Vitalik: Why Ethereum needs a strong social layer

One of my favorite memories from a decade ago was a pilgrimage to a place in Berlin known as the Bitcoin Kiez: an area in Kreuzberg where about a dozen shops, located a few hundred meters from each other, all accepted Bitcoin payments. The centerpiece of this neighborhood was Room 77, a restaurant and bar run by Joerg Platzer. In addition to simply accepting Bitcoin payments, it served as a community center frequented by various open source developers, political activists of different political persuasions, and other various characters.

A similar memory from two months ago was PorcFest (“porc” means “porcupine”, aka “don’t tread on me”), a libertarian gathering held in the woods of northern New Hampshire. The main source of food there came from small makeshift restaurants with names like “Revolution Coffee” and “Seditious Soups, Salads and Smoothies”, which of course accepted Bitcoin. Here, discussing the deeper political significance of Bitcoin and using it in daily life went hand in hand.

The reason I bring up these memories is that they remind me of the deeper vision behind cryptocurrency: that we’re not just here to create isolated tools and games, but to fully build toward a freer and open society and economy, where the different parts — technological, social, and economic — fit together.

The early visions of “web3” were also of this type, heading in a different, albeit idealistic, direction. The term “web3” was originally coined by Ethereum co-founder Gavin Wood, and it referred to a different way of thinking about what Ethereum was: unlike my original view, which was “Bitcoin plus smart contracts”, Gavin thought about it more broadly, as one of a group of technologies that could together build a more open base layer for the Internet.

A diagram used by Gavin Wood in many of his early speeches.

When the free and open source software movement began in the 1980s and 1990s, software was simple: it ran on your computer and read and wrote files saved on your computer. But today, most of our important work is done collaboratively, often at scale. So even if an application’s underlying code is open and free, your data is routed through centralized servers operated by a company that may arbitrarily read your data, change the rules, or delist you from the platform at any time. So if we want to extend the spirit of open source software to today’s world, we need to give programs access to a shared hard drive for storing content that multiple people need to modify and access. What did Ethereum, along with similar peer-to-peer messaging technologies (Whisper at the time, now Waku) and decentralized file storage technologies (just Swarm at the time, now also IPFS) create? A public, decentralized shared hard drive. This was the original vision that gave rise to the now ubiquitous term “web3.”

Unfortunately, these visions have faded somewhat into the background since around 2017. There is little talk of consumer crypto payments, the only non-financial application that is actually used at scale on-chain is ENS (Ethereum Name Service), and there is a large ideological divide among a significant portion of the non-blockchain decentralized community who see the crypto world as a distraction rather than a kindred spirit and a powerful ally. In many countries, people do use cryptocurrencies to send and store funds, but they usually do so in a centralized way: either through internal transfers on centralized exchange accounts or by trading USDT on Tron.

Background: Justin Sun, founder of TRON and a pioneer in decentralization, has bravely led the world’s coolest and most decentralized crypto ecosystem.

Having lived through that era, I think the fundamental reason for this shift is the rise in transaction fees. When writing to a blockchain cost $0.001, or even $0.10, you can imagine people creating all sorts of applications that leverage the blockchain, including non-financial ones. But when transaction fees rise to over $100, as they did at the peak of the boom market, there is only one audience that is willing to participate — and in fact, is made more willing to participate by the rising price of the coin: the avid gambler. In moderate circumstances, avid gamblers may be okay, and I have spoken to many people at events who joined crypto for the money but stayed for the ideas. But when they become the largest group using the chain at scale, this adjusts public perception and the internal culture of the crypto space, and leads to many other negative situations we have seen in the past few years.

Now, fast forward to 2023. We actually have a lot of positive news to show for both the core challenge of scaling and the various “side quests” that are critical to building a viable cypherpunk future:

• Rollups (Rollup chains) begin to truly exist.

• After the regulatory crackdown on Tornado Cash, privacy solutions experienced a temporary downturn as second-generation privacy solutions such as Railway and Nocturne re-emerged.

