enormous growth, but there was questions about the sustainability of business at the end of it, right? And you know, just others that I can’t even think of right now, just other cases like ChangeTip, for example. That was another case of hard to monetize but hyper growth startups.
There’s another dogma that I think is interesting, which is the builder versus the trader meme, right, and it’s always implied in all of these dogmas that builders are the heroes and traders are secondary and less, right, and I think that…to be far, I do think that builders are very important, right? Like, I think most traders think that builders are very important, but most builders don’t think that highly of traders, right, because they think that they are on a moral high ground, and they don’t quite respect the level of intelligence of traders in general. Now obviously, there’s some better and some worse, right?
So, there’s always something kind of like this permeating, unexpressed, unsaid, silent agreement that it’s the builders that matter, and I think that’s sort of one of the reasons that I even proposed in the first place, you know, one of my tweets, that hey, I’m going to consult for either side. I’m a mercenary. I’ll consult for either side for five mil. and if you only want me to exclusively consult with your side, you’ve got to pay me an extra two and a half mil for forgone profits that I could have gotten maybe from the other side, right?
And you know, I changed my mind about this later, but at the time I was thinking to myself, you know, why shouldn’t I make money? You know, I think my ideas are pretty good. I think there’s a lot of value there. Why should I just give them out for free? You know, they should pay me. In fact, I feel like it’s symbolic, right. because what I was thinking is like, what’s the actual expected value of a lot of this stuff, right? Like, if things are done correctly versus things are done normally or averagely, it probably affects the market cap of, like total Ethereum, Eth 1 plus 2 plus all the other forks, by like probably more than 200 mil, you know? So I was thinking, man, you know, five mil, what a great deal for them. You know, they could just get that, right?
And I was kind of being a dick, right, because like, I knew, like, the Eth Foundation, they don’t pay their devs, like, very well, right? So like, all the devs make like only 100 grand, right, and I’m like, oh, yeah, this random trader just comes in, just gets five mil just for his ideas. He doesn’t even do code. He doesn’t even code it up. He doesn’t even execute on these ideas. He’s just for ideas, right? Just for thinking about it, right? So, I kind of wanted to…like, you know, I had some feeling about just really wanting to stick it to them a little bit there.
And you know, and I think part of it also wasn’t even so much about the money or even my own ego, you know, because like, ever since I was growing up, everybody has always told me that I was smart, you know, so like, at this point, I don’t think what people thoughts are about my intelligence are going to move me either up or down on that. I think I’m pretty set in my own beliefs about myself, but it’s almost like I wanted them to kind of, like, concede that they did not think of everything, right, and that’s why I wanted it to be a sizable amount, but not so much, because I kind of did want to help him, you know. I didn’t want to price it at EV, but I also didn’t want it to be, like, insignificant. I wanted it to be that it was something where was just like a public concession of that idea.
Yeah. Well, I just have to say, for people who didn’t see this exchange, so I’m not sure if Vitalik was trolling you or if this was a real response, because it could also be his real response.
No. He was trolling. It’s okay. I still like him.
But he wrote, wait, I read the above and I’m confused. Why does Twitter say that so many people I know follow Galois Capital? Is it a famous parody account? And because of who he is, I truly didn’t know if he was being real or if he was trolling you, but you think he knows who you are and that he was just trolling you.
I’m pretty sure he was trolling me, but it’s okay either way. I mean, I still like the guy. I still think he’s a really smart guy.
But you know, I guess, you know, originally the reason I made this proposal is because I did feel like there was a lot of dogma, and I wanted them to publicly come down and out of that dogma because, you know, at the end of the day, if they’re on the same page, we can all think through all of this together. They certainly know their own protocol better than I do, right? So, if I’m the only one trying to come up with all sorts of weird cases, I’m not going even get to all of them, right, so we should all work together, but that can only happen if sort of the veil of dogma is parted, and part of that, I felt like, was just concession that maybe they had not thought of everything, right?
Like, and there’s like tons of dogma out there, right? There’s also, like, software will eat the world. Well, it will, but not everything, right? There probably there are some weird cases where it actually goes in the reverse, where we start doing stuff with more humans and less software, right? Probably there’s at least some weird cases like that.
There’s, like, money is a shared illusion. Well, that’s true. Money is a shared illusion, that’s the property of all good money, but is that the only thing? Like, maybe there’s some knock-on effects with the properties of the money itself, which then also have feedback effects on it becoming a shared illusion and the shared illusion having feedback effects on it, right? Like, I think a lot of these common sayings are generally good heuristics to use, but eventually start to permeate what we do and our thoughts in the simple version, and then we take it as true, right?
