Vitalik tells you personally: What is Ethereum and its advantages and disadvantages

Crypto KOL Naval recently interviewed Ethereum founder Vitalik in a podcast. Vitalik reviewed the origin story of Ethereum in the podcast and personally explained what Ethereum is, the pros and cons of Ethereum, Ethereum's philosophy and even the future of blockchain technology. Golden Finance compiled this interview with Vitalik.

Naval: Welcome to the podcast. My guests on this episode are Haseeb Qureshi, who is a partner at Dragonfly and someone I worked with when I was more active in crypto. And Vitalik Buterin, who is certainly the polymath genius — although he might bristle at that description — who created Ethereum, the first smart contract blockchain to get any transaction volume, and changed the face of blockchain computing as we know it.

Haseeb, would you like to give us a brief background on yourself?

Haseeb's Background

Haseeb: I'm a software engineer and now an investor. I run Dragonfly Capital, a global crypto fund - we invest only in cryptocurrencies - and I've been doing this for over four years.

It’s interesting because when I first got into crypto, I remember I was actually at IC3, this crypto conference, where I first met you and Vitalik. I had just quit my job as a software engineer at Airbnb, and I remember asking you, “What do you think is the most important problem in crypto?” And your response was about wallets. You were like, “I think it’s important to build more wallets.” At that point I had a vague understanding of what building a wallet meant. That’s what triggered me to dive down the Ethereum rabbit hole.

In the early days when I first really dug into crypto, after that IC3 conference, I remember leaving with a strong feeling that Bitcoin was going to die. I was like, “Look at the clear and huge difference in the intellectual energy and character of what’s going on in the Ethereum world, which is everything I saw at IC3, and what I saw in the Bitcoin world was a whole bunch of religious rage and enthusiasm, and not a whole lot of innovation.”

It turned out that my understanding at the time was very simple. But this is how I first got into crypto full-time, through the little interaction you and I had at the time.

Naval: If I remember correctly, you also have a background as a poker player.

Haseeb: That's correct too. I was a professional poker player for about five years before I got into tech.

Naval: Before we got into crypto, a lot of us were either in Magic: The Gathering or in poker.

BUTA: Or World of Warcraft.

Naval: Maybe just geeks and gamers.

Haseeb: I do think it's bigger than that. I have this theory that you and I talked about before. Every generation has some hustle, and if you're really smart and really aggressive in finding an edge and aren't afraid to look weird, there are ways to get ahead early or make a lot of money in ways that aren't obvious to most people and maybe even be a little bit subversive. If you spend a lot of time on this thing, your parents will be surprised by it.

In my day, it was poker. There was a time when it became fantasy sports, then it became crypto, then it became DeFi and liquidity mining, then it became NFT trading. Two years from now there will be something else. When NFTs are very specialized and there isn’t a lot of alpha that can be converted into NFTs, there will be something else that young, really hungry people who are not afraid of looking stupid will do a lot of things to make a lot of money.

Naval: Vitalik, would you like to briefly introduce yourself?

Vitalik's Background

Vitalik: I was born in Russia and moved to Canada when I was 6 years old. When I was in high school, I had already done a lot of math and programming, and I found Bitcoin interesting. It immediately fascinated me because it combined all my interests at the time.

Bitcoin had the math side, it had cryptography, it had computer science. It was all open source software, and I was really into open source software at the time. And then there were these economic and political aspects. I was already kind of into Austrian economics. Bitcoin just pushed all of those buttons.

I started joining the Bitcoin community as much as I could. I browsed Bitcoin forums, looking for jobs that would pay in Bitcoin, because I thought the point of Bitcoin was that you were supposed to earn it. I found someone who was willing to pay 5 Bitcoins per article (which was $4 at the time) to write for his blog, and I did that for a few months.

Then, a poker player from Romania named Mihai Alisie contacted me and said he was starting a Bitcoin magazine and wanted me to be the first writer. I immediately agreed and I became the first writer for Bitcoin magazine.

I started writing more and more Bitcoin related articles, learning about Bitcoin, and eventually started more programming related projects. I did some work on a covert coins library called Bitcoin X, and started digging deeper and deeper into the industry.

Then in mid-2013, I decided to take six months off from school and travel around the world, visiting all the Bitcoin communities I could find, learning about them, and seeing what everyone was doing. A few months later, I met these people who were trying to take the blockchain and expand it to do things other than cryptocurrency.

There is a project called "Covert Coin" that has been around for a long time that attempts to use the blockchain as a database layer to issue other kinds of assets on top. You can issue stocks and digital dollars on the blockchain. There is a project called "Master Coin" that attempts to expand it further to create a complete financial system to do what we call "DeFi" today. This is a very early version.

After I spent enough time in these circles, I eventually had my own idea about how to create a more general version of all of these ideas: not a blockchain with just one application, but a blockchain that you can build any application on top of.

This is where Ethereum comes in.

