What's Next for Ethereum Post-Shapella

26:55but multi-sigs did exist in that initial kind of early stage format where you could have a multi-sig like a Gnosis Safe if you're a DAO or you're a long-term holder who wants to give some keys to their family. But what account abstraction adds to that sort of basic early multi-sig is that So account abstraction lets you approve a transaction using a program. So let me explain. With ordinary Ethereum wallets, when you want to sign a transaction, the only way to make that transaction invalid so it goes into the system is for you to click that big approve button on your wallet and go through that process.

27:41But account abstraction says, what if you could approve a transaction by logging in with your Gmail? What if you could approve a transaction by pressing your thumb on your phone's fingerprint reader or your face ID? What if you could approve a transaction in any number of ways? Oh, and by the way, we're also going to let you pay that transaction gas fee in any way, which could be subsidized by the application. So you can imagine, for example, Facebook subsidizing gas fees for their users. They have not announced they're using Ethereum. That's just a hypothetical example. And so account abstraction combines with multisig to give us these futuristic experiences where a user can store their assets in a wallet that knows who their friends and family are so that if they lose their access to that wallet, they can say, hey, oh, hey, mom, hey, cousin Stu, can you guys, by your powers combined, unlock my money for me?

28:44instead of just losing your money permanently. And that's if you lose access to your wallet. That's a so-called social recovery. But even your access to your wallet gets upgraded where instead of having to remember this 24-word phrase or write it down or have your 24-character password you put in your password manager, your last pass, and now it can just be your fingerprint from your phone. So you have this double whammy upgrade where one, your authorization mechanism to spend your money or interact with DeFi apps or on-chain games or all these emerging apps, it gets upgraded from crazy password I have to not lose to fingerprint.

29:28And then if it does go south, if you do lose it or you have advanced needs, now you can use a smart contract wallet to rely on your friends and family and have amazing other functionality like allowances. Like you could give your kid his weekly allowance in your smart contract wallet. So you have a smart contract wallet for your family, and that's where your money accumulates. And you could say, you know, here's Junior's smart contract wallet. And, you know, Junior has his own social recovery where his parents can unlock his money. And then in your family's smart contract wallet, you can say, okay, Junior gets 20 USDC stablecoin per week allowance.

30:07And then you put your thumbprint to authorize that allowance, and Junior puts his thumbprint to transfer the money into his wallet. And so we're really starting to see this next generation science fiction user experiences come to life. Yeah, and what's so fascinating about this is I think we've just barely scratched the scratch on the surface in terms of the potential for this technology because you can create these rules to almost arbitrary degrees of complexity. For example, if cousin Stu and cousin Bob have to unlock the wallet, but if his sisters, Sarah and Samantha, both within 24 hours object to that recovery, you can build in functionality that would override it.

30:49Now, for something like a$25 transaction, maybe you don't care. But when you're talking about very, very large transactions, this stuff becomes material. I also think about this question, the idea of account abstraction and the ability to build in varying levels of security for different levels of transactions. This is something we already have today. For example, I live in New York City, and you can pay the subway$2.75 with your phone. Now, when I make a transaction, if I am paying for a cab that maybe costs$30 or$40, I actually have to have my phone near my face so it can recognize me, go through the face ID and verify that transaction.

31:25New York City Transit, MTA here in New York, has a workaround with Apple that for a low value transaction, a$2.75 subway ride purchase, I don't need to look at my phone. I can literally just have it in my pocket. I can have it on a wearable. I can just scan by the turnstile and walk in. What's interesting to me about this is you can have different levels of transactions for$25 ,000, for$25, and for$25 million, which really does begin to create a lot more functionality and a lot more potential around the technology. Oh, certainly, Ash. I love that example because it combines this idea of the multi-sig smart contract wallet with also the account abstraction.

32:06Anything can be the authorization. Got to get my lawyer to sign off for the$25 million. But it also, I think, I love your example of Apple in the New York subway which which i didn't know and it it it shows the power of the permissionlessness of the public blockchain because these payment technologies are an open protocol an open platform that anyone can use and innovate on you could reach agreements of that nature between any two parties or even even just a single party saying no matter who is trying to charge me there's this lower threshold to security if it's under five bucks. Whereas New York subway, big organization, had to make a deal specifically with Apple, big organization.

32:50The power of open platforms and open finance on Ethereum means that anyone can do this in partnership with anyone else or even unilaterally just putting themselves out there. So we're really going to see incredible open innovation in the years to come. Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision crypto daily briefing.

33:16Right. And of course, you could then theoretically opt in. Like, for example, if a transaction is only$2.75, I could then say, hey, I'm okay with not approving this through some elaborate method. If it's a$2.75 transaction and there's a limit, you can only make two of those transactions within a one hour period without validating it, I'm okay, right? I stand to lose about$5.50 if stuff goes horribly wrong for the convenience. I'm probably willing to take that. Now, I'm not willing to make that security tradeoff if we're talking about hundreds of dollars or certainly not thousands of dollars. The other thing that this opens up, and I think this is interesting and probably controversial, but something that I've been thinking about in terms of account abstraction technology is the ability to have intermediated financial services, to have financial intermediaries.