I did want to, like, ask you specifically about this issue because I do agree that there’s a disconnect kind of between traders and the Ethereum Foundation or developers in general, and in my book I wrote about how immediately after the DAO hard fork there was a trader at Kraken who tried to obtain the coin that eventually became known as Ethereum Classic at an extremely cheap price, and this was, like, in the few days like right after the hard fork but before ETC was actually listed on exchanges. I recently found out that that trader was you, so I was wondering for the upcoming merge, are you trying to do the same thing?
I don’t personally think for the…so first, I do want to talk about that, but I want to say that for the upcoming merge, I don’t think that I’ll be able to get these coins that cheap, right? Because like, if I really wanted to get these coins cheap, then I would say, yeah, you’re totally right, Eth 1 goes to zero, you know, and I’ll just scoop that stuff up myself, right, when it goes to, like, really pennies on the dollar, pennies on pennies on the dollar.
Now, about that particular point about that with me at Kraken, yeah, that definitely happened, and you know what’s funny about it is that I wonder if they’re still sore about that, right? Because it was still at a time where I was in a very aggressive make money mindset, right? So, I was like, well, clearly these Eth guys, they’re way too optimistic. They think that this thing absolutely has no value, but I think, like, it has some value, right? And I didn’t even think it would have that much value. This is like before Polo listed it, right? So, even for me, I was like, maybe this is like ten cents? Is it like 10 to 20 cents, maybe? Okay, so if I can get it cheaper than that, that’s probably a good idea, right?
So, I reached out to a lot of these devs, asked them to OTC it. I actually got to, I’m not going to name the names, but one of them for 70,000 and another for, I remember it was 200,000, but I could be wrong. It was bigger than 70,000.
Yeah, Eth/ATC or…
Or what was then being called dead Eth, but anyway.
Yeah. Well, I guess internally…I didn’t even know they were internally calling it dead Eth. What we were calling it at the time was ETHC, so it wasn’t even ETC at the time. That came when Polo listed it. They basically named the coin ticker, basically. At the time we called, it was Eth Classic, ETHC. I basically got them to agree to sell 70,000 and 200,000 ETC at two pennies apiece, and then basically they needed a longer settlement window. I realized later from reading your book it was because the person was on vacation or didn’t have access to it for a time, but I remember that the other person, they gave me the reason is that, oh, they’ll get to it because, you know they need to do to do the splitting contract and all that, so they’ll get to it. Like, I remember it was a Friday that they were going get to it, but I could be wrong. Maybe it was actually a Wednesday and I got that confused with the listing date, but some short time afterwards.
Now, normally with OTC trading, you settle the trade within 24 hours. Now, for this one, I knew that I didn’t want to bother…I felt like I was getting such a good deal, you know, so I was like, I don’t want to, like, rock the boat there. So I was, okay, if want a longer settlement, that’s fine, you know. It’s all good. You know, I’ll get it eventually.
So then, basically in between the time where I did the trade and confirmed…I have receipts of them on email confirming…I still think they owe me money, by the way, but I’ll let it go, but anyway, then in the dead of night, Polo lists ETC, price skyrockets way higher than two cents. I forget. What did it rally to? One fifty or something after a number of days? I forget.
I think it went as high as $3.53, if I remember correctly.
Yeah, I mean, somewhere along the way, so then in the end, they basically reneged out of their trades, I didn’t get paid on those trades, which I mean, is extremely rare. In OTC, word is deed. When you do a trade, when it’s done, it’s done. You know, you don’t reverse out of that.
And I’ll tell you another thing too, one of the reasons I was actually thinking about this, so I was already kind of looking at the Bitsquare and Bisq markets, right, and Reddit, right, but one of the reasons I was thinking about this is because, I don’t want to say who, but there was somebody who approached Kraken and said, hey, we want to buy all of your ETC that’s now worthless, has no price, for one penny each, right? And I was like, this is way too much tail risk, right? So, you know, I talked through it with Jesse, I was like, this is way too much tail risk. Like, what if like all the sudden it revives and stuff and has value or whatever? You know, one cent is way too cheap, right?
But I think looking back, I might have even sold it to him for ten cents, right, because that was my counteroffer. I came back to him and I said, you know, maybe for ten cents we could do it. You know, I still have to think about, I still have to talk with Jesse and stuff, and he’s, oh, that’s too rich for us, you know, we can’t do it. We can’t do it at ten cents. You know, so that was very fortunate. Not getting wrecked on that trade actually was really, really fortunate, but getting reneged on on the two cent trade was very unfortunate, you know.