• Account abstraction begins.

• Light clients, long forgotten, are starting to really come into existence.

• Zero-knowledge proofs, a technology we thought was decades away, are now here, becoming more and more relevant to developers, and are on the verge of being used in consumer applications.

These two things: the growing recognition that lawless centralization and over-financialization are not what “crypto” is, and the fact that the key technologies mentioned above are finally starting to come to fruition, together offer us an opportunity to take things in a different direction. That is, to make at least part of the Ethereum ecosystem truly the permissionless, decentralized, censorship-resistant, open-source ecosystem we originally built.

What are some of these values?

Many of these values ​​are shared not only by many in the Ethereum community, but also by other blockchain communities and even non-blockchain decentralized communities, though each community has its own unique combination of these values ​​and the degree to which they are valued by each community.

• Open global participation: Anyone in the world should be able to participate as a user, observer, or developer, on as equal a footing as possible. Participation should be permissionless.

• Decentralization: Minimize an application’s dependence on any single actor. In particular, an application should be able to continue working even if its core developers disappear forever.

• Censorship resistance: Centralized actors should not have the power to interfere with any given user or application’s ability to operate. Concerns about bad actors should be addressed higher up in the stack.

• Auditability: Anyone should be able to verify the logic and ongoing operation of an application (e.g. by running a full node) to ensure that it operates according to the rules its developers claim.

• Trusted Neutrality: The infrastructure should be neutral, and in a way that anyone can see that it is neutral, even if they don’t already trust the developer.

• Build tools, not empires. Empires seek to capture and trap users in walled gardens; tools accomplish their mission but interoperate with a broader open ecosystem.

• Collaborative mentality: Even while competing, projects within the ecosystem collaborate on shared software libraries, research, security, community building, and more that are of mutual value to them. Projects try to achieve a positive-sum game, collaborating both with each other and with the wider world.

It is entirely possible to build things within the crypto ecosystem that do not align with these values. One could build a system that is called “Layer 2” but is actually a highly centralized system secured by multi-signatures with no plans to move to a more secure system. One could build an account abstraction system that attempts to be “simpler” than ERC-4337, but at the cost of introducing trust assumptions that ultimately eliminate the possibility of a public memory pool and make it harder for new builders to join. One could build an NFT ecosystem where the contents of the NFTs are unnecessarily stored on centralized websites, making it even more fragile than storing these components on IPFS. One could build a staking interface that unnecessarily steers users towards what are already the largest staking pools.

Resisting these pressures is difficult, but if we don’t we risk losing the unique value of the crypto ecosystem and recreating a clone of the existing web2 ecosystem with additional inefficiencies and extra steps.

Ethereum is the Dark Forest

Crypto is an unforgiving space in many ways. This was vividly expressed in a 2021 article by Dan Robinson and Georgios Konstantiopoulos, who argued in the context of MEV that Ethereum is a dark forest where on-chain traders are constantly vulnerable to exploitation by front-running bots, which themselves are vulnerable to counter-exploitation by other bots, etc. This is also true in other ways: smart contracts are frequently hacked, user wallets are frequently hacked, centralized exchanges are even more prone to failure, and so on.

This is a huge challenge for users in the field, but it also presents an opportunity: it means we have a space where we can actually experiment, incubate, and quickly get feedback on a variety of security technologies to solve these challenges. We have seen successful responses to the challenge in a variety of settings:

Everyone wants the internet to be secure. Some have tried to ensure it by pushing approaches that force reliance on a single specific actor, be it a company or a government, who can act as a centralized anchor for security and truth. But these approaches sacrifice openness and freedom and contribute to the growing tragedy of the “split web.” People in the crypto space hold openness and freedom in high regard. The level of risk involved and the high financial stakes mean the crypto space cannot afford to ignore security, but a variety of ideological and structural reasons ensure it cannot use centralized approaches to security. At the same time, the crypto space is at the forefront of very powerful technologies, such as zero-knowledge proofs, formal verification, hardware-based key security, and on-chain social graphs. These facts together mean that for crypto, an open approach to security is the only way forward.

