The Real Fork

Thanks to MEVBandit for helping me on this and other mechanisms or whatever. Also special thanks to Tim Beiko at the EF. He hasn’t read this and I’m pretty certain he will not agree with the premise but he just seems like a sweetheart so I wanted to say thanks to him too.

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I used to write more frequently on this Substack. I quit because I didn’t want to be thought of as someone who Substacks, not unlike publicly identifying as a Bitcoiner on crypto Twitter or admitting that you’re a Christian in Silicon Valley Recent events in the Ethereum community have caused so much inner turmoil that I have been forced to become a Substacker once again. I thought this would be better suited for a longer form post.

Most of you are aware of what’s going on with Lido. I won’t go into details, there are plenty of people more articulate and knowledgable than myself that have commented on this. We lack not a dearth of sideline hecklers (me). I will say that I believe Lido is a turning point: it is the strongest confirmation we have that the composition of the social layer is either failing the values or, maybe more intutively, the values have changed.

There’s this idea in crypto, “speculation drives innovation.” This narrative is so pronounced, so oft-repeated, many would consider it a ~first principle~ of sorts. We justify the scammers, the hucksters, the ponzi schemes, we justify (or at least know they will come around) the existence of the occasional rogue SBF character because we argue that there’s a light at the end of the tunnel. We continue to marinate in this cesspool of fraud and degeneracy not because we like it or because we always think it’s necessarily a productive allocation of capital, we stay because there is some belief that the systems we are building are innovative and disruptive (or at least we say this to the LPs). But we can also be candid about this: to the extent that product market fit has been achieved in crypto, it is because it has enabled permissionless speculation. Even the most well-respected members of the community put forth this notion.

So who do you think we attract when we advertise crypto in this way? We attract the speculators. We attract the profit maxis. We attract the sophisticated actors, the MEV searchers, the shitcoin traders, and the stakers. We attract a diverse group (that part’s good, I suppose) but that group mainly just wants to make money. Is it reasonable to say that *this* group of people is the social layer? If not these users, who is the social layer? For every bat-speaker Twitter avatar ideologue, there are ten speculators that use the Ethereum chain. I’m sorry Rocket Poolers, I do love your screeches but you are merely a vocal minority. It’s not immediately clear that the developers of the Ethereum protocol are willing to accept that they too are outnumbered. Lido fixes this.

This tweet from Ethereum Foundation researcher Dankrad Feist about Lido is interesting. ¹ Interesting because I believe (very strongly in fact) that Dankrad believes what he is saying but also interesting because it seems that the Ethereum Foundation and independent researchers who work on the layer 1 protocol are increasingly detached from reality.

Protocol developers attempt to design systems that uphold the ~values~ of the community through an agreed upon set of consensus rules. These bits, these 1s and 0s, are merely lines of code and cannot express an ideology. But if arranged properly, the code can tightly restrict users and developers and enforce what can and cannot be done on a blockchain. In theory, this forms a rough consensus where everyone is happy or at least everyone is happy enough that the incentive to defect from the rules is costly or annoying. Usually, this works out ok in practice. The protocol enforces strict rules but users and developers still have enough dexterity to build and use the applications they want. Lido has torn the Ethereum community in a way that hasn’t really be done before: it has built an application that has captured a tremendous amount of power over Ethereum the protocol.

I’m not so focused on Lido here actually, or at least not Lido exclusively. There’s been enough discourse on “alignment” and “enshrinement” and whether or not Vitalik and Justin Drake are employing a strong-cocked Stalinistic strategy of pointing out businesses that get a little too big and absorbing them into the state. It’s not so interesting to discuss the strong centralizing incentives of liquid staking or Proof of Stake in general, these too have been belabored on Twitter. What’s more interesting to me is the disconnect we are seeing with the ideologues and the pragmatists, the decentralizors and the capitalists. A disconnect that has boiled over more acutely than anytime I can recall (to be fair I wasn’t around for the DAO hack, I’m literally 14 years old).

Dankrad’s tweet is noteworthy because it seems to contradict what we know about how these systems are intended to work. Arguing that Lido is an attack when the social layer has signaled (in the only tangible or measurable way we know: with their money) that they support Lido is baffling. “All of the people who deposited .1 ETH in Lido, all of the people who are too poor to run their own 32 ETH nodes or simply want the ease of use provided by Lido: you are an attack on the social consensus. Your values are not those of the social layer.” Who then, apart from the majority of ETH stakers, comprises the social layer?

This question is hard to answer, the closest we have is that there is no social layer. It is one and the same with the Invisible Hand: you cannot touch it or see it, but you feel it in your bones, the market pulsating if you will. So to the extent that there is a social layer, it has signaled support for the ever-creeping force of Lido. Arguing otherwise is an admission that the system design is one that cannot project and enforce its values. The social layer continues to deposit their ETH into Lido. This, of course, makes logical sense when you understand that the minimum amount of stake required is more than 98% of people around the world make annually. The point though is that when the rules are codified, the only value judgements we can make are those relating to actions. The actions of the Ethereum users are inconsistent with that of an attack. At what point does the single largest block of voters *become* the social layer? It doesn’t appear as though anyone can answer that.

Lido in this case is a proxy for sentiment within Ethereum. The sentiment is one where users will always maximize for their own utility over ideology. Lido is the vessel for this realization or issue, if you consider it one. Ethereans love nothing more than waxing poetic about the versatility of the chain, the high volume of transactions that occur on a daily basis, “all the cool things you can do on Ethereum.” What are those things? Getting sandwiched by Jared. Minting a 10k profile picture project. Borrowing against your coins so that you can buy more coins. All of these are speculative in nature.² This is the social layer. There are ways to neuter these forces. You can democratize staking rewards. You can have trusted intermediaries relay blocks so neither the builder nor proposer can dupe each other. But you cannot tell people why they should use the chain. If you didn’t want the profit-maximalists to enforce the rules, then you shouldn’t have given them the ability to, well, profit from centralizing the stake. It’s a hard pill to swallow but if you wash it down with green tea and red wine it makes it a bit better.

From what I can tell, the Ethereum Core developers are highly ideologically driven. I do believe they have a vision and I believe that vision is rooted in decentralization and permissionless innovation or some version of these ideals. But I do wonder at times if they see what Ethereum is *actually* used for. Like do they look at the transactions on the chain? I’m serious. You can try to restrict the value extracted by all the various actors through code but its not immediately clear that this is what users want *if* it limits their ability to participate in the casino. Those who suggest we cannot merely rely on “rational actors,” but instead “we must also rely on the values and ideals”: ok, that’s fine. What if I told you the values and ideals were also more in line with maximizing the amount of money you can make engaging with a financial system that invites the ponzi users and the traders?

Choose one of the following:

• “Speculation drives innovation. We invite the speculators and encourage the builders to cater to them”

• “We cannot solely rely on the blockchain to uphold our values, we need the social layer to step in to enforce decentralization”

I have become fairly convinced you cannot have both. We are not the deplorables for using stETH.

1. Dankrad clarified that he was expressing his personal views and not those of the EF. I’ve heard Dankrad is rad, I don’t know him but I thought I’d pass this along out of respect

2. ok sure, we can argue that all of finance is technically speculation but recall, no other financial system has tended toward decentralization which is the point here