Wow. I have to say, like, it just amazes me how I’m finding out this tidbit now, because you know, I mean, yeah, finding out even what I did about this offer from the Kraken trader, it was not easy. Let’s just say, you know, people don’t want to talk about stuff like that, so yeah, it was kind of a fun nugget for me to find out who was behind that.
Well, this has been an incredibly fascinating conversation. I just, you know, really felt like, you know, whether or not any of this comes to pass, I think, you know, I would agree that it’s at least worthy thinking about these possibilities and having a game plan in place for any of them. In the meantime, well, I guess we’ll just have to see how things play out when the merge comes, where can people learn more about you and your work?
Yeah, so they can go to @galois_capital on Twitter. Yeah, I post a lot of my thoughts over there.
I did want to say actually one last thing if you don’t mind, which is that I did say that initially I made these offers, you know, for consulting, you know, because of these reasons, right, and eventually I actually changed my mind and that’s why I kind of rescinded it, because I thought at the end of the day…I still think that it’s important that we get paid something for doing consulting, but I think the way that I phrased it as two different sides going to battle with each other, I think wasn’t healthy for the space, and I think at the end of the day, it shouldn’t be a kind of game where if you hire me I will also help you destroy the other side, so I think that’s basically off the table.
If people want to hire us and do consulting, we will still do that, but not in an aggressive way to destroy the other side. I personally think that both sides have a right to exist, and it’s not for me to judge which side is correct in this kind of moral or ethical debate, you know, in the markets in the end of the day, I think it’ll sort things out and settle.
So, we’re still open for that. I don’t mean it in a way to say that, you know, it has to be this side or that side that pays. Whoever wants to pay, we’ll take it, but we’ll only try and suggest constructive things that are actually good for the space without destroying anybody, and I think that was my mistake, and that’s what I feel like I did wrong, which is why, you know, at the time was a little bit, you know, aggressive at the time, but having thought about it and slept on it, I think it really is important that Rome survive and we do what’s best for the industry.
All right. Well, we’ll have to see if either side takes you up on it, but in the meantime, it’s been such a pleasure having you on Unchained.
Yeah, likewise. It’s always fun. I appreciate it, Laura.
As mentioned earlier, Kevin Zhou and I recorded his analysis of the possibility of an Ethereum proof of work chain on Monday, so there have been a few updates on the topic from the past few days.
First, as mentioned during the show Chandler Guo, an important and well-known Chinese crypto miner, announced on Twitter that he would be attempting to fork the Ethereum blockchain and create a proof of work chain. Back at the time of the DAO hard fork, he had initially said he would attack the Ethereum Classic chain and then a month later changed his mind. He tweeted last week, I forked Ethereum once, I will fork it again.
On Monday, the day this interview was recorded, BitMEX released a blog post outlining in detail many of the same theories Kevin laid out here. I highly recommend you read this for further information.
On Tuesday, a new group called Ethereum Proof of Work tweeted that crypto exchange Poloniex would be supporting the proof of work version of Eth. Poloniex subsequently followed up with a blog post on Thursday stating it would list two potential forked ETH tokens, ETHS, representing the proof of stake token and ETHW, representing the proof of work token. All Ethereum ETH holders on Poloniex will receive the forked assets at a one-to-one ratio when the upgrade is completed, Poloniex said.
Following Poloniex’s announcement, Justin Sun, the owner of Poloniex and founder of Tron, said that he would donate some of Polo’s ETHW to the potential proof of work ETH community and developers to help build the ecosystem.
Also, Ethereum Proof of Work tweeted that USDD would be the first stablecoin of the Ethereum Proof of Work community.
For those of you who have read my book, you will see echoes of what happened at the time of the Dao hard fork here, including the involvement of Chandler Guo, the fact that traders were a large driver of the interest in the old chain, and that Polo was the first exchange to give legitimacy to the old chain.
Thanks so much for joining us today. To learn more about Kevin and the whole Ethereum merge, check out the show notes for this episode.
Get exclusive access to even more of my interviews through Bulletin. Subscribe for content you won’t find anywhere else on Unchained, including videos, weekly news roundups and more. Visit laurashin.bulletin.com
Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Matt Pilchard, Juan Aranovich, Pam Majumdar, Shashank, and CLK transcription. Thanks for listening.