Naval: Ethereum is a blockchain that you can build any application on. Whereas Bitcoin is obviously limited to trying to be the new currency or the new reserve currency, or as some people now say, "digital gold." So you were the original creator, and there was a team that wrote the code, and then you released it. How old were you when you did that?

Vtalik: Nineteen.

Naval: How long had you been working in the computer field at that time? When did you start programming?

BUTA: I think I started programming when I was about ten years old.

Naval: Are you mostly self-taught, or did you go to school for this? What’s the secret, besides the obvious genes?

BUTA: I grew up writing video games for myself. I would make a video game and play it until I got tired, then make another video game and play it until I got tired. That was pretty much how I learned until high school.

Naval: Was there anything your parents did or anything unique about your environment that facilitated your development in programming?

BUTA: My parents did buy me a lot of programming books. They did find me some programming courses and some math courses. They were definitely very supportive.

Naval: Are you in a school for gifted children or a regular public school system or private school?

VB: I was in gifted programs or public schools until eighth grade. Then in high school, my parents sent me to a private school, and I found the private school experience to be much better.

Naval: Do you meet most of your collaboration colleagues online, or is that where you are? Where are they all hanging out that you stumble upon them?

Vitalik: It’s almost entirely online. The Bitcoin world lives on a forum, and unless you’re in one of the major cities like New York or San Francisco, the community has been online almost since the beginning. Bitcoin Magazine has been a completely remote company since the beginning. Bitcoin Weekly, the blog that preceded Bitcoin Magazine, was also completely remote from day one.

Naval: To this day, most of your collaborators are located almost all over the world. Is that right?

BUTA: Almost.

What is Ethereum?

A blockchain on which any application can be built.

Naval: Ethereum came out in 2014. If I remember correctly, you had been developing it for a few years before that. There was a public sale, a lot of people participated in it, and then in 2017, there was a boom in people building assets on Ethereum and different kinds of tokens. Then, of course, games, NFTs, DeFi, and all these things came out.

Let’s review the evolution of Ethereum. What does Ethereum do at the core level? What is it good at? And today, what is it not doing well? What does it need to get better at?

Vitalik: I think of Ethereum as a general-purpose blockchain. So it's not a blockchain with just one application, but a blockchain on which any application can be built. The way to do this on Ethereum is to write a piece of code, then create a digital transaction containing that code and publish it.

When you publish this transaction and it is included in a block on the blockchain, this creates an object called a "contract". This is a virtual object that the blockchain keeps track of. So a contract is an object that contains a piece of code.

Now the blockchain has this object, it has a piece of code, it's like a little application that the Ethereum blockchain maintains from that point on. After that, anyone can send another transaction that says "I want to talk to this object."

So step one, I create a transaction that creates this object. We'll call that object X. And then step two, you want to use my application, so you send a transaction, and in your transaction you say, "I want to talk to smart contract X, and here's a little piece of data that says what I want to do with that application."

When that transaction is encoded into a block, the code I first posted runs, taking the data from your transaction as input and interpreting it in any way it wants.

We can illustrate this more concretely with an example.

Let's say I have a company and I want to issue shares on the blockchain. I'm going to create a transaction that has a program in it. The rules of that program will say, "Okay, what can you do with your shares?" We're just going to say you can transfer your shares to other people and you can vote, right?

That program will interpret whatever data it thinks is an instruction to transfer your shares to someone else, or an instruction to vote. I publish this transaction, and it initializes the whole thing. As part of that transaction, I might say, "Naval owns 50 shares, Haseeb owns 100 shares, and I own 25 shares." So now there's this thing on the blockchain, and it has a piece of code. It has its own little memory that says, "I have 25, Haseeb has 100, and Naval has 50"?

If Naval is feeling generous and wants to give me half of his shares, he creates a transaction. That transaction will have some data. It will encode the idea that I, as Naval, want to send my 25 shares to Vitalik. So you create a transaction that encodes that and sends it to the network, and it gets included in a block.

Once it's included, this code runs. This code sees the transaction and says, "Okay, obviously I have to transfer 25 shares from Naval to Vitalik. Before, Naval had 50, so I'm going to subtract 25, and now Naval has 25. Before Vitalik had 25, and now Vitalik has 50. I'm going to write down that Vitalik now has 50. Okay."

That's it. The transaction is processed.

Advantages and Disadvantages of Ethereum

Eth trades efficiency for transparency

Naval: Why is all of this happening in the cloud in this very complicated way? It's very complicated. Why not just use a regular computer? Why not just send an email?

VB: This creates a very transparent, public record of the rules. I can guarantee that all interactions I create with this application follow the rules. No actor has a backdoor key.

Naval: It's a trusted computer in the cloud, and each of us can verify all the activity. We can audit all of this, and we know nobody cheated. Nobody else moved my funds. I was the one moving the funds, and everybody verified the code, and it's exactly what it should be running. Obviously there are sacrifices for this, right? It's not free.

BU: Exactly. Even I, as the creator of the contract in this example, don't have the ability to go in later and say, "Oh, I changed my mind. I'm going to give myself 400 shares." Once I create it and publish it, I have no more privileges than anyone else. The application doesn't even have an owner.