All of this is to say that the crypto world is a perfect experimental environment to apply its open and decentralized security approach to real-world high-stakes environments and mature it to the point where parts of it can be applied to the wider world. This is one of my visions of how the idealistic and chaotic parts of the crypto world, and then the crypto world as a whole and the wider mainstream world can transform their differences into symbiosis rather than constant tension.

Ethereum as part of a broader technological vision

In 2014, Gavin Wood introduced Ethereum as one of a suite of tools that could be built, the other two being Whisper (decentralized messaging) and Swarm (decentralized storage). The former gained traction, but with the turn towards financialization around 2017, the latter received less attention. Nonetheless, Whisper survived, became Waku, and is actively used by projects like the decentralized messenger Status. Swarm is still under development, and now we also have IPFS, which is used to host and serve this blog.

Over the past few years, with the rise of decentralized social media (Lens, Farcaster, etc.), we’ve had the opportunity to revisit these tools. In addition, we have another very powerful new tool to join this trinity: zero-knowledge proofs. These technologies are most widely adopted as a way to improve Ethereum scalability, such as ZK rollups, but they are also very applicable to privacy. In particular, the programmability of zero-knowledge proofs means that we can cross the false binary choice of "anonymous but risky" vs. "KYC-ed and therefore secure", and achieve privacy and many kinds of authentication and verification at the same time.

An example from 2023 is Zupass. Zupass is a zero-knowledge proof-based system incubated in Zuzalu, used both for live event authentication and online authentication to the Zupoll voting system, Twitter-like Zucast, and more. The key feature of Zupass is that you can prove that you are a resident of Zuzalu without revealing which member of Zuzalu you are. In addition, each Zuzalu resident can only generate one randomly generated cryptographic identity for each application instance they log into (such as a vote). Zupass was a huge success and was applied to Devconnect's ticket sales later that year.

The zero-knowledge proof proves that I, as an Ethereum Foundation employee, have access to the Devconnect coworking space.

Perhaps the most practical application of Zupass so far is voting. A wide variety of polls have been conducted using Zupass as an anonymous voting platform, some of which involve politically controversial or highly personal topics where people feel a strong need to protect their privacy.

Here we can start to see what an Ethereum-style cypherpunk world might look like on a technical level, at least on a purely technical level. We can hold assets in the form of ETH and ERC20 tokens, as well as various NFTs, and use a privacy system based on stealth addresses and Privacy Pools technology that both preserves privacy and excludes the ability of known bad actors to benefit from the same anonymity pool. Whether within our DAO or when helping to decide on Ethereum protocol changes or achieving other goals, we can use a zero-knowledge voting system that can use various credentials to help determine who is eligible to vote and who is not: in addition to voting with tokens as we did in 2017, we can also anonymously vote for people who have contributed enough to the ecosystem and attended enough events, or implement a one-person-one-vote system.

In-person and online payments can be transacted super cheaply on L2, leveraging data free space (or off-chain data secured with Plasma) as well as data compression, providing super high scalability for users. Payments from one Rollup to another can use decentralized protocols like UniswapX. Decentralized social media projects can use various storage layers to store activity like posts, retweets, and likes, and use ENS (cheap on L2 with CCIP) for usernames. We can have seamless integration between on-chain tokens and off-chain proofs of personal holdings, with zero-knowledge proofs through systems like Zupass.

Mechanisms like quadratic voting, cross-tribal consensus lookups, and prediction markets can help organizations and communities be autonomous and transparent, while blockchains and zero-knowledge proof-based identities can keep these systems safe from internal centralized censorship and external coordinated manipulation. Complex wallets can protect people as they participate in dapps, with user interfaces published to IPFS and accessed as .eth domain names, and hashes of HTML, JavaScript, and all software dependencies updated directly to the chain through the DAO. Smart contract wallets, designed to help people not lose millions of dollars in cryptocurrency, will be extended to protect people's "identity roots," creating a more secure system than centralized identity providers like "Sign in with Google."