34:01If you want, if you want to have that type of functionality, you might be able to build a kind of a kind of neobanks on top of it. I'll just give you an example because it happened to me yesterday. I woke up yesterday morning and as I was like brushing my teeth, I see on my phone, I get a notification from PayPal. You've just approved, you know, a transaction has just has just processed. And I think it was it was a couple hundred bucks, two hundred dollars for a data service that I that I canceled in April of 2021. 2021. So of course, I get really annoyed. I get on the phone with PayPal. I start talking to them.

34:34They tell me, well, we've got to go through this 14-day dispute process, and then it's going to take five days for your bank to return the money. And of course, I was kind of annoyed about it. But the reality is, at the end of the day, if this had been a transaction that had taken place in today's Ethereum ecosystem, that money would be gone. There'd be just no getting it back. There would be no dispute resolution protocol to go through, even though I felt that that was an imperfect one and I was annoyed that it was going to take me three weeks to get my 200 bucks back, that money would never come back.

35:02One of the things that's interesting about this, and I know this is probably controversial in the community, but it creates the potential with these additional abstraction layers to add layers of financial intermediation. And I'll give you a quick example about just sort of like what I was thinking. Let's say, for example, you've got$25 ,000 in Ether. You might decide that you wanted to move, say,$2 ,500 of it to an intermediated account where you could have a bank or a neobank standing in the middle of transactions, relatively low-value transactions that you make. Again, the risk is kind of moderate with that amount of money.

35:33If you lose$2 ,500, you're going to be depressed for perhaps months over it, but you're probably not going to be destroyed financially, at least for most people here in the developed world. And so you start to see all this potential for intermediation technologies, for traditional banking services to potentially be built upon the Ethereum ecosystem when you have transactions that have the capacity to do account abstraction on the wallets and also multisig. Give us some of your thoughts about this. I know this is sort of a very new area that people are just beginning to think about, but what do you think about the potential for financial intermediaries to actually provide value for people who want them?

36:10Absolutely, Ash. I think you're absolutely right. It is an exciting frontier for traditional corporations to use Web3 technology to achieve outcomes that at the beginning and on the surface seem similar to the fintech we have today. But six months, two, three years later, offer dramatically new capabilities with greater levels of reliability and very much lower costs, both marginal and fixed. And so I love your example of this like fraud alert. You can imagine that if I have a smart contract wallet and I tap my thumbprint to pay, well, I could actually set up my wallet in this sci-fi future of probably only six months to three years away.

37:00And I could be actually, for my purchase level of$500, from$200 to$500, I'm actually in a two of two multi-sig. That two of two means there's two people who can sign and both of them have to sign to spend that money at that spend level. And okay, so my thumbprint's the first signer, but who's the second signer? Well, that could be an antifroud company. That could be someone else with an automated system looking out for you saying, are you sure you wanted to spend this money? It could be someone who actually custodies the money on your behalf and they give you a yield, maybe even a traditional bank where they're issuing traditional loans.

37:44There's this thing now called deposit tokens, which are going to be a great competitor to stablecoins in the year to come. Explain the difference right there between a stablecoin and a depositcoin. Right. So stablecoins were invented during the very early stages of crypto. And so it's very, very important to know that when you had one unit of stablecoin, it was good for one US dollar. There's a bunch of different ways to guarantee that. Some of them work really well, like MakerDai's over-collateralized model where you have maybe$2 or$3 of Ether per dollar of stablecoin. And another way that works really well would be Circle's USDC, where they hold, I think, if I recall correctly, about 80 % of the backing of all USDC in short-term US treasuries, and then about 15%, 20 % in cash and accounts.

38:42And there was some recent controversy about that, which I won't go into. But the important thing is that - By the way, we should say, around the traditional banking system, Silicon Valley banks, failure was what caused that controversy. The idea that some of those assets were stored in a traditional financial system that became inaccessible because of the challenges that occurred, again, in the traditional banking system. Right. And to touch on that briefly, I think there's two interesting notes that maybe aren't necessarily widely appreciated. One is that that's the very first time a traditional financial system failure hurt crypto instead of the other way around.

39:21Right. That's so well said, Ryan. That's so well said. Well, we had some anxious weeks there to stew over it. So I had plenty of time to get my wording right sitting there watching my USDC dip down to 83 cents. It was a challenging weekend. And also to see it recover the peg. I mean, I think for people who went through the Terra Luna debacle, there was that moment when it dips down, you know, it's off 27 cents on the dollar where people were having heart palpitations. Yeah, and I think here we see the information asymmetry in crypto where if you have the time and inclination to really study this stuff, when Terra Luna UST flipped off its peg, the folks who study this with respect and to be gentle, because I know a lot of people lost a lot of money, we knew it wasn't going to get back on the peg.