So that's powerful, right? Completely neutral, completely transparent, visible, treating everyone equally according to the rules.

Now, what do you sacrifice for that? One big thing you sacrifice is efficiency.

The way all of these blockchains work, including Bitcoin and Ethereum, is that you have this network of tens of thousands of computers, and every computer helps validate transactions. When I broadcast this transaction, it goes to every computer on the network, and every computer on the network runs that code. Every computer on the network validates it. Every computer on the network processes it.

Naval: Parallel computing is, "I split my code into a thousand computers, and each computer runs one thousandth of my code." Now I send it to a thousand computers, and all a thousand computers run my code.

BU: Indeed, it’s very different computation. One intuitive way to think about why this makes sense is to compare text to audio and video.

Right now we're recording a podcast, and the podcast has some audio and some video, and in order for us to see each other in the video, hundreds of thousands of times a second are flowing between us.

Technically, those thousands of flows are unnecessary. We could do the whole thing with a text conversation if you wanted. But there is a benefit to being able to hear each other's voices and see each other's expressions. So the computational overhead that people use computers for is already high. Video and audio are good examples.

Like plain text, Eth is simple and efficient

What happens in the blockchain is more like text - like Naval minus 25, Vitalik plus 25. It's very simple, very efficient stuff.

Therefore, it is completely feasible to have the activities of thousands or even millions of users verified by a single computer, because the blockchain cannot do everything. The blockchain only does this core business logic, and the core business logic is actually not that complicated.

Only high-value transactions can pay for blockchain

Haseeb: This is because of the limitations of the blockchain. It's a function of all the redundant constraints you have to have on the blockchain. We can only put "Naval minus 25, Vitalik plus 25" on the blockchain. In the long run, our goal is to allow more and more low-value computation to happen on the blockchain as well. But right now, out of necessity, only high-value transactions can afford the cost.

Naval: Just to back up a little bit, what you've done is you've built a computer, a virtual computer in the cloud that's stitched together from thousands or tens of thousands of real computers, and that computer is very inefficient. It's slow. It's going to move at a very slow pace. So to compare it to the throughput of a home computer or a supercomputer is nonsense. That misses the point.

But any code that runs on it is very trustworthy, and you know it hasn't been hacked. Now you no longer need a government, or you no longer need a middleman like Mark Zuckerberg running Facebook to tell you which transactions are valid, which contracts are valid, which programs are valid and which are invalid.

Eliminating “trusted” third parties

You have eliminated the need for a trusted third party and replaced it with a trusted computer that has been audited, verified, and checked by thousands or tens of thousands of other computers.

The technical complexity comes from scaling. Making this computer faster; keeping it secure; creating economic and technical incentives; there's an incentive there so that people want to add computers to this network; and there's also a disincentive to use the network. You have to pay for it, or it's easy to overwhelm it.

Trading performance

This giant contraption is Ethereum. Of course, people have come along and created other smart contract blockchains. Although we call it a “smart contract” blockchain, it’s actually a trusted computer in the cloud that can theoretically run any application — but it trades performance for security, which can be measured by decentralization.

In other words, no single entity controls the computer. It can be measured in terms of how secure the code is, whether it has been hacked, etc. A lot of subtle and beautiful elements come out of this that aren't obvious.

We're used to thinking about computers as, "Okay, Facebook runs some computers. These are central computers that are run by Mark Zuckerberg and crew, and the code is not public. Of course, I don't have access to the code. I'm just a user. I don't own my data. They own the data. It's in this database, and I don't have access to that database to read or write to it. I have to go to Facebook and ask them to read or write from the database."

But now you've created a computer where the code is all open. In fact, even the data is public; some of it is encrypted, some of it isn't. Some of the data anyone has permission to see. Some of the data you actually need to have the encryption decryption key to access. Anyone can read from it or write to it if they have the proper permissions. It's a crazy, mind-blowing concept.

It's a true shared database with no owners and no permissions at a very granular user level, where users actually own the data. And, in fact, users own the network that's now run by this database. So if someone builds the next Facebook app on top of Ethereum, they can design it in a way that users actually own the app.

"An impenetrable castle built with mathematics"

This is the extraordinary achievement behind Ethereum, and it’s hard to sum it up in a few words. One way I tried to do it was, “Smart contracts are castles made of mathematics that can trade freely with each other. The castle is impenetrable.”

"Cryptography is very powerful and makes for a strong defense, but they are made of math - very much like the video games you programmed when you were young. These are structures put together by anyone around the world in an anonymous or pseudonymous way. They trade freely with each other, and the lord of each castle decides what to trade with everyone else."

Ethereum’s limitations are latency and privacy

Now, this obviously has significant limitations. We've talked about how this network of computers is going to move at about the speed of one computer, at least until we find some way to scale and grow. What are the other limitations of this network? Can you give us some specific applications of where it's used and where it's not used?

Vitalik: Besides scaling, another important performance element is latency.

