Sep 29, 2023

As part of CoinDesk's Staking Week, presented by Foundry, Gitcoin co-founder Kevin Owocki discusses the key takeaways from Ethereum in the past year, after transitioning to a proof-of-stake (PoS) consensus mechanism.

Video transcript

It's staking week at Coindesk brought to you by Foundry. Our next guest has been in the Ethereum community since the early days and co-founded Bitcoin, one of the Ethereum ecosystem's big funders joining us now to discuss the evolution of Ethereum is Bitcoin co-founder, Kevin Milwaukee. Kevin. Welcome to the show. Hi, thanks so much for having me. Of course. Thanks for being here. Now, let's talk about your perception um of what's happening in the Ethereum ecosystem. It's of course, been one year since Ethereum switched to proof of stake. Uh What does this one year mark mean to you? Well, it means that the Ethereum network is secured by the people who hold Ethereum and are using proof of sake algorithm in order to earn rewards on top of their eth by securing the network. So I think it's quite a nice alignment of what are called validators, people who are validating the transactions on the network and the people who hold the network. So really, really excited that uh as an eth holder, I can secure the network contribute to the public good. That is the e network security and then also earn uh uh some dividends from doing that really excited that Ethereum is now nearly carbon neutral, 99.95% less carbon emissions because of the merge. And also Ethereum is now the first Blockchain network in history to go deflationary. Um So Bitcoin is famous for its 21 million BT C cap. And by the year, I think it's 21 45 A Bitcoin is designed to uh not be inflationary anymore. Um Ethereum because of all of the volume and the Ethereum network and because of the merge is now uh what we call ultrasound money. So it's basically uh deflationary now and has been since the merge, about half a percentage point of youth has been burned since the merge. And that's a really exciting milestone for the Ethereum community. All good things, all good things there. But recent data have said that there's more than 800,000 validators who are operating in the Ethereum ecosystem, 20% of Ether is currently being staked. And if this continues, there's a prediction that 100% of Ether will be staked by the end of 2024. What are the challenges with that? Yeah, I mean, I think that the Ethereum proof of stake transition has been more successful than any of the core developers could have even imagined. And so um as far as I know, the uh the number of stare has exceeded the wildest expectations and that's because it's just such a good deal to, to be securing the network and to earn rewards on top of your e uh I've heard others call it e that's taking the, the internet bond. So, so basically earning a return on your, your stake of, of the financial system of the internet. And so, um because there are, it's such a good deal to stake on the Ethereum network. I, I believe that we're gonna see a slowdown of the, uh we're gonna, right so far, we've seen a ramp up of the amount of that has been staked. But I think eventually we're gonna run out of people who want to stake and we're gonna sort of naturally see a, a decrease in the activation queue, which is the queue to get into the Ethereum network and eventually less people will start to stake. If that does not happen. Then I think that we're gonna be looking at a change to the reward structure into the queue times um coming into an upcoming fork. But uh that, that's all all something that the Cordes and the Corp governance process is going to be deciding over the next couple, couple months in quarters. What are the challenges associated with Ethereum developers potentially slowing down staking by capping the number of new validators? Well, um the Ethereum reward curve uh actually deflates naturally as, as more and more validators come in. So this is something that has been planned for from the merge. Um So basically, I think that right now I'm earning about 4% by, by validating on the validator network. And, uh, if there were twice as many validators, I'd be earning about 2%. And if there's three times as many validators that be earning closer to 1% so there's already a, uh, a decrease in the rewards as more and more validators come onto the network. And so there's just sort of gonna be a natural equilibrium that is reached when uh when more and more validators come onto the network in, in, in the form of of lesser and lesser rewards. And I think that we haven't hit that point. It, the the validation queues have been, have been over 10 or 15 days to get to get a validator online since the merge. And that just speaks to the massive success of the proof of stake network. I think that as we get closer to 3% 2% 1% rewards, we're gonna find the natural equilibrium where people stop entering that validator queue and entrances and exits about reach a equilibrium. All right. So are you saying that potentially it could be less appealing for new validators to start staking out or it will get increasingly more, less appealing? Yeah. So it's a market and um the more validators become validators on the Ethereum network, the less appealing it becomes for the net new validator to join. And likewise, if