40:14It was an absolute doomed ship. With USDC, it was the opposite. We knew that USDC had the support and liquidity it needed to recover the hole in its peg. And so unfortunately, a lot of us were sitting there thinking, we don't know who's selling this USDC for 85 cents, but we're buying it. And there were some folks who made a quick 10 % because they knew USDC was fine. By the way, I mean, the people who were in the know believed that that was going to be the case, that there would be a recovery. But I remember that weekend because it happened on a Friday. And then it went and, you know, oh, there we go.

40:52We've got the DPEG chart right up on the screen. You can see that just like wedge-shaped divot in the chart where it breaks the peg and then essentially recovers it shortly thereafter. I believe on the Monday after the bank reopened. The banking system, I should say, reopened. And of course, FDIC and the Fed had backstopped SVB. But I remember that weekend, man. I remember hosting Twitter spaces until like four in the morning and people were completely freaking out. Right. And I don't I don't think that these were just kind of the shorts trying to drive down the price. There were there were people who were having full on panic attacks on Twitter spaces that the peg was going to be broken.

41:31It was never going to recover. And as you say, those who believe they were in the know in this case turned out to be right. yeah yeah ash i remember that i uh that was one of your spaces where i was uh able to join you and i i mean this was this is one of the game days this is a day where like if you're a crypto person like you're you're breaking out whatever your guilty pleasure is you're glued to your screen i was up all night i was i was i was drinking heavily uh uh you know talking talking shit about about the things that i you know thought were gonna happen and uh it was an exciting night you My only regret is that we couldn't get the message out more widely that USDC was fine because there were folks who just heard from a friend, quick, quick, sell your USDC.

42:15But you shouldn't have. And before we move on, one point I'd really love to make is that it's a common misconception that USDC, the stablecoin, was bailed out by taxpayers. Right. What actually happened was the Circle had submitted their withdrawal wires to Silicon Valley Bank on the Thursday, and FDIC ended up honoring all Thursday wires. So what technically happened was that USDC got their money out before the bank went into receivership. And so I think you could say, oh, well, that's still getting bailed out by taxpayers because not everyone could get out. Well, OK, if you're going to argue that anyone who gets out of the bank before it goes into receivership was also bailed out, well, then you're right.

43:08I guess USDC did benefit from that. But just to be technically correct, USDC did not receive bailout money, which I think is important. We're always saying that crypto should stand on its own two legs, and I think so far it has. Yeah, and by the way, we should say that the difference between the so-called bailouts that happened this time around and what we saw in 2007, 2008 were manifold. Number one, we protected the FDIC, Treasury, and the Fed protected depositors in those banks. But the common stockholders got wiped out. Management got fired. Subordinated bondholders were not – the bonds were not trading at par.

43:47So we saw some significant differences there. And by the way, FDIC, those insurance premiums are essentially paid by the industry itself, by banks. Now, you can say eventually that gets passed on to customers, which I believe is true. But some of the anger, the emotion that's still very raw, I think, from 2007, 2008, this idea of wholesale bailouts of banks where management stays in place and the shareholders, the common stockholders get supported. And basically, it's business as usual. That's not what happened. I'm not suggesting that the solution that we came up with for the three banks that went into receivership this time around were perfect.

44:24But it is important to point out this was a very different model than the 2007-2008 model where everybody got back, stopped. Management got to keep their jobs. People got paid huge bonuses. It was just a different type of methodology. And I think the current administration, who has not been the most embracing toward crypto, deserves some credit for at least taking some actions to do things a little bit differently. in the wake of the anger that we saw on both the left and the right, almost universally, with the way the 2007-2008 bailouts were handled. Right, Ashton. I'm not a banking expert, nor for that matter a TradFi expert, but I think everyone should feel good that the run on the bank was nipped in the bud before it could really spread because that was a timeline none of us wanted to live in.

45:11Yeah, and listen, I'm not a banking expert either. I'm not an expert in anything. I'm just the dope who asks the questions. But the important point for people to understand, I think, about the reason why those banks were backstopped, obviously, Silicon Valley Bank, SVB specifically, had a very prominent role in the Silicon Valley ecosystem. You heard people, again, on the left and on the right, complaining about that, this idea that this bank was backstopped to sort of save Silicon Valley. I think the issue is much bigger than that, which was, you know, if in the United States you had failures of large regional banks, of specialty banks, of boutique banks, what you would have seen would have been a massive flight of deposits from those institutions to the five or six largest banks in the United States.

45:50And essentially, this would have changed the structure of the economy, the idea that you would have had this massive concentration in the J.P. Morgan's, Wells Fargo's, Bank of America's, Citibank's of the world, which would have been a significant, significant change and a high degree of concentration of an enormous amount of wealth and an enormous amount of power in very, very few hands. My suspicion is that that's what the regulators, that's what the administration was thinking about when they made that decision. And it would have been just catastrophic to the economy to have local lenders, regional lenders fail en masse as everyone who had a banking relationship with someone at JPMorgan Chase and Company picked up the phone and started moving assets there.

