Bankless: Debate - BTC vs ETH: Which is more Sound Money?

Primer: In this episode of the Bankless podcast, David Hoffman and co-host Dennis Porter pit the Bitcoin and Ethereum camps with a debate to see which one is actually sound money. On the Bitcoin camp, there is Muneeb Ali and Dennis Porter while on the Ethereum camp, there is Justin Drake and David Hoffman. Read on to learn from each camp's point of view and realise that perhaps both are on the same side.

Introduction

Bitcoin Camp

Muneeb Ali

  • CEO and co-founder at Stacks

  • Background is in distributed systems

  • PhD in computer science at Princeton

  • Got into BTC around 2013 and was well known in the BTC community

  • Took part in the Genesis sale for Ethereum

  • Involved in the Ethereum community also took part in the seed round for OpenSea

Dennis Porter

  • Started mining Bitcoin around 2017 but was a lost endeavour

  • Is a Bitcoin maximalist

  • Had a podcast called Smart People Shit and another show called Update

  • Involved politically as well, supporting people e.g. Aarika Rhodes in California 30th District to try to take down the most anti-Bitcoin congressman in office currently

Ethereum Camp

Justin Drake

  • Researcher at the Ethereum Foundation

  • Work on a set of upgrades to Ethereum collectively known as Ethereum 2.0

  • Also involved in sharding research

  • Background is in technology and studied mathematics at Cambridge

  • Was an FPGA programmer and know about Bitcoin as well

David Hoffman

  • Co-founder of Bankless

  • Former COO of RealT

  • Background is in Psychology and Fine arts

  • Had been doing blockchain research and in the crypto field before Bankless

What is Sound Money?

Dennis Porter

  • Sound money can go up or down over time, as long as it is slow and incremental over time

  • The true definition of sound money is stable money, not necessarily money that always goes up in value

"Sound money is money that is not prone to sudden changes, appreciation or depreciation and purchasing power over the long term. So pretty short and sweet. Has three uses: storing, transferring, and measuring value."

- Dennis Porter

  • Just as gold stole monetary premium away from silver, Bitcoin will also steal monetary premium from gold

  • Humans coalesce around the soundest money

Justin Drake

"Money is basically an asset which has a monetary premium. But their premium being this magic meme energy, economic energy that provides this asset more value than the base utility."

- Justin Drake

  • E.g. Gold is a classic example

  • Has industrial utility like it is used in every iPhone

  • On a utilitarian basis, gold is worth a trillion dollars. But it is actually worth more than 10 trillion dollars. The extra value is the monetary premium because gold can be used as money

  • Sound money is the ability to accrue and maintain this monetary premium

  • There are 2 components

    • Space component: How much monetary premium can it accrue?

    • Time component: How well can it retain this premium over time?

  • Currency is different from money. Currency comes from current, which is basically money that flows

  • Sound money being stable money is a historical definition

    • As technology progresses over time, a reasonable definition of sound money will include a list of properties

    • As innovation causes these properties to be transcended, the notion of money will be redefined too

    • E.g. Gold is sound money in the past, but as Bitcoin comes along, gold might no longer be sound because it does not have the property of being digital

Muneeb Ali

  • Money focuses on the medium of exchange like using it on a daily basis. Sound money focuses on the long term storage value of the currency

  • For the normal exchange of goods using money, you don't need to think about the long term storage value of the money

  • For long term storage, like holding it over a decade or so, you have to worry about how other things are priced against this asset

  • Thinks that the currency issue is solved but sound money as a problem is still not solved yet

    • Both BTC and ETH are in their discovery phase right now hence their value will go up as the market size is potentially bigger than what they have right now

    • When it reaches a stable point, it will be interesting to see how the sound money aspect will be like

What makes BTC Sound Money?

Dennis Porter

  • Extremely stable, nearly impossible to be manipulated, has a hard supply cap that cannot be changed

  • The cap is set at 21 million and as it becomes more difficult to mine, the value goes up

  • Most importantly, it removes human control and manipulation

  • One important distinction between ETH and BTC is that ETH has an issuance rate but BTC only has a supply schedule and no issuance rate.

    • In 2140, all the Bitcoin will be issued completely

    • The problem with the issuance rate for ETH is that it is decided by humans, hence subjected to manipulation

Muneeb Ali

  • Proof of work makes Bitcoin sound money, it's like in the past where work has to be done to dig up gold

  • The community that has grown around Bitcoin is the defender of the 21 million cap and this adds to the value of the entire network

  • The community as a whole is very good at rejecting changes and makes it extremely hard to make changes at the consensus level

  • Bitcoin is also designed from day one to be a global network so anyone with a laptop and connection can independently verify the correct state

Counter arguments

Justin

  • Thinks that Bitcoin security aspect is a broken design

  • Every 4 years, the security resets and Bitcoin will have to be secured on a smaller and smaller issuance

  • Understands that the high price of Bitcoin will act as a security but it has its own issues

"You can kind of think of Satoshi as kind of this, this degen blockchain designer, kind of trying to see how far he can push down the security of Bitcoin until eventually it kind of breaks. And so it's kind of like slowly boiling the frog over several decades, and kind of seeing if and when it breaks."

- Justin Drake

  • The model of scalability and programmability for Bitcoin is inconsistent with its security

  • Stacks will leach transactions fee away from the main chain, even as it provides for programmability and scaling solutions

💡 Stacks is an open-source network of decentralized apps and smart contracts built on Bitcoin. Stacks unleashes Bitcoin’s full potential as a programmable base layer.
  • At some point in the future, something must change because this is not sustainable

Muneeb Ali

  • Important to separate proof of work with the incentives

  • Proof of work will still function as long as there are incentives

  • Bitcoin is a settlement network, not a transactional network, hence Stacks is not a side chain and more like a layer 1.5

  • There are limited block space in Bitcoin so people are willing to pay very high transaction fees to put any data on the chain, so the incentives part will work out well

  • A fundamental disagreement between BTC and ETH camps is that the latter think that a full Turing complete language is needed at the base layer. For BTC, you can still build applications without that

Where is the demand for Bitcoin block space coming from?

  • The value of Bitcoin is in HODLing with very few transactions in between

  • But Muneeb thinks that Bitcoin block space will become insanely valuable

  • One example he gave is the Bitcoin NFTs where every NFT has its data and has stored on Bitcoin for every single transfer

  • The data on Bitcoin is growing based on the number of NFTs, not on the Stacks block. As Bitcoin NFT takes off, each Bitcoin block space will become more valuable

  • Dennis mentioned that by the year 2140 when the final 21 mil Bitcoin is up, the block space could be used by very large institutional banks in global trade for settlement. That will drive the value of the block space up

How much is needed to secure a blockchain?

  • Justin mentioned that one can quantify the resources needed to secure a blockchain

  • Blockchain security is very important because it relates to the ability to hold value over time, which is related to the soundness of money

  • Bitcoin's hash rate is 150 million Tera hashes/second

  • The question is to ask how much it cost to manufacture and deploy 1 Tera hash per second

  • At $100, it'll cost $15 billion to secure Bitcoin. This is peanuts compared to the US army spending of $750 billion per year

"And I still believe that $32 billion is too small, right? We need to have a trillion dollars of economic security. And I see a roadmap with Ethereum to achieve that, you know, partly because we have this guaranteed issuance. But I just don't see it for Bitcoin in the context of this exponentially decreasing issuance."

- Justin Drake

  • For Ethereum, one can take the number of ETH tokens currently staked multiplied by the price of ETH to get roughly $32 billion

  • He believes even $32 billion is too small, but there is a roadmap with Ethereum to achieve that because of the guaranteed issuance.

  • He just doesn't see how Bitcoin can cope with this exponentially decreasing issuance and still maintain security

What makes Ethereum sound money?

David Hoffman

  • Proof of stake consensus mechanism is the most efficient consensus mechanism possible

  • Collapses the cost of providing security down to the absolute minimum - just need an internet-connected computer and capital

  • If there is capital at stake, then there is an incentive to not lie to the blockchain and this makes the blockchain secure

  • For Bitcoin, proof of work is also like staking with extra steps - the cost of operating a mining farm is about 1/3 computer hardware

  • Hence Ethereum has efficient security - costs very little to secure the blockchain and thus need very little issuance to secure a very large market cap of economic activity

Counter arguments

Muneeb Ali

  • Concerned about the independent verifiability of the blockchain

  • Proof of stake is good for certain applications where the stakes are low, but if it is talking about a global reserve currency, the stakes are very very high

"I think this is almost like a proven theorem in computer science that you have a bootstrapping problem in proof of stake, you have to trust certain nodes to be able to boot up. You can't boot up on your own."

- Muneeb Ali

  • A normal person with an internet-connected laptop cannot independently verify which blockchain is the correct one because of the bootstrapping problem and thus have to trust certain nodes

Justin Drake

  • Not true that a person can independently verify which blockchain is the correct version

  • To do so, one will have to download the latest version of the software and verify all the lines of codes. But nobody does that, so inherently one will have to trust the codes

  • Secondly, Bitcoin is a peer to peer networking bootstrap node. When one connects to the network, there is a set of IP addresses to query the very first time the software is run

  • If the IP addresses are compromised, then one can be fooled to accept a version of the world that is not true

Proof of work vs proof of stake

  • Muneeb mentioned that with proof of work, an attacker will have to do a lot of work to produce different versions of the blockchain and all its history

  • But with proof of stake, it is easy to give 10 million different copies without doing any work

  • Justin argues that the argument does not hold because you can have rules which disqualify chains

  • Essentially once you mess around with the state transition function, you cannot validate state

Dennis Porter

  • The biggest issue with proof of stake is that it incentivizes hoarding for the people minting ETH

    • For proof of work, miners have an economic cost and they are incentivized to distribute the Bitcoin they are creating

    • Historically, whenever there is a large consolidation of supply in the hands of the wealthiest on the network, there will be a greater incentive to debase or manipulate the currency

    • Hence, human control over the issuance will lead to debasement and manipulation

  • Secondly, there are problems in switching from proof of work to proof of stake

  • Not sure if this is technically possible

"The other part is just this transferring from proof of work to proof of stake. I'm not sure if it's possible. It feels like open-heart surgery while flying a rocket ship."