When I send a transaction, I have to wait about half a minute for it to be included and confirmed. In the future, this will become more efficient. Maybe 10 or 12 seconds will be a reality soon. But this is not a real-time thing that you stick real-time video game logic into. You can use it for payments, for example, but you probably don't want to use it for something that needs to be more real-time than payments.

This is a limitation.

Another limitation is the transparency property. This is probably one of the places where we might have to get into some cryptography. Basically, the blockchain itself is completely transparent and everyone can see everything that is going on.

If we go back to this example where we issue shares of this company on the blockchain, then when Naval sends me his 25 shares, everyone in the world will be able to see that. Now, in some cases this is totally fine, but in some cases you might want some privacy.

This is one of those areas where you can often get privacy and security at the same time. There's this extra cryptographic math. We don't need to go into it in depth, but it's worth mentioning the name of it. It's a "zero-knowledge proof." The way I describe a zero-knowledge proof is that it's a way to prove a piece of information without revealing that information.

Let's say we will have the same application, a stock of my company on the blockchain. Instead of the blockchain recording the numbers 25, 50, and 100, the blockchain will record an encrypted version of 25, an encrypted version of 50, and an encrypted version of 100.

Then, when Naval sends me his 25 shares, he’ll say, “Here’s the encryption for the number of shares I own now; here’s the encryption for the new number of shares I’ll own; here’s the encryption for the number of shares I’m giving Vitalik; and then here’s a magic cryptographic proof that the numbers line up. It says X plus Y equals Z, and I don’t want to give away more than I actually own.”

You can verify that everything follows the rules without having to verify what a specific transaction is doing and with what parameters.

There are ways to get your privacy back

There are ways to get your security and privacy back at the same time. There are still some limits to how much privacy you can get. For example, even in this case, people can see when people interact with this particular application. If you just use blockchain, you lose a lot of privacy. If you use blockchain plus zero-knowledge proofs and other types of cryptography, you can generally get a lot of privacy back.

You might get more privacy than in a centralized case. In a traditional centralized system, Facebook runs everything and sees everything. But with these types of systems, there’s no one at the center. There’s a mathematical castle in the sky that verifies the proof.

Naval: In theory we can get anonymous digital cash. Going further, we can even get anonymous smart contracts, where maybe you can tell you that I interacted with a smart contract, but the details beyond that are lost.

VB: It’s not just theoretical. It’s something that already exists. Zcash has been around for over five years.

Naval: Zcash is a blockchain built around zero-knowledge proofs, where all transactions, recipients and senders can be anonymous. True “moon math,” as they say.

The future of blockchain technology

Can Eth provide both high levels of decentralization and high levels of scalability?

Naval: Let’s fast forward ten or twenty years into the future. I know that’s a really long time in blockchain, because Bitcoin only came out in 2009, and Eth only came out in the first half of the 2010s. But let’s say ten or twenty years from now, we’ve done all the hard engineering we need. We’ve built as much technology as we can imagine. What are the limits of blockchain scalability and privacy? Where will we end up?

Do we eventually want every transaction to be private, or do you think a lot of them will be public? Do you think we’ll be using blockchain in almost all cloud computing, or just in finance and high-value areas?

Vitalik: It’s worth mentioning that the scalability of blockchain is improving rapidly. The way blockchain works today is that I send a transaction, the transaction goes into the network, and every computer on the network has to verify the transaction.

There are scaling technologies out there now. Again, we don’t have to get into that, but technologies like Rollups and sharding allow you to use blockchain in smarter ways, you still have a lot of very redundant computation happening, but it’s a lot more efficient.

Naval: What are the different technologies?

Vitalik: In a centralized system, you send a transaction to Facebook. Facebook has one computer. One computer verifies it. In a blockchain, you have 100,000 computers. You send your transaction. All 100,000 computers verify it.

Sharding leads to more centralization

Sharding is: Send your transaction. The system randomly selects 1,000 computers out of 100,000 computers. Those 1,000 computers validate it, and the transaction is accepted. Not all 100,000 computers are validating, but only 1,000 computers are validating.

When you have a large number of transactions being accepted into the system, each computer in the network only has to verify, on average, 1% of all activity. You can make that even more efficient. Eventually it could be that each computer doesn't even have to verify 1%; each computer might only have to verify 0.1%.

Think about how BitTorrent works, BitTorrent is also like a highly distributed network. If you want to download a really popular movie, you can usually. But on BitTorrent, you don't really have every computer downloading every movie, because that would be crazy.

On average, a movie will have a few hundred seeders, maybe a few thousand. That number is large enough that you have redundancy and you can usually get the content you want, but it's not so redundant that it just becomes crazy inefficient.

The question is, can you create a network that works the same way as BitTorrent — from a data distribution and efficiency perspective — but create something that still has the same validation properties as a blockchain? That’s where sharding comes in.

One of the downsides of sharding is that it's more technically complex. There's work that has to be done to actually figure out what the exact rules are for how these transactions are split between the nodes, how they get them to communicate with each other, and how this distributed verification is done.