46:30That could have been really, really difficult for the U.S. economy. Certainly, Ashton, glad to have avoided that. And so I spoke earlier about Ethereum having these four big sectors. And there's the layer one ecosystem that now has completed the Chapella withdrawals upgrade, completing the merge. There's the layer twos that are Ethereum's go-to-market strategy to reach the entire world. There's the infrastructure, especially wallets that are improving with account abstraction and other technologies. There's the so-called embedded wallets now, which is a slightly different topic than account abstraction.

47:11Embedded wallet is like a wallet that's an API instead of its standalone app. And that allows the wallet to become programmable in a way that we haven't been able to see in the past. Right. And it separates the company or the team building the user experience from the company or team building the wallet infrastructure, which much more closely mirrors how fintech and the traditional financial system work. and will really unlock the specialization of both of those parts. So the wallet teams can be great wallets, and then the customer experience teams can be great customer experience teams. And so to that point, everything we've been discussing is in service of actual applications that actually help people and benefit the world.

47:55And so that's really what we've been seeing having as significant growth and excitement as in the other areas. So let's talk about those applications. It's a point that you mentioned before when you divided it into the two things that you were most excited about, account abstraction, multi-sig, and also applications. Talk about what's happening at the application layer, what you're interested in, and why you see so much potential opportunity there in your view. Certainly, Ash. And so fast forward 30 years, we want huge chunks of the economy to be running on Ethereum. You're paying folks. You're getting paid.

48:41There's streams of stable coins and stable coin derivatives and tokenized bank deposits being flung around everywhere by money robots. And the wallets are everywhere. They're in the browsers and the phones. And probably robots are going to have their own wallets where it's like the money is actually in the robot. It's going to be wild. And this is the distant future. And right now, the task is on us to make applications that are useful beyond speculation, beyond rich people making rich people investments. We need to make applications that actually help regular people, drive regular sectors of the economy that already exist.

49:23So it's less about crypto for the sake of crypto and more about how can crypto serve the world and help the world. And to that point, we've been seeing great advances in e-commerce, in content creation and monetization for all kinds of creators, in intellectual property management, and in making financial assets, including real estate and treasuries, more accessible to a broader, more globalized audience, including people who can't afford a whole house. So they maybe want to buy some fractions of a house in an efficient, in an easy, frictionless way that preserves their property rights. So we've just been seeing absolutely incredible innovation in all these areas.

50:16Let me ask you about something else. We've been talking about this idea of layers, a very popular concept in computer science for people to understand and break down different technologies, different services. One of the things that's a bit confusing about Chapella is just the name itself, Shanghai plus Capella, this distinction between the consensus layer and the application layer. Let's talk about the transaction layer, I should say. Let's talk a little bit about that because I think that probably confused a lot of people. Right. So before the merge, back when Ethereum was running on proof of work, it was, as you might imagine, a single blockchain kind of doing its thing.

50:55It's a blockchain. It's got its mining. And then the transactions are built on top of the mining. And at that time, whenever we would have a hard fork, and there were a few back in the day, we would give it a name. And it's just one name. and then along came the merge and it turned out that and like nobody actually really very few people knew this would be the case maybe four years ago but it turned out that the best way to do the merge was to make a standalone parallel proof of stake blockchain that was just running of its own accord called the beacon chain and this beacon chain proof of stake blockchain was just like it was a ghost town There were no transactions, no user activity.

51:43It was just a blockchain running nothing. It would come to consensus and it would build blocks. And other than that, it didn't do anything. And then when the merge happened, we took the application blockchain, the so-called execution layer, and we said, all right, let's take the engine out of that. And let's take this parallel blockchain and make that the engine. So now there's kind of the two chains running side by side. More specifically, the application layer sort of ceased to become its own chain because now it depends on the beacon chain. And so as a consequence of this kind of parallel track design, there's two different specifications.

52:23There's the beacon chain proof of stake specifications. That's the written design of how the thing works. And then there's the same specifications to the execution layer. So anytime, well, not anytime, but typically now when Ethereum has an upgrade, they have to change both specifications, both the consensus layer and the execution layer. And the amazing scientists that quarterback this process, what makes sense to them is they give each set of changes its own name. And technically, they can occur independently. You could have a consensus layer hard fork without an execution layer hard fork or vice versa.

53:03And so when withdrawals came, the execution layer hard fork was nicknamed Shanghai. and then the consensus layer hard fork was nicknamed Capella. But they were scheduled to happen at the same time and people were having so much, they were sick and tired of saying both. So they've smushed them together into the portmanteau, Capella, Shanghai, Capella, Capella. That's how we got here. Very well said. Listen, I have one other question for you. Before I start to get our viewers involved, we've got a lot of folks watching this And I just wanted to ask people out there, please put your questions down in the chat wherever you're watching.

53:44We're going to ask the best ones on air a little bit later in the show. Remember, Real Vision members take priority. But the good news is, of course, membership is free. You can go to realvision.com forward slash crypto to sign up. That's realvision.com forward slash crypto to sign up. Listen, I think this is an incredible conversation, and it's really a pleasure to get to bring this content to you. If you're watching this on YouTube, please tweet out the link. Let's bring some people in. Let's support great content like this. Let's support folks like Ryan who have really interesting things to say about this technology and get this out to as many people as we possibly can.

54:18And of course, you can always follow me at Ash Bennington on Twitter. And of course, please follow Real Vision at Real Vision on Twitter. So much to talk about. But I wanted to ask you this one other question before we get to viewer questions. And we've got quite a few of them coming in, which was something that I alluded to at the top of this conversation, which was Arbitrum. Obviously, a token drop on Arbitrum, some technical challenges there in getting that initial process out. Talk a little bit about Arbitrum, the role it plays in the ecosystem, and your views on Arb. Certainly. And so in Ethereum's Layer 2 ecosystem, there are two main types of Layer 2s.

54:57The first is based on the so-called optimistic roll-up technology, which is sort of like a zip file. It's very impressive, fancy technology, but you can think of it as just being a zip file. And the cool thing about it is that the optimistic part means you don't have to unzip the file unless someone else detects a problem with it, and then you dig into it and figure out what's going on. So in other words, let me just try and explain this to our viewers. If I understand it correctly, the idea is generally you assume that the ledger is correct unless there's a dispute where you have to then go through and unzip it and unpack those transactions and validate to make sure they're correct.

55:36But the baseline assumption is that they are correct. That allows you for greater speed, greater efficiency. Absolutely correct, Ash. And it's that baseline assumption that it's the default assuming correct. That's where the name optimistic comes from because it optimistically assumes everything's correct until proven otherwise. But you have the capacity to dispute that if you do detect something that is not. Certainly. And it's secure. It inherits Ethereum's security. And so the other type of layer twos are the so-called zero-knowledge-based layer twos. And zero knowledge is a new type of mathematics that it's kind of like the next generation.

56:15But Arbitrum started earlier. Arbitrum is a market leader because they're an excellent organization with an excellent strategy and execution, excellent community and ecosystem, but also because they got started earlier. And one of the reasons they were able to start earlier is not just because they literally started earlier like many years ago, like around the time Ethereum itself started, but also because the optimistic roll-up technology is younger than the zero knowledge. So the optimistic roll-ups have an edge. And so Arbitrum has started with this early lead of being first to market, and they've really doubled down on it.

56:48And the results they've been seeing lately are just extraordinary. I would encourage everybody to take a look at Arbitrum's transactions per second relative to other Layer 2s, which you can see on the excellent L2Beat website. That's L2Beat website. and then you can take a look also at the amount of DeFi volume on Arbitrum, on the excellent DeFi Llama, like the horse kind of creature, DeFi Llama website, one of the best websites in the industry. And what you'll see is that Arbitrum is killing it, Ash. Their stats are off the chart. This is truly the age of Arbitrum. And I think that they're excellent planners and executors, And they knew this advantage of theirs would build and build given the timing of their competitors.

57:42And so they recently launched the ARB token to really decentralize governance and take advantage of this amazing ecosystem they've built. You know, my views on ARB is I think it's, you know, one of the best governance tokens out there. You know, governance tokens as a cohort can have certain challenges. But Arbitrum is a model in industry for how to create and launch and manage a token, you know, a little hiccup on one of their first days, notwithstanding. Right. And we should say also about ZK roll-ups, zero-knowledge roll-ups, shameless plug here, if you would like a great conversation about this, I did a conversation with Silvio McCallie, who is one of the creators of the actual underlying math for zero-knowledge proofs, and then I believe in the 1980s with a few other mathematicians and professors who helped him work on that.

58:32But he also, of course, is one of the creators, I believe, the founder of Algorand. And it's a great conversation if you want to understand about the math behind zero knowledge proofs, which is just like surreal and fascinating and bizarre and just really, really cool. Okay, as promised, viewer questions, lots coming in right now. Ralph on the Real Vision website wants to know, has Ryan been following developments with some of the Ethereum options protocols like Lira, Open, DOPEX, Hedgex? If so, any observations? I have not been following them closely. My apologies. What I can say is that DeFi is still in the oven.

59:11The protocols that are out there today are mature and working, but we continue to see new foundational technologies discovered and launched all the time. A really great example would be Infinity Pools. Infinity Pools realized that being the counterparty to a Uniswap LP token was an underutilized opportunity, and they built an options protocol on it with just extraordinary properties. So I think my advice when it comes to that is expect big innovation in the years to come. It's not reached a steady state yet. Okay, next question comes to us from Bandit. $88.99 on YouTube wants to know, Ryan, why did you call ETH staking rewards a risk-free rate?

59:55Isn't slashing a type of risk? Great question. That is a great question. So slashing is the network penalizing a validator for not just not doing its duties, for not just going offline. You don't get slashed for being offline. If you turn your validator offline, you lose, you get penalized at a very slow rate, approximately equal to what you would have earned had you stayed online. Slashing occurs when malicious activity is detected. So with a modern staking setup, the risk of slashing is virtually zero. In fact, almost 100 % of slashing incidents have been due to people accidentally running multiple copies of their same validator when you're only supposed to run a single copy.

1:00:42So we think of staking as a risk-free rate of return denominated in Ether, by the way, because of course the US dollar price is volatile. So there is risk in terms of the FX risk, Herstat risk, the risk of not being able to get Ether into dollars, but the risk you're saying is risk-free in terms of within the Ethereum ecosystem denominated in Ether. Correct. Let me ask you a question about slashing. And this has sort of been one of my own sort of pet theories about what could potentially go wrong on the Ethereum network. I think like many people who have traditional finance backgrounds, we always look for where the potential fault lines are.

1:01:21One of the challenges is this idea of sanctions, the idea that if someone who is on the OFAC SDN list, that's the Office of Foreign Asset Controls at U.S. Treasury, the primary sanctions regulator in the United States, If someone's on this specially designated national list and they attempt a transaction, what happens when a publicly held regulated U.S. company that has U.S. persons as directors and officers runs that staking pool here? We're talking about potentially folks like Kraken and Coinbase. What happens when one of those transactions crosses? They have really, it seems to me, a bunch of very unpleasing options.

1:01:58The first is they can include the transaction and violate sanctions laws, which for a publicly held U.S. corporation is a total nonstarter. They can remove the transaction from the pool, in which case they get slashed, or they can just turn off their stake pools entirely. I don't know. Are there third options here, fourth options that I'm not seeing? No, I think you're right, Ash. And I think in short, when a US-based or US-compliant staking operator is faced between doing the job for the network versus complying with sanctions, Ethereum is not the one harmed by this tradeoff. It is very difficult approaching impossible for Ethereum to experience material censorship as a result of these sanctions.

1:02:42For much greater detail from a world expert on this subject, I'd recommend the Ethereum Uncensored episode of Bankless with Justin Drake. That's Ethereum Uncensored, Justin Drake. and uh when companies i think you you you listed the options well ash it's like they can they can either play ball or they can't and and and if they don't play ball it's it's their stake that gets hurt it's their inactivity leaks it's potentially their slashing if they decide to equivocate it's it's their opportunity cost if they have to offboard their stakers and and not participate in the staking process. And, you know, an example would be there was there was much, much excitement or much FUD about OFAC compliance resulting in censorship.

1:03:31But then folks built the dashboards and dug into it. And like the average time for a transaction to be confirmed that has a tornado cash, pardon me, for a block to be confirmed, pardon me, if you have a transaction that uses the sanctioned Tornado cash, it only waits like 30 seconds longer than an unsanctioned transaction. So this idea that Ethereum is captured is patently false. Yeah. But does that raise the sort of mirror image risk, which is if it takes so little time, if there's so little penalty, is it more likely than that US authorities, G20 authorities more generally might begin to crack down on Ether because it is so difficult to sanction those transactions.

1:04:18And that might have material price impact if you saw a concerted effort by the G7 or whoever, BIS, to significantly undermine the ability of stakers to engage in this business line. It's an important question, Ash. And at the end of the day, politicians and national leadership live in a world of pragmatism. They need to make the pragmatic decision for the benefit of the country. They can't live in a world of absolutes. That's not how the real world works. And so what's actually happening here is that while it's effectively impossible for American authorities to prevent somebody from using tornado cash, what America can do is two things, and we're already seeing this.

1:04:59The first is that they can realize and embrace the fact that Ethereum is excellent for America. Over 99 % of stable coins are denominated in US dollars, and that was the market choice. Ethereum is effectively a vehicle for the extension of the US dollar to greater parts of the world, new kinds of transactions. So Ethereum is good for America in the same way that property rights and freedom of speech are good for America. And if America chooses to double down on their early lead, they stand to gain a lot from embracing it. So that'd be the first thing. The second thing is that there's a lot of real world, reasonable, favorable, bilateral regulation that is on the table here and that insiders want.

1:05:43We don't want to be unregulated. We want to join the club. We want to be regulated. And the fact is that the controls that you're discussing, Ash, are best implemented at the edges of the network, in the exchanges, in the banks, in certain kinds of permissioned tokenized assets, as we're seeing now in the US on-chain treasuries market, where some of them can only be purchased if you're KYC'd. And so the network is going to stay permissionless. And this is, I mean, America has to sort of wake up and realize that there's now this crazy thing in the world called the decentralized blockchain that's out of reach.

1:06:26It can't be controlled any more than hurricanes in the middle of the Pacific. It's become a natural phenomenon of the modern world. And so they have to embrace the advantages and work around the disadvantages with appropriate regulation, especially enforced in the exchanges and at the edges, and not by attempting to ban self-custody of storing my own assets. And that's the whole idea of credible neutrality, the idea that all actors on the network get treated equally. By the way, you know what else can't be controlled? Briefcases filled with$100 bills, briefcases filled with 500 Swiss franc notes, that as well.