a large validator was to exit, then the rewards would, would increase again, thereby creating a market incentive for new validators to increase. And so, uh because we've only been proof of stake for the last year, we have not reached that equilibrium point. But uh markets are really great at collective intelligence and figuring out equilibrium points. And I think that within the next year or two, we're gonna find that equilibrium point for the validator network. I don't think we're gonna get up to 100% stake. I think that the number will probably land in equilibrium around, uh, between 30 50%. But we'll see, it's, it's up to the market. Not to me, that's not financial advice. That's just my guess. I got to ask you, you know, we're talking about this increasing number of validators in the Ethereum ecosystem, but data that's recently come out, come out has said that Ethereum fees are at 2023 lows pointing to less users actually, um, interacting with different products in the Ethereum ecosystem. What does that tell you that we have so many validators? But fees are going down because there are not that many folks that are actually doing things. Yeah. Well, um, uh, it's a, it's a bear market and so, you know, call me during the bull market, I think we'll see really huge blocks and a lot more fees during the, the, the bull market. But that's not, that's a, that might be a good thing for validators, but it's not a good thing for people who are actually using the, the Ethereum main net. Um, the way that the Ethereum network has solved tradeoff between validator rewards and high fees on the main net is to move a lot of the action over to what are called layer twos. So layer twos are kind of other blockchains that inherit the security of the Ethereum main net but can have way less fees. And so um there's, there's optimism, there's arbi there's CK sync and there's polygon, all this layer two network providers that are allowing basically any D A in the Ethereum ecosystem to launch their own layer two. Get point was recently involved in the launch of a layer two called the public goods network, which is a network that will um validate transactions very cheap. But the, the the amount of money that the validators make will go back to funding public goods in the Ethereum ecosystem. So we're gonna see a lot of innovative experiments in the Ethereum ecosystem because there's gonna be many different layer twos. And it's sort of like in the United States, uh we have 50 different state houses that are gonna try new experiments around health care or marijuana legalization. And if those are popular, they'll cross pollinate across all of the different states. It's the same thing in the layer two ecosystem. People are gonna experiment with new mechanisms uh in order to provide more value to, to network users. And if those are successful, I predict those will propagate across the layer two network learned how legislation propagates between the 50 States and the United States. So um it's quite an exciting time to be in the Ethereum ecosystem to have solved the tradeoffs with the scalability, trilemma and layer two is going live. Um When people say that fees are uh too high on the Ethereum network, I think that they don't really understand the layer two architecture, uh the modular architecture of the Ethereum ecosystem. And so the next bull market will not be like the last full market. I can tell you that any predictions on when the next bull market might start. Oh, let me get up a crystal ball. Um I do not, I had to, I had to, I, I don't know, I mean, I, I think that traditionally, um you know, if I were to hazard a guess and this is again, not financial advice, but this is just one man's thinking. Uh we've traditionally seen a bull market every four years around the Bitcoin having has been the liquidity cycle in the crypto ecosystem. Then again, we were in a zero interest rate environment for the last 10, 12 years. And that's, you know, a arguably that Macron and is what has caused the plight of capital to risk on assets like crypto. Um But there's a lot of moving parts here, right? The crypto ecosystem is less centric around Bitcoin. Um, we're now not in a zero rate environment. People are wondering when the fed is going to cut rates next year. You've also got the ETF variable in the equation. We don't know when there's gonna be Bitcoin or E spot ETF S approved by the SEC. And, um, you know, we don't know what kind of weird funky use cases are gonna come online next cycle, last cycle, we had defi summer and yield farming and then we had NFTS as both driving the bull market. And I don't know what the next, what is gonna drive the next cycle, whether it's gonna be Macro ETF or some sort of weird new use case everyone in e right now is excited about friend, the ability to financial your, your friend and, and um, I, I don't know what is, uh what is gonna drive the next cycle or even that we're gonna even have another massive full market like we have in the past. But, um, I, I think that the, the key thing for the community is just to continue building things that have value for users. And um I think the market will reward that over the long term as we shift from a speculative asset to something that has strong fundamentals. All right, Kevin, you