Posts from blockchain

The Merge

In about a month, an important moment will happen in the world of crypto/web3. The Ethereum blockchain will move from a proof of work consensus mechanism to a proof of stake consensus mechanism. This event is known as “The Merge” in Ethereum land.

There are many reasons why this is an important moment for the world of crypto/web3, but to my mind the most important reasons are:

1/ The Merge reduces the carbon footprint of the Ethereum blockchain very significantly. No longer will miners be required to run large energy-intensive compute facilities to secure the Ethereum blockchain. There are many people out there who have serious concerns about web3 over environmental reasons. We can argue about that and have, but The Merge takes the concern off the table for the largest and most used smart contract blockchain. This is a big deal.

2/ The supply/demand balance of the Ethereum token will change dramatically. In a proof of work system, miners spend significant sums of money to run large energy-intensive compute facilities to secure the chain. They are rewarded with tokens (in Ethereum’s case, these are Ethereum tokens) and they must sell most of these tokens to pay their electric bills and hardware costs. In a proof of stake system, validators stake significant amounts of the base token (in Ethereum’s case, these are Ethereum tokens) and risk losing them if a bad transaction is validated. There is very little cost associated with staking so the tokens that are earned from staking are mostly held/re-staked instead of sold. I have seen a lot of estimates of how this shift will play out and my take is that Ethereum will move from a system that has roughly $20mm a day of structural outflows to a system that has roughly a half a million dollars a day of structural inflows. This shift in supply/demand will likely result in a very different dynamic for ETH/USDC, ETH/USD, and ETC/BTC (and other ETH pairs too) going forward.

3/ Proof of Stake systems (of which they are many in the market already like Solana, Avalanche, etc) are considered more secure because the likelihood of a 51% attack is much lower. I don’t plan to lay out the argument here, but suffice it to say that Ethereum is moving to a consensus mechanism that many consider to be more resistant to attack, making it even more secure than it has been.

There are some interesting side effects of this event. The current Ethereum proof of work blockchain will not go away. This chain, which many are calling ETH POW, could develop a community around it and live on and provide value to developers and others. This has already happened in the Bitcoin community a few times and once before in the Ethereum community. Holders of ETH at the time of The Merge will receive ETH POW tokens as a result of this fork. These ETH POW tokens could be worthless in time or worth a lot in time. There is really no way to know how ETH POW will develop.

The Merge is probably the most important change that a large scaled blockchain has ever undergone. It is not without risk and there is a chance that things will not go smoothly. The Ethereum core developers have been working on this effort for many years and have deployed many testnets and they are confident they can pull this off next month. The crypto/web3 world will be watching closely and I am rooting for them. I think this is a very important moment for the sector and that it will be very positive if things work as planned.

Disclosure: My family and USV have large holdings in ETH and other crypto assets and may continue to add to them in the coming weeks, months, and years.

#blockchain#crypto#Web3

An Earth Day Message To The New York State Legislature

It is Earth Day, a day to celebrate our planet and rededicate ourselves to saving it. I plan to walk and ride my bike, avoid cars, and enjoy being out and about in NYC today.

But I’d also like to talk about something that is bothering me.

The New York State Assembly and Senate are working to pass a bill that would put a two-year moratorium on “proof of work” cryptocurrency mining. Here is the most important part of the bill:

1. For the period commencing on the effective date of this section and
    25  ending two years after such date,  the  department,  after  consultation
    26  with  the department of public service, shall not approve a new applica-
    27  tion for or issue a new permit pursuant  to  this  article,  or  article
    28  seventy  of  this  chapter,  for  an  electric  generating facility that
    29  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    30  behind-the-meter  electric energy consumed or utilized by cryptocurrency
    31  mining operations that use proof-of-work authentication methods to vali-
    32  date blockchain transactions.
    33    2. For the period commencing on the effective date of  this    section
    34  and  ending  two years after such date, the department shall not approve
    35  an application to renew an existing permit or  issue  a  renewal  permit
    36  pursuant  to  this  article  for  an  electric  generating facility that
    37  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    38  behind-the-meter electric energy consumed or utilized by a cryptocurren-
    39  cy  mining  operation  that uses proof-of-work authentication methods to
    40  validate blockchain transactions if the  renewal  application  seeks  to
    41  increase  or  will allow or result in an increase in the amount of elec-
    42  tric energy consumed or utilized by a  cryptocurrency  mining  operation
    43  that  uses  proof-of-work  authentication methods to validate blockchain
    44  transactions.

I believe this bill resulted from an application to fire up an old coal-powered electric plan to power a Bitcoin mining facility and I will be the first to admit that is a horrible idea. We should not be firing up old fossil fuel plants for any sort of economic activity. It is time to retire fossil fuel-powered plants and replace them with nuclear, hydro, wind, solar, and other clean energy sources.

But the idea of targeting a specific industry for this moratorium and leaving all other economic activity in NYS free to use fossil fuel is just absurd. Is it OK to use fossil fuels to power bowling alleys, movie theaters, car washes, sports stadiums, data centers, banks, homes, cars, etc, etc? Is it just not OK to use fossil fuel to power a network that secures our next-generation technology stack?

And at the same time New York State is doing this, the State of California is preparing an Executive Order that will be extremely friendly to the emerging crypto/web3 industry. New York State is already fighting an uphill battle with the crypto/web3 industry with its god awful BitLicense law and now they want to do this.

New York State should just put signs up on the Holland Tunnel, the Lincoln Tunnel, the George Washington Bridge, the Peace Bridge, and everywhere else people arrive in New York State that says “Web3 Is Not Welcome Here.” And save themselves the time and energy of doing nonsense like this.

We get the message loud and clear.

#blockchain#climate crisis#crypto#Current Affairs#NYC#Web3

Dune.xyz

Dune.xyz is a community of crypto enthusiasts, analysts, and investors who use the open data available to all via public blockchains to create charts and other analyses to understand what is going on in these systems.

One of the most important differences between blockchain-based systems and traditional web-based systems is that the blockchain has an open data layer. That means that we all control our data when we use a blockchain-based system. But it also means that this shared data layer is available to all to observe, measure, and analyze.

Here are some examples of community-built charts:

The P&L of the Maker lending system:

A time-based comparison of trading volume on the leading AMMs:

What is interesting and different about Dune vs traditional analytics services is that everything is built on open data. There is no proprietary data involved. And this is as much a community (like Reddit or Wikipedia) as an analytics service.

USