Vitalik Buterin's 'Proof of Stake': The CoinDesk Megareview

What a decade of essays – covering everything from Soulbound tokens to superrational DAOs – says about Ethereum and crypto.

AccessTimeIconNov 3, 2022 at 11:30 a.m. UTC
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While he’s best known as the co-creator of Ethereum, Vitalik Buterin began his cryptocurrency journey in a role that often gets a bit less respect: journalist.

Driven by his interest in Bitcoin, Buterin was a co-founder of and incredibly prolific contributor to Bitcoin Magazine starting way back in 2012. His writing about Bitcoin helped him deeply engage with the theory behind crypto, and formed connections to early projects like MasterCoin that shaped his ideas for Ethereum.

Even after stepping back from journalism, Buterin has continued to guide thinking in the cryptocurrency world through blog posts on an array of topics. Now a selection of Buterin’s posts and related writing have been assembled in a proper book, “Proof of Stake: Making Ethereum and the Philosophy of Blockchains,” released Sept. 27 from Seven Stories Press.

Curated and edited by University of Colorado Boulder media studies professor Nathan Schneider, the volume features important documents of the early days of Ethereum, but focuses largely on Buterin’s big-picture takes on deep questions about markets, money and society.

The maturity and nuance of these essays makes them inherently interesting regardless of authorship. But they are important for two added reasons. First, reading essays stretching back as far as 2014 shows just how profoundly Buterin has shaped thinking about crypto: Many concepts and lines of reasoning that are now part of the fabric of crypto theory got their first or most prominent airing in Buterin’s writing.

(Penguin-Random House)
(Penguin-Random House)

Second, the body of work in “Proof of Stake” demonstrates the sheer depth and complexity of thought that goes into designing economic and technical systems that are both innovative and sustainable. You might even argue that the intellectual foundations Buterin forged through writing have played a major role in the long-term success of Ethereum. Luna founder Do Kwon, to draw a particularly pointed contrast, is not exactly known for his care with words, a lack that might have been reflected in the nuance, or lack thereof, in Kwon’s wealth-annihilating creation.

Here are the key takeaways from the collection, according to staffers from Layer 2 – starting with Buterin’s rarely appreciated lighter side.

Vitalik, the low-key cut-up: 7 zingers from ‘Proof of Stake’

Reading “Proof of Stake” reminded me of meeting its author, Vitalik Buterin, in 2014. It was hard to keep up with his train of thought, but he still managed to seem upbeat and open. While abstract and often technical, Buterin’s collected writing comes off as similarly personable – in no small part due to a wry sense of humor. In fact, Buterin often uses jokes to convey important ideas.

The Ethereum creator’s witticisms range from dark comedy to inside baseball to low-key trolling. In a 2016 post describing commonalities between the crypto community and existential-risk researchers, Buterin defines the latter group’s fears this way: “[I]f you tried to tell a superintelligent AI [artificial intelligence] to cure cancer, it may end up reasoning that the most reliable way to do that is to simply kill everyone first. If you tried to plug that hole, it may decide to permanently cryogenically freeze all humans without killing them.”

A notable difference between those two communities, Buterin writes, is that unlike the “Age of Ultron”-style AI that “X-Risk” scholars worry will wipe out humanity, in blockchains “the algorithms are dumb, and yet the agents that they have to control are quite smart. AI safety is about agents with IQ 150 trying to control agents with IQ 6,000, whereas cryptoeconomics is about agents with IQ 5 trying to control agents with IQ 150.”

Buterin takes a few sly digs at the Bitcoin community he belonged to as a teenager before leaving to start Ethereum. In a 2017 post about blockchain governance, he defines the “bottom layer” of the stack, the “ultimate deciding layer,” as users’ ability to run whatever software they want, regardless of external decisions or pressures. This is surely something Bitcoin maximalists would agree with, and why they scoff at, for instance, environmentalists’ campaign to impose code changes from the top down.

But to illustrate the idea, Buterin tweaks maxis’ noses with a scenario straight out of their worst nightmares: “[A]ll Bitcoin users wake up one day and decide to edit their clients’ source code and replace the entire code with an Ethereum client that listens to balances of a particular ERC20 token contract, then that means that that ERC-20 token is bitcoin.”

In another 2017 post describing the different ways to gauge how decentralized a network is, Buterin challenges the assumption among many in the Bitcoin community that mining “consists of many small actors that make decisions independently.” Above a photo of a panel of top mining executives taken at the 2015 Scaling Bitcoin event in Hong Kong, he quips: “Can we really say that the uncoordinated-choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?”

Cryptocurrency exchanges, which make their money on trading fees, also get a subtle roasting. In his piece about blockchain governance, to illustrate the downsides of coin voting on protocol changes, Buterin imagines exchanges enticing investors to store coins with them so they can control the votes, which he suggests would not be in a network’s best interests. “Exchanges profit from chaos, so their incentives are clearly quite misaligned with users and coin holders,” Buterin writes.

And in a 2021 post that tries to fathom why blockchain-based prediction markets gave Trump a double-digit probability of overturning the 2020 election even after the U.S. Supreme Court rejected his challenge, Buterin offers this zinger: “Those who are experts in electoral politics have a hard time getting into crypto, and crypto has a large presence of not-always-correct forms of contrarianism, especially when it comes to politics.”

These moments of levity take the edge off the otherwise intimidating challenge of exploring Buterin’s labyrinthine head.

Vitalik on Ethereum, then and now

In his January 2014 essay, “Ethereum: A Next-Generation Cryptocurrency and Decentralized Application Platform,” Vitalik Buterin laid out the various features of Ethereum, a system that then existed only in his mind, and how it differs from Bitcoin.

The essay served as Ethereum’s white paper, and became a model for many others. It explores the potential of smart contracts and how it enables transaction types such as financial contracts, multisignature escrow, savings accounts and even peer-to-peer gambling. In 2014, all of this was theory; in 2022, it’s reality.

Ethereum has grown into something real people (as many as half a million at last count) use. And it’s likely to continue growing. The problem of scalability – namely, the storage costs, the throughput concerns and the cost of gas to run the Ethereum blockchain – was just a twinkle in Buterin’s eye back in 2014.

Even back then, Buterin realized blockchain scaling would be a community effort. Today, whole teams with names like Optimism, Arbitrum and Polygon are building different approaches to scaling Ethereum, demonstrating the much-desired plurality Buterin talks about in another 2014 post, “On Silos.”

In this essay, Buterin argues that fragmentation in crypto is both inevitable and “the only way this space can reasonably prosper.” He starts with the assumption that people disagree, and it is only through agreeing to disagree that the Ethereum community can establish a “plurality of networks.”

He also argues that the amount of room in the crypto space for projects with different preferences to develop makes a winner-take-all mentality “completely unnecessary and harmful.” That’s crucial to remember today, as fights between blockchain systems rage on.

Fast forward a year to 2015, and Buterin is again writing about the fundamental advantages of distributed systems – this time noting how decentralized autonomous organizations (DAO) can develop a type of “superrationality.” With publicly viewable source code, “not only is it the case that the organization will make it obvious to everyone if they start to cheat, it’s not even possible for the organization’s ‘mind’ to cheat.”

If nothing else, this may remind us of how much the concept of a DAO has shifted, specifically in the declining emphasis on the “autonomous” element. In Buterin’s early writing DAOs were something like artificially intelligent businesses managed by a small human team, rather than the collaboration environments they’ve become.

You can have an idea, but you can’t know how it will be applied. But for Buterin’s sake, let there be many ideas and many attempts to put it into practice.

Vitalik on economics and society

On the surface, Ethereum and subsequent smart-contract platforms have a simple and arguably somewhat boring value proposition. Ethereum wants to be like Bitcoin in that it leverages the protection of decentralization and censorship resistance to transcend national boundaries, but adds more complex (mainly financial) functions than Bitcoin can handle.

But there are a number of broader, more sociological concepts that guide the kinds of projects created on Ethereum. “Proof of Stake” in many cases provides the earliest articulation of those concepts.

In the 2014 essay “Markets, Institutions, and Currencies – A New Method of Social Incentivization,” Buterin makes the case for money that can, while functioning as a medium of exchange, also support particular social endeavors and public goods through their “seigniorage,” or the value of the money above what it costs to create.

Buterin highlights an early example of this in Primecoin, which is still operational. Instead of simply searching, as Bitcoin does, for purely random hashes, Primecoin’s mining algorithm searches for prime numbers while minting new coins. People who use or accept Primecoin for transactions are supporting this mathematical quest by funding the hashpower to search for primes.

Primecoin has fallen from the limelight since 2014, but its appearance here highlights another major benefit of reading “Proof of Stake” – an enhanced awareness of just how much experimentation and innovation took place in what now seems like crypto’s ancient history.

The idea of money as social incentivization wasn’t born with Buterin – he draws inspiration from long-running local currencies like Berkshares. But it has been an underlying premise of both the proliferation of ERC-20 tokens around the 2018 initial coin offering (ICO) boom and, more recently, the rise of affinity-based DAOs that issue their own token to help organize around particular causes or goals. The idea of a currency as a form of social organization is still relatively unproven, but it’s a major premise behind Ethereum’s culture.

The “Markets” essay also provides a touchpoint for Buterin’s intellectual evolution over the years documented here. In this early essay, he flatly claims that “Markets, in their pure form, are fully decentralized.” But by 2020, in a piece called “Credible Neutrality as a Guiding Principle,” Buterin’s views on markets had become more complex: in place of the earlier implied Austrian-school or Lockean naturalist view of economics, he acknowledges the importance of governments in enforcing property rights as a precondition of markets.

Buterin also rightly identifies this need for the state as a problem, particularly since governments are so often opaque and so rarely selfless. “Credible neutrality,” the idea that blockchains cannot be seen to favor or disfavor any one entity, has not yet entirely caught on as a crypto narrative, mostly because it’s not nearly as sexy as, say, “digital gold.” But for those thinking long-term about globalization and the fitful decline of nation-states, it may be the most compelling case of all.

Navigating a logistically unified world still riven by political and social tensions demands, as Buterin puts it, that “everyone must be able to see that the mechanism is fair,” whether that’s the mechanism of exchange or communication. The cryptocurrency and blockchain model tick many boxes for credible neutrality, for instance with their use of open-source code.

However, Buterin does presciently warn that simplicity is another requirement for real transparency: as we’ve seen in the recent crypto unwind, even open-source code can be used to hide a fraud if it’s complex enough.

Soulbound creator

The last chapter of Vitalik Buterin’s “Proof of Stake” begins with a thought experiment about “World of Warcraft,” the massive multiplayer online role-playing game Buterin often cites as his motivation for getting involved in the world of crypto. Buterin reportedly played WoW incessantly between 2007 and 2010, until game creators Blizzard “nerfed” one his “beloved warlocks’” powerful spells.

“I cried myself to sleep, and on that day I realized what horrors centralized services can bring,” Buterin wrote (half-seriously) on an page that has seemingly since been scrapped. The experience led him to open-source tech, primarily Bitcoin, which offered a different vision for digitization based on decentralization and immutability.

Unfortunately, Buterin’s blog post about Warlocks is not part of the new book, though there are plenty of other gems. The best parts of “Proof of Stake” concern Ethereum’s practicality – how the second-largest blockchain can actually be used. This stretches from Buterin’s initial thoughts on decentralized autonomous organizations, or DAOs, – a type of non-state, non-corporate way to manage projects – to “prediction markets,” a long-theorized way of crowdsourcing truth through betting platforms.

Take also Buterin’s earliest writing on Soulbound tokens, which were pitched as sort of curriculum vitae, a way to record all of a person’s achievements. As the name implies, soulbound tokens are unique digital assets held onto for life. This is opposed to non-fungible tokens (NFT), which are also singularly scarce but transferable.

Buterin, perhaps still thinking about his Warlock, writes NFTs and WoW weapons are similar in an important way: they’re digital goods that have value and utility, but can be bought instead of earned. If NFTs and in-game items are often more about “signaling wealth,” Buterin writes, Soulbound tokens reflect the “sacrifice” of time or energy to create them. SBTs cannot be purchased, they can only be earned.

In writing, when Buterin is coining terms or inventing use cases, he’s clarifying the ideas of others. His essay on “decentralized governance,” (or DeGov, to use Buterin’s parlance that never caught on), focuses on live projects that use on-chain voting, and how those situations, often corrupted by perverse incentives and monopolization, can be improved.

There are a few guiding principles that run throughout the book, which seemingly motivate Buterin in everything he builds. The first is that transparency is better than opacity, that public chains are better than private and that communities should always be at the center of what you build.

In an essay on trustlessness, Buterin reflects abstractly on how code can replace companies. He argues there will always be varying levels of trust, even within open, free and decentralized crypto protocols. Likewise, the world will always have companies like Blizzard, that make choices in pursuit of profit that are detrimental to customers.

If there is no way out of trust, crypto, for Buterin, offers an alternative way of establishing it between self-interested actors. With the right design, crypto can make the better choice between getting yours and being prosocial, whatever it is that’s best for the all. Still, no one knows where all of this will lead. Least of all Buterin, who writes that in DAOs a “specific actor” will “behave in a specific way,” even if specific changes “push them to act in some different, unexpected way in the future.”

Throughout his decade-long writing career, an exercise in trying to better understand and improve the thing he loves, Buterin has seen many of the ideas he’s proposed or advocated for put into practice. Take the proof-of-stake algorithm, the namesake of the book, which went live on Ethereum a month or so ago. This one change, which required years of deliberation and testing and refining, immediately cut the blockchain’s significant energy use. For this Buterin should be immensely proud – if only for demonstrating the practical effects crypto has on the world.

In the introduction, Schnieder notes Buterin is forever a journalist, cursed with a keen eye for drama and truth-telling. Twice now, during different peaks of crypto and Ethereum hype (in 2017 and more recently), Buterin has questioned whether the machine he helped build “deserves” the level of attention it had achieved. Things are broken, incentives are misaligned and scams run amok.

Or as Buterin put it in the soulbound essay: “A common criticism of the ‘[W]eb3’ space as it exists today is how money-oriented everything is. People celebrate the ownership, and outright waste, of large amounts of wealth, and this limits the appeal and the long-term sustainability of the culture that emerges around these digital collectibles.”

But solutions are possible, economics can be modeled and communities can take root, as Ethereum takes on a life of its own.


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