stepped away from Bitcoin last year. You've been back for about three weeks. Now, talk to me about returning. What's your involvement been? And what do you see for the future of Bitcoin? Well, Bitcoin is one of the top crowdfunding protocols and platforms in the web three ecosystem. Last cycle, we, we gained prominence for funding the Ethereum ecosystems, public goods, things like open source software and community and education, things that are good for everyone, but don't have a business model. We delivered $50 million worth of value to the Ethereum ecosystem. Last cycle and Bitcoin has transitioned into a dow a decentralized auto an organization and we have rewritten the products from being a centralized platform to being a suite of modular protocols that anyone can use in their ecosystem. And so we're going from this interesting place where we were fishing for you last cycle, we were running Bitcoin Grants for you last cycle. But now people, we've been teaching people to fish. So basically, uh what works for Ethereum and uh and, and the metallic last cycle. Bitcoin grants for the Ethereum ecosystem is now available to any EVM based community. And so Bitcoin is going to be allowing any EVM based community to do Bitcoin grants, quadratic funding, conviction voting, quadratic voting, dominance assurance contracts are all the mechanisms that you're familiar with if you're a capital allocation nerd in the Ethereum ecosystem. And our aim is to make it easy to do those things for any dow that has a billion dollar treasury and wants to deploy that capital in order to grow their ecosystem to grow their, their, their public goods. So, um I'm really excited that we have achieved a place in which Bitcoin has decentralized into a dow and a suite of protocols. And we are going to be going to market with those protocols. So, um you know, I've, I've been learning the new faces back at Bitcoin. I've been learning how the products work, been giving demos to them, been going to my friends in the Ethereum ecosystem and asking them to take them out for a test drive. And it's been a lot of fun to help communities build their ecosystems, but also to be a source of capital for new developers in the ecosystem that want to enter. Anyone can apply for a Bitcoin grant and make thousands tens of thousands in some cases, hundreds of thousands of dollars in exchange for building in these ecosystems. And so I'm really excited about taking Bitcoin grants in and bringing it to, to layer twos and EV and uh I and NFT communities and helping those communities grow and helping the people who are entering those communities make money for doing so. So it's been a lot of fun and uh you know, I'm, I'm gonna be returning as, as sort of a network catalyst to get coin in the company. I was the CEO and founder and now I'm just a founder and a network catalyst because we're not a hierarchical organization. There is no CEO. So it's a transition but dolls are the frontier and I'm happy to be back at the frontier. All right, and it is staking week. So I got to end off with this earlier this year. The G coin community voted to seed initial liquidity for its stake E index GT Ce. Um How has, well, I don't know if you have any intel on how adoption has been with that project and I guess more broadly, what do you think of the growing interest in liquid staking? Yeah. Um So GT ce is a staked E liquid sticking token, basically, you can earn dividends on top of your eth with GG ce. Um And uh and some of that, that those dividends will go to public goods. I was actually not around when the Dow passed this and I think it's a testament to decentralize, decentralized governance that um something like this would pass Bitcoin out and it could be a massive success for funding public goods and for giving people a way to earn dividends on their eats. And so I have only public information about this and about other matters that get coined out. But um you know, it's really neat to see the evolution of liquid taking tokens in the Ethereum ecosystem. And um see derivatives of liquid taking tokens that are able to represent the values of different communities in the Bitcoin community. We want to fund what matters to the Ethereum ecosystem and to all these EVM based communities. And so just the fact that it's very easy to take the money Legos off the shelf and create a Liquid Staking Token. Just speaks to the Testament of it's a testament to the power of open source software and to the Ethereum modular architecture. So I'm really excited about the future of liquid staking as a builder, but also as one who runs a couple of nodes in my basement. So it's been a lot of fun and uh invite me back two years after the merge and we'll see where everything settles. You're definitely invited back, Kevin. Thanks for joining us uh for staking week and good luck and congratulations on getting back uh in the well, I guess not the driver seat but in a seat at and I look forward to seeing what you do there. Yeah, public goods are good. Thanks everyone. Peace. That was Bitcoin co-founder. Kevin awake. Be sure to check out more staking week stories in this series presented by Foundry on coindesk dot com. Foundry and Coin Desk are of course, both owned by DC G.

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