Soul wallet recovery interface. I personally prefer to entrust my funds and identity to such a system rather than centralized web2 recovery.

We can think of the greater world of Ethereum (or “web3”) as creating an independent technology stack that competes with the traditional centralized stack on all levels. Many people mix and match the two, and there are often clever ways to match the two: with ZKEmail, you can even use your email address as one of the keepers of your social recovery wallet! However, there are also many synergies between using different parts of the decentralized stack if they are designed to integrate better with each other.

One of the benefits of thinking of it as a stack is that this fits very well with Ethereum’s ethos of diversity. Bitcoin tried to solve one problem, or at most two or three. Ethereum, on the other hand, has many subcommunities with different focuses. There is no single dominant narrative. The goal of the stack is to enable that diversity, but at the same time strive to enhance interoperability across that diversity.

Social Layer

It’s easy to say “these people doing X are corrupt influences and bad things, these people doing Y are the real deal”. But that’s a lazy response. To really succeed, we need a vision not only for the technology stack, but also for the social part of the stack that enables the technology stack to be built in the first place.

In principle, the advantage of the Ethereum community is that we take incentives seriously. PGP wanted to put cryptographic keys in everyone’s hands so we could actually sign and encrypt emails for decades, and it largely failed, but then we had cryptocurrencies and suddenly millions of people had keys publicly associated with them that we could start using. Of course it has other purposes too — including going back to encrypted email and messaging. Non-blockchain decentralized projects are generally chronically underfunded, and blockchain-based projects got a $50 million Series B. We get people to stake ETH to secure the Ethereum network not out of the benevolence of stakeholders but out of their own self-interest — and we get $20 billion in economic security as a result.

At the same time, incentives are not enough. DeFi projects often start out humble, collaborative, and as open source as possible, but sometimes abandon these ideals as they scale. We can incentivize stakers to participate through very high uptime, but it is more difficult to incentivize stakers to achieve decentralization. It may not be possible at all through purely protocol means. Many of the key components of the “decentralization stack” described above do not have viable business models. The governance of the Ethereum protocol itself is inherently non-financialized — which makes it much stronger than other ecosystems where governance is more financialized. This is why Ethereum needs a strong social layer that actively reinforces its values ​​in places where pure incentives cannot reach — but without creating a concept of “Ethereum consistency” that will evolve into a new form of political correctness.

A balance needs to be found between these two aspects, although the correct term is not balance, but integration. There are many people who first came into the crypto space because they wanted to get rich, but then became familiar with the ecosystem and became active believers in building a more open and decentralized world.

How do we achieve this integration? That’s the key question, and I think the answer lies not in one silver bullet, but in a series of technical means that are likely to be iterative. The Ethereum ecosystem has been more successful than most in encouraging a collaborative mindset between Layer 2 projects through social means. Large-scale public goods funding, especially Gitcoin Grants and Optimism’s RetroPGF round, has also been very helpful because it has provided another revenue channel for developers who don’t see any conventional business models that don’t require sacrifices in values. But even these tools are still in their infancy, and there is a long way to go to improve these specific tools, and to find and evolve other tools that may be better suited to specific problems.

This is where I see the unique value proposition of Ethereum’s social layer. While valuing incentives, there is also a unique way to not be consumed by them. While valuing warm and cohesive communities, it is also important to remember that what feels “warm and cohesive” from the inside can easily feel “oppressive and exclusive” from the outside, and to value the hard norms of neutrality, open source, and censorship resistance as a way to guard against the risks of over-emphasizing community-driven. If this hybrid approach can work successfully, it will be in the best position to achieve its vision on both the economic and technical levels.