- Dennis Porter

  • Miners will get fewer rewards over time. These are the security guards that are paid to secure the blockchain

  • When you have employees and you intend to fire them, don't tell them months in advance as this will lead to sabotage and colluding to steal

  • Will expect to see MEV and time bandit attacks getting out of control - turbulent time lies ahead as ETH moves to proof of stake

Justin Drake

  • Justin thinks that these problems are short term issues and they will disappear

  • The argument that miners will hold the ETH minted does not hold because miners have to pay taxes too and they will sell it to pay for them, which is the same as Bitcoin

David Hoffman

  • Bitcoin does not print more money and does not issue more because of the hard cap

  • Ethereum chooses to spread the issuance to the maximum number of people so that there is maximum decentralisation and also reduce the cost of proving security to the absolute minimum

ETH killers

  • With the rise of other blockchains, Ethereum is losing the thing that it is supposed to do - being a smart contract platform

  • David mentioned that it's the ETH killers that need to be more decentralised so that they can have the monetary premium

  • Bitcoin also needs to do more DeFi stuff and have its own internal native finance

  • Looking at it the other way, ETH is a neutral platform while the other ETH killers are execution optimised networks

  • They sacrificed decentralisation to be layer 2 on Ethereum while keeping the more secure and decentralised layer 1 money untouched

  • Muneeb mentioned that if he were designing Ethereum, he will keep layer 1 simple and limit the types of activity one can do, The rest of the activities will shift over to layer 2

  • He will also not change to proof of stake as this will define the security of the system outside of the system

Supply hijack

  • Dennis mentioned that for the ETH community, it is economically feasible to attack the proof of stake network, especially by targeting large holders of ETH e.g. Lido

"You can collude with people, you can collude with exchanges, in order to gain larger controls of the supply. You don't actually have to buy $32 billion worth of ETH."

- Dennis Porter

  • The supply and staking become very centralised and concentrated in fewer hands

  • David replied that even though ETH is concentrated in a central address but that address is represented by a very large number of people i.e. Lido is a DAO with staking as a service protocol

  • Justin talked about the idea of slashing, which is the removal of bad actors in the network. If you own 51% of the hash power, you can attack Ethereum but after 2 tries you will get slashed

  • This is in contrast with Bitcoin as you can attack Bitcoin repeatedly

  • There are 2 kinds of slashing - one is cryptographically provable slashing that happens automatically. The other is social slashing, which essentially produces a hard fork

Immutability

  • In Bitcoin, there is no concept of the social hard fork. Not acceptable to remove Bitcoin from someone's wallet and roll back the state of the blockchain

  • History has shown that anytime you leave the door open for human beings to come and change the money supply or the issuance, it will be done

"The path of the Ethereum is that you're willing to have social consensus around the monetary policy, and then change the monetary policy. Bitcoin is saying that there's no concept of social consensus around these things. This is all proof of work. And that's it."

- Muneeb Ali

  • This is the underlying fundamental difference between the ETH and BTC camps

  • David argues that the immutability of the two blockchains lies on a spectrum. BTC is very immutable but ETH is also quite resistant to changes that the community does not want to endorse

  • Justin mentioned that the ETH community are very selective of which upgrades to pursue. Generally takes 5 to 10 years from conception to actual implementation

  • Ethereum changes are done on the court of public opinion in a transparent manner

  • Dennis counters that there is a hard fork every now and then, so it is not that resistant to changes and the court of public opinion, decentralised that may be, is still run by humans

Is the mining community part of the Ethereum community?

  • Dennis notes that it is interesting that this public court does not include the mining community because they had been screwed by the changes recently

  • David replied that they are not ignored, and they had been accumulating ETH to become validators instead. This will align everyone to be on the same incentives.

  • Justin thinks that eventually, even Ethereum will be as ossified as Bitcoin as they become a victim of their own success unless forced by an external looming threat e.g. quantum computing

Closing

  • Not true that only Ethereum is innovating. Bitcoin's innovation happens outside the chain

  • A lot of mining hardware e.g. GPU, are researched and upgraded because of a need to mine Bitcoin more efficiently

  • The use of renewable energy is kickstarted because of the proof of work to mine Bitcoin

  • There are also innovations like Stacks and Liquid that enable BTC to do the things the ETH claims to do with its smart contract and programmability

  • David mentioned that both ETH and BTC camps have the same values but they believe in different ways to reach there

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