1:07:01And you could actually see, to extend your point, that metaphor that you made, that gets controlled at the nodes of the edges of the network as well. You have regulation in place so that when someone walks into a bank with a bank check and then wants to withdraw$750 ,000 in cash immediately, that gets flagged. So it's a very interesting point. And in some ways, it's quite analogous to what we see happening now with banknotes. Certainly. And to respond to that, the irony is that the goal of properly locking down this potentially adverse behavior is the same goal as embracing crypto. The sooner the banks do deep integrations with crypto, the sooner they can catch the bad guys and also gain the benefits of this technology.

1:07:55So really all roads lead to hardcore institutional adoption. So well said. And I think that these are the challenges that we're going to hash through here in Western democracies at the political level, at the legislative level, in the courts in the years to come. And I think that you're right in terms of this core thesis that decentralized blockchains are good for American competitiveness, are good for American values. And I think that it may take us a little while to get there, but I certainly hope that that's where it lands. And with the reasonable controls and the input of folks who think about this, sanctions regulators and law enforcement also has a role to play in this.

1:08:35And I hope that it gets sorted out sooner rather than later. Here's a great question. By the way, I'm always humbled and awed by how good these questions are. This one comes from Wrong again on YouTube, MEV, maximal extractable value, seems like a very problematic area. How is it being addressed? I would only add to that for folks who are not familiar with MEV. Give us a little thumbnail sketch of the challenges in that space right now. Right. So MEV is this idea that as transactions occur on the blockchain, it turns out that there's naturally as like a natural phenomenon, like a force of nature, a digital exhaust trail of money that can be hoovered up by different kinds of robots.

1:09:18For example, if I'm on Arbitrum and I buy some of the ARB token, when I buy it, I push the price of the ARB token up. Well, that means that the ARB token is now higher on the Arbitrum layer two than it is on the layer one blockchain or the optimism layer two. And so now there's an arbitrage opportunity, a financial arbitrage opportunity for a robot to come in and align those prices and make a bit of money. And so MEV is this idea that unfortunately, there's this digital exhaust of money to be captured and no money's free, there's no free lunch. So where does it come from? Well, it comes from the so-called MEV victims of the ordinary users that transact, where like when you go buy ARB token, you're actually getting slightly less ARB than you could have because this bot has like done some fancy stuff.

1:10:09And there's a lot of work being done by some of the smartest, most industrious people dedicated in the space to address the MEV problem on multiple levels. It's not a simple problem. There's not a silver bullet solution. And I would say that the main thing we're looking for, besides steady progress is really, I would say, three things. The first is that the regulators and law enforcement authorities of the world have to understand that when you buy a token and a bot takes a slice of that, you're not being stolen from. You've agreed to buy a token under certain circumstances, and those circumstances happen to include a small slice for the bot.

1:10:53So anytime you sign a transaction, you're agreeing to be the MEV victim, which is strange, and you don't know you're agreeing, but you are. So it's kind of like Ethereum's terms and conditions, which is an unfortunate analogy that's fairly accurate. So that's the first thing. The second thing is that there are certain kinds of MEV extractions or attacks that rewrite blockchain history. Those are very, very bad. And mitigating those and avoiding those 100 % of the time at all costs is a major area of research. And so far, it's been mostly pretty good.

1:11:30and the third thing about MEV is,

1:11:38is, pardon me, really just the steady progress that like you can expect many different kinds of mitigations to appear in the years to come. You know, for example, there are certain ways to use a wallet that are shielded from MEV because it takes like a private pathway into the network. So they can't see your transactions to get the MEV from it. Another example would be that there's some active research so that you as the user get to get paid by your own MEV. So it's like getting a little bonus, a little bit of cash back. So it's a complex topic and there's important work being done on it actively.

1:12:14A couple more questions. I know we're running long today, but this conversation I think is so important and the questions are so great that I just wanna go and keep going through this. And by the way, the flip side of this, if you're watching this conversation, especially if you're watching this on YouTube, help support us so that we can make great content like this available for free, and we can continue to do this. Please tweet about it. Post about this conversation on all of your favorite social media platforms. We really want to get attention to conversations like this. It's so important. Help support this.

1:12:40Help join us in these. Ask us your questions. The questions that come in are just consistently amazing. Here's another one from Bandit8899. Is there a concern that if most Ether is staked, there will not be much Ether left to run apps, and as a result, it becomes very expensive to run the application side, Ryan? Oh, that's a great question. There was a time when we wondered if so much ether would be staked that this would actually happen and there'd only be this little tiny slice of unstaked ether. We're not really worried about that anymore. The main reason is that the way that the staking yields work, the natural staking equilibrium caps out today at approximately a third of staked Ether, some recent work by a great author named Data Always.

1:13:33So the staking rewards decline as more people stake. And so the peak real yield is a stat you can calculate where you can say, how many people should stake for the total real yield to be maximized among them? And the answer is that today it's far less than 100%. So what we're expecting is a market force to naturally stabilize the amount of staked Ether. I think it'll stabilize above 33%, but I think there's going to be plenty of Ether to go around for gas. And then of course, withdrawals are alive. So there's going to be a steady market of people unstaking to sell to people to buy gas. Okay, final question before we do final thoughts on this.

1:14:14Another one, this one comes to us from Wrong again. Another question, are there concerns about the weight, and he has that in double quotes, and complexity of the blockchain? Are there any concerns about lagging or hardware that are problematic as the code becomes more complex? This question, in essence, is as functionality expands, as the code base expands, are there risks in terms of performance, the risks in terms of complexity? Presumably also the question wants to know about risks in terms of security. Oh, that's a great question. There's certainly security complexity and scalability, like hardware risks.

1:14:48So on the security side, proof of stake is way more important to get secure than proof of work. Because in proof of work, the miners don't have anything you can steal. They have a piece of hardware that they're pumping electricity into and it's moving a mile a minute. There's nothing to steal there because like digitally, you could steal the miner, you could break into the mining facility. With proof of stake, it's totally different. If a bad guy, a bad attacker gets a hold of your validator keys, they can steal in the worst case, all of your money and realistically up to about half your money.

1:15:22So securing the proof of stake validators is like very, very of the utmost importance. And nowadays, there's a world-class security ecosystem that has been working on this problem for several years to make sure we're secure. And that requirement will never ease off. The security job will never be done. It's an ongoing fact of life now. And by the way, they're solving it not just in the sense of preventing bugs, but also picking good technologies that are inherently more secure, as well as on the hardware side where we're seeing now hardware innovation where the validator keys that run the validators are on little hardware wallets that plug into the computer that does the validation.

1:16:02just kind of separate those keys from the validating process, kind of like a hardware wallet for staking or for live online staking. So security, very important and ongoing. In terms of complexity, I think this is actually the big kahuna. There are those who fear that Ethereum is so complex now and has so much roadmap ahead of it that it will never settle down and ossify or stop changing the way Bitcoin has successfully done. There's this balance here of, you know, you don't want to ossify too early before you can meet the whole world's needs and be future-proof. You don't want to ossify too late when you become a political entity that's captured or you collapse under the weight of your own complex changes.

1:16:45So this is probably one of the bigger long-term concerns of Ethereum. When do you stop changing it? So far at this time, for this set of years, I feel very confident in our community roadmap. So I think this is more of like a long-term concern, you know, five to 15 years out. And in terms of scalability, a challenge is that the main challenge there is state growth, the amount of data in the Ethereum blockchain. So there's ongoing roadmap work to be done to reduce the state growth so that those hard drives running the Ethereum full nodes don't just continue getting bigger. At some point, there's a limit that they never get bigger than that limit.

1:17:23But an example of that is that the new blob space from EIP 4844, Dank sharding, it actually expires after, I don't know exactly, I think maybe four to eight weeks. So the blobs don't actually kick around on the Ethereum network for all time the way ordinary data does today. So there's about an eight-week period for the industry, for anyone in the world to download them and hoover them up and seed them on BitTorrent and IPFS, and then they disappear from Ethereum. So in that regard, Ethereum will eventually turn into a real-time bulletin board where things get added and removed, as opposed to just an archive you're constantly adding to.

1:18:06It's important to note that when these blobs do expire and they're no longer directly available on Ethereum, it's only the data payload that expires. The signature of that blob, the fingerprint to prove it's correct, stays forever. And so there's been a great deal of research around this. And I think they've really come up with a great solution that's going to work for the whole world. Brian, this has been, I think, one of the most powerful conversations that we've ever had on Real Vision Crypto about Ethereum and also one of the most accessible. You've explained lots of these key concepts here.

1:18:38We've gone really deep and I think we've kept it accessible for a broad audience who is just coming into this technology. Thank you so much for joining us. I wanted to give you an opportunity very quickly to do final thoughts, key takeaways that you'd like to leave our audience with. My pleasure, Ash. Thanks, as always, for having me on the show. And this conversation today was incredible. And it focused almost exclusively on Ethereum, the platform. But the future of Ethereum, the real future, is applications that actually help people. and we're seeing incredible innovation in the area of applications that actually help people.

1:19:17So as these upgrades are coming together, as we get scaling and withdrawals and L2s and account abstraction, these are incredible things and they're so exciting and interesting and wonderful to dive into and there's such talented teams and areas of the community working on them. And yet they are all in service of the market. They're all in service of the application layer. And so, you know, sometime soon we'll have to talk more about what's going on on this side of how is Ethereum going to help ordinary people and have a big impact on the broader world using all these amazing innovations and progress updates we discussed today.

1:19:58Ryan Berkman, thank you so much for joining us. Looking forward to doing this again soon, man. Thanks, Ash. Thanks for watching, everyone. What's up, revolutionaries? thanks for tuning in to the Real Vision Daily Briefing. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.