The easier way to do it from a protocol perspective is to say, "We're going to require every node in this network to be really powerful." So instead of a laptop being able to be a node, we're going to require every node to be almost a supercomputer. If you do that, then you can make blockchains still work the same way they do now, but they can handle a lot more transactions. Maybe instead of processing 50 per second, they can process 1,000 or 5,000 per second.

Verifiability at the expense of scalability

The weakness of this approach — and the reason why Ethereum doesn’t adopt this approach — is that it leads to more centralization. There are fewer people who can actually verify what’s going on. There are fewer people who can collude to try to make some changes to the protocol that users might not want.

It’s still more decentralized than Facebook, but it’s become much less decentralized than it could be.

Maybe in some cases that’s the right approach. If you want to make a decentralized video game where people aren’t going to lose millions or hundreds of millions of dollars if it gets captured, then this more centralized approach is actually totally fine. There are all sorts of applications in the middle, which is great.

If you want something high assurance, then you do want to create decentralization close to the edge - like to the maximum - and current Ethereum does provide that. It does provide this very high level of decentralization and high level of verifiability, but at the expense of scaling.

What we’re trying to do with sharding is we’re trying to say, “Can you provide this high level of decentralization and this high level of verifiability while still having a higher level of scalability?”

Decentralization

How much decentralization is appropriate?

Haseeb: I want to go further into this decentralization question. A lot of people coming into crypto, especially if they don’t have a lot of experience, notice that decentralization is important. It’s hard to end up in crypto without believing that decentralization is important in some way.

But the question is: Why here? You show up, and there’s a culture around how much decentralization is appropriate. Ethereum is like, “You have to be able to validate Ethereum on a laptop.” The question is, why a laptop?

Vitalik: The more users that are verified by default, the more secure our blockchain will be.

In the extreme case, if no one but 10 different stake polls are validating by default, then you need to try to force a rule change that users may not like, with just 10 stake polls coming together and agreeing.

But, on the other hand, if you have 10,000 users, and the default way those users interact with the chain is that they validate it locally, and they only accept those blocks if they think they are valid, then if someone wants to try to push some change to the rules, they actually have to go to the users, they have to convince the entire user base to agree to this.

This is a higher standard.

Haseeb: Solana is an ultra-high throughput blockchain. It has higher hardware requirements than Ethereum.

If I were a Solana supporter, I might say, “Look, Ethereum has 5,000 odd nodes, somewhere in that range. Let’s say Solana has 500” — I don’t know exactly, we’re just arguing — “it’s going to be really hard to actually have everybody at Solana not notice that there’s some fundamental failure or security violation inside Solana, right? Yeah, it’s one-tenth the number of Ethereum nodes. But Ethereum only has a few nodes, and Solana has a few nodes. They’re both really big, and they’re both big enough communities that if something went wrong, they’d notice.”

What is your rebuttal to Solana advocates who say, “Look, this is consumer hardware. It’s expensive consumer hardware, but it’s still consumer hardware, and someone motivated enough can still go out and validate Solana transactions.”

What happens when the subsidy for joining a node disappears?

BUTA: I think it’s not just the technical ability level to run a node. Once it becomes so easy to run a node that people become comfortable doing it by default.

If running a node is difficult but possible, then there will be this constant pressure to try to save time and point yourself to another node. It's possible that even some of the people participating in proof of stake incentives will start pointing to the same node. I think this actually happened with EOS a few years ago. Now, doesn't the Solana Foundation even have to explicitly do a whole bunch of work to actively encourage people to run nodes?

Haseeb: There are a lot of subsidies for all these new small nodes, which are given to most of the node providers.

BUTA: Exactly. So the question is, when the subsidy goes away, will the network still operate in this way?

There are two aspects to this. One side is technical feasibility. Is it easy enough to run a node that people will continue to do it as a hobby? Even with Ethereum, there are a lot of things we can do to make running a node easier than it is now. A lot of the scaling things we're doing and a lot of the protocol changes we're making over the next few years are trying to move in that direction.

Stateless clients can verify the chain with very little on your hard drive

For example, we are working on a feature called stateless clients. The goal of a stateless client is to be able to verify the chain with very little information on your hard drive. Right now, an Ethereum node takes up half of my hard drive. With a stateless client, none of my hard drive would be used.

Bitcoin is already in a very good position. From the perspective of the ease of running a node, Bitcoin is better than Ethereum. But obviously, Bitcoin does sacrifice a much lower throughput than Ethereum.

So, technical feasibility is one aspect. Another important aspect is culture.

Staking culture is difficult to cultivate

People need to feel like this is an ingrained responsibility, that there's a lot of this very independent verification going on. That's hard to cultivate. It's one of those things where if you lose it, it's hard to try to get it back. I do think that Bitcoin has that culture.

I do think that in Ethereum, with the staking culture, it has actually been improving recently and I hope it continues to improve. But it is something that needs to be taken very seriously.

These two things feed off each other. If you have a culture that values ​​running a node, then you have a culture that values ​​changing the protocol to make running a node easier. If it is technically possible to run a node, then you are more likely to have that culture.

People sometimes ask us, “Hey, why don’t you increase the parameters by a factor of five,” and “Why don’t you require people to have 10TB hard drives?” A lot of people in Ethereum core development actively resist that. I think only Ethereum and Bitcoin have a culture that is willing to sacrifice for decentralization to nearly the same degree.

New blockchain entrants tend to seek minimum viable decentralization

Naval: I have always believed that the most decentralized tokens will ultimately win because the whole point of blockchains is decentralization. Otherwise, you wouldn't need them in the first place.

That said, it seems that every wave that happens in the crypto space, new users come in, boom and bull market, new users tend to seek the least viable decentralization. They don't care about decentralization until monsters appear and start stomping them under their feet.

Even in decentralized finance, many of them are just nominal decentralization. They are running a centralized front-end. These teams are in a well-known position. They may have failed the Howey test to some extent. We will see to what extent the government will test decentralized metrics.

People won't value privacy unless someone goes to jail for this

Privacy is the same. People don’t value privacy until someone goes to jail for it, and then they’re like, “Oh, wait, I want privacy.” Or someone is deplatformed.

Now we are in a bull market. When the risk is not that high, people ignore decentralized privacy. But after a few incidents, you see people starting to focus on decentralization and privacy.

To some extent, OG knows this because most of the funds are still locked in Bitcoin. Some of them are motivation, but some of them are security too. You can put money into Bitcoin and forget about it for a long time. I don't believe you can do this in many other protocols that are not completely decentralized.

Privacy, now everyone seems to be overlooking this.

Vitalik: Well, Tornado Cash exists.

Ethereum's philosophy

The foundation of Eth is "simple"

Naval: Have you seen Tornado Cash and Ethereum in separate layers or in separate applications, or have you ever seen it collapsed into Ethereum at the core level?

Vitalik: Actually it stays in a separate layer. Overall, the philosophy of Ethereum is to try simple on the basis and build a lot of extra functionality on it. There are many other blockchains that adopt different ideas. In EOS, their default wallet type contains social recovery or something like that.

Haseeb: Vitalik, you have to update your references.

Social Recovery Wallet Makes You More Easy to Be Your Bank

Naval: We should go into social recovery. Social recovery is a very interesting concept.

Now, if you really want to be a cryptocurrency person, you have to be your own bank. It's so scary. Some of us have to trust third-party custodians, but then you're back to normal banking. So if you want to maintain it yourself, a social recovery wallet is where you can share your wallet with your friends, family, or other trusted people so that when you need to recover it, it takes two-thirds or two-thirds, or any key.

Bitcoin has native support for this. Eth now has products like Gnosis Safe and other products that support it. So wallets are getting better and better security.

Block space is getting more and more expensive

One thing we are not talking about is the block space market where blockchain runs. Block space is limited because of limited computing power. So you are always participating in auctions and you need to pay to get your application's execution included in the current blockchain run. For this, you are buying block space, and Ethereum block space becomes quite expensive.

Like sharding and adding things called Rollup and 2 layers – we haven’t discussed yet – these are ways to create more block space and reduce block costs. But even if Ethereum is still very expensive, then high-value applications will stay on Ethereum. Those people will only pay more.

If you are building Wall Street, you need the rule of law. You want equal protection in law. You want property rights. So you pay for it. However, if you are just building a game and you are trading magic axes and swords that are worth a few dollars each, maybe you are just going to a blockchain that doesn't value decentralization.

So maybe the application will break down this way.

Innovation Culture

Design-wise, Bitcoin doesn't have much innovation

Naval: We didn't talk about the entire Eth ecosystem, which is interesting.

We're talking about scalability, I mean Eth is a decentralized culture. It will be decentralized first, which actually makes it attractive for high-value applications like decentralized finance because if you trade $10,000 you're going to pay $50.

One thing we haven't talked about is this incredible ecosystem, all of whom are building around Ethereum.

My personal opinion is that Eth is saved. If you look at Bitcoin, you will see that there is not much innovation. Of course, the core developers have done some great work.

But now the meme of Bitcoin is, "No, no, we won't change anything because we're trying to be the reserve currency here. We're working on being digital gold, so we don't want to change anything. Everything is fixed, perfect conception, and when we make some adjustments, it's basically right. Just go. We're going to fix some minor issues, but you can rely on it because it doesn't need to change. It's done the job and it's done well."

I don't believe this is the maximization argument for the ultimate goal of all blockchains. You can do other blockchain things, and in Eth, we do much more than that.

Even there, I noticed that there is an incentive mechanism around the tokens. When you create a blockchain, you create these tokens to regulate access in the network. Now, in theory you reward those who work hard around the blockchain. You reward miners who protect the blockchain or stakeholders who protect the blockchain.

It's hard to reward developers. I know Zcash has a founder's reward, which is controversial. Satoshi Nakamoto owns 5% of the Bitcoin blockchain, and the Zcash founder's reward is like 10% of the blockchain. Some modern blockchains, 70%, 80%, 90%, 99% will flow to the original team and investors, these are VC chains.

The “Hit-Ride Effect” of Blockchain

So how do you inspire people to build on someone else’s blockchain? Because the incentive is becoming, “Well, this is a great blockchain, it’s open source. Let me fork. Let me copy a copy and run it myself.” Or, I’ve seen game developers say, “I don’t need Solana level of security. I’ll just fork an existing blockchain and make it my own, and the users who run the game myself will run the blockchain.”

Developers don't have incentives to build on other people's blockchains.

I got into trouble for saying that in 2017, but I still insisted: there is a hitchhiking effect on blockchain. There is a strong motivation to fork a chain and build your own chain, not build on existing ones.

Innovation is the slowest in the first floor

There are a few wonderful things, which may be accidental or intentional, happening on Eth, which makes it possible for an innovative ecosystem on Eth. ERC-20 is where people build their own tokens, then these Rollups and 2 layers, people build on top of Eth, and in theory, they will issue their own tokens.

I would argue that one of the slowest places in Eth innovation, perhaps because it is technically the hardest, always on your own level. It has been on Layer 1, the Ethereum Foundation is working, where shards should happen, and where Eth 2.0 should be built. That's where the timeline is lagging the most.

And when it comes to Summary, Layer 2, ERC-20 and other assets built on Eth, things are going very, very fast. I wonder if it’s as simple as motivation. Have you ever thought, “How do I inspire people working on the first level to act quickly?”

Maybe if they somehow got their own tokens?

Vitalik: The Ethereum Foundation does have a bunch of Eths, which uses Eth to pay for people working on Layer 1.

A few months ago, we announced a client developer reward that every team building the software can understand and talk to the Ethereum protocol and can run nodes, thus getting a certain number of Eths that are locked in the proof of stake system in the form of Eths, which is not fully connected to the rest of Ethereum. Ethereum has to switch to proof of stake in order for them to withdraw that money. So this incentive exists.

Level 2 moves faster because it does not require permission

It doesn't even have that much about incentives. Application layer and 2 are faster because building on these layers is license-free. There is no need to coordinate with anyone to build 2. There is no need to coordinate with anyone to build the application.

However, if you want to change the Ethereum protocol, that is one of the most licensed things. You have to get a lot of people to agree. You have to get the entire community to accept the protocol changes to the layer.

What if we freeze 1 layer today?

Naval: This is an interesting question. Imagine we frozen 1 layer today. You can make some small changes like Bitcoin people, but you can't make big changes. 2 layers continue to innovate without permission. They continue to build all their wallets and related technologies. But you're still in the proof of work, you're still in that shard, that 1 layer.

Can Eth still be used? Can you carry the 2nd floor with you for a while?

Vitalik: Yes. I don't think people would be happy about it because people in Ethereum do like proof of stake and want to accept it as soon as possible.

Just give some specific numbers, today Ethereum makes about 15 to 20 transactions per second. These are complex transactions. Many of them are much more complex than Bitcoin. If you are just doing remittances, you can make up to 50 transactions per second under the current settings. But if we move to 2 layers, we can handle about 5,000 transactions per second.

Keep the same blockchain, but instead of using the blockchain directly, you use these extra protocols to package information and use the blockchain in different ways. You are still doing the same thing. You can still get the same security guarantees. But you are using blockchain more efficiently. There are more scaling, and more computing is done off-chain through other protocols.

If the 2 layers are done well, hundreds of improvements can be made. That hasn't happened yet. Now, the 2 layers that exist today, they are far from perfect. Currently there may be only 10 times or even less gain, rather than 100 times gain.

But Rollup technology is improving. All of this is improving.

So if layer 1 hasn't changed, if all we can do is to do is to process more layer 2, we can handle up to 5,000 transactions per second. That's definitely a pretty good Ethereum already.

Calculate trade-offs

Naval: Layer 2 execution is code. What about the data? Does the data still have to be retained on the Layer 1 blockchain?

Vitalik: The way Rollup works is that they execute code off-chain. So there are these encryption protocols, execution is done off-chain, and then verification is on-chain, and verification is much faster than the original calculation.

Then the data has to be on the chain. But the data can be on the chain in a very compressed form. So instead of putting the transaction on the chain, you put the zip file of the transaction on the chain. It's like doing data for the calculation tradeoffs. You have less data, but you have to do more calculations.

We can do more calculations because we can really do more calculations off-chain effectively.

If you do a Rollup super efficiently, you just have to put about 16 bytes on each transaction. Today, on average, the transaction is about 100 to 200 bytes. So, 16 bytes on the chain, and then decompression verification and calculations happen off-chain. Everything happens off-chain except for this trace data.

This is where efficiency comes from.

Blockchain throughput

Big comparison of benchmarking blockchain

Naval: Haseeb, you and your team recently conducted an analysis trying to see the actual throughput of these different smart contract chains. But you haven't done the decentralized part yet, so obviously Eth looks the worst because it's the most decentralized.

Let's also talk about how much of it is because of its legacy and how much is because Eth just chooses to be the most decentralized.

Haseeb: As far as Vitalik is concerned, usually when people benchmark blockchains, they tend to choose benchmarks that make them look good and produce big data.

The most obvious way is to only benchmark transmissions. Especially for many of these newer blockchains, they tend to benchmark transmissions completed in a testnet or in a development network environment, where there are always huge numbers that can not reflect the reality.

We've seen a lot of ridiculous claims about what types of throughputs blockchains can do, and we thought, "Well, why don't we develop a clearly objective benchmark to verify what these blockchains can do when comparing them? In terms of common transaction types that all blockchains do, let's have a big comparison?"

The most common one is Uniswap-style AMM transaction, which is the way to almost all transactions in today's blockchain. AMM, an automatic market maker, is a very simple mathematical method to trade two assets.

Most of these you can simulate by looking at Gas limits and viewing block time, and you don't need to do a lot of things. Some of them you have to verify empirically because the way Gas is calculated doesn't tell you enough information to verify whether the blockchain can actually get it in production.

We found that Ethereum can do about 10 transactions per second; Celo can do about 25; AVAX can do about 30, but its cap is much higher; Polygon can do about 50; Binance Smartsheet can handle about 200 times. Then Solana, known for being able to handle thousands to tens of thousands of transactions per second, can handle about 280 times.

Adopting decentralization

As Vitalik's previous point of view, part of the reason why Ethereum has performed so well is that it has achieved a certain degree of decentralization. As an institution, it is important to make sure that anyone can access Ethereum through their laptops.

And most of these newer blockchains don't choose this. They choose different points in the range of decentralized performance. My point is that it's totally wise to have blockchain choose different points on the tradeoff curve. It's very important to have Ethereum and Bitcoin, and they keep going left.

It is wise for some people to have blockchains that adjust for different tradeoffs. But when adjusting to different tradeoffs, you'd better get real high performance if you're not very decentralized.

My point is that if you are going to make such a big trade-off, then when you do, you'd better have a good value for money.

Ethereum adaptability

Tensions between expansion and value

Naval: Not only that, I think in this case, high-value applications will eventually appear on Bitcoin and Ethereum, and the highest-value applications are money.

I'm curious, Vitalik, do you think being money long term is a use case for Eth.

Ether is a token, is the Ether price a byproduct of what you need to run your network, or is it a core value itself, which should be a store of value? Should it be a place where people can invest money and forget it for 10 years?

Vitalik: Ultimately it's a matter of community decision.

I think over time, the community has become more and more determined that yes, Eth is an important asset, maybe you can use Eth as storage value. We can use Eth as currency, and you can use Eth to trade.

Because, at the end of the day, it is a cryptocurrency. It is a cryptocurrency whose value is supported and supported in some way by all the activities that occur on the Ethereum chain. With EIP-1559, most of the transaction fees paid for every transaction paid in Eth must be burned. Once we have proof of stake, we are even expected to have a negative issuance. So Eth is quite unique in this case.

But for me, this is not either this or that. Eth assets and the Ethereum application layer ecosystem are coordinated with each other. The stronger the application layer ecosystem, the stronger the Eth; and the more Eth is, the stronger the application layer ecosystem.

There will be multiple store of value

Naval: People often compare Bitcoin to gold or USD as a means of store of value. But the largest store of value in the world is not even Bitcoin and gold. They are factories, stocks, houses, real estate—actual productive assets. Oil is another type, commodities, and so on.

People store value in all kinds of weird places like art and NFT. So, there is absolutely a possibility that there are multiple stores of value. If anything, what more decentralized than having dozens of viable tokens that can be stored to run thousands, tens of thousands, or millions of assets that can be stored? This is the real decentralization.

You don't think about it. You're like, "Whatever the community wants, you can get the network running." But trying to welcome newcomers and new applications, highly scalable, let everyone use the network, constantly innovate, change and try new things and keep value for those who already exist and retain the value that has been established?

There is an inner tension there.

Vitalik: There must be some tension. One of the big benefits of the Ethereum ecosystem—its 2-layer aspects, its diversity aspects, the way the ecosystem has many sub-ecosystems—is that in many cases it can satisfy both.

If you just want to have Eth and you want to hold Eth, then you can do it. Even some Ethereum applications place almost as much emphasis on stability as Ethereum itself. Maker DAO may be a good example. Rye may be another good example. Some algorithmic stablecoins. But if you want to do crazy things, then Ethereum can also make you crazy things. If you need more scalability to do crazy things, then you can do crazy things.

So Ethereum as an ecosystem does strive to have a place for many different types of players in this way, which is definitely a difficult thing to achieve. For many other blockchains we know, either you adapt to the digital cornerstone or you are just a platform, but there is no digital cornerstone to keep the whole thing solid.

In Ethereum, we focus not only on solving the problem of having an ecosystem that can do a lot, but also on the problem of having the digital cornerstone in the middle to maintain stability. Of course, whether we will succeed will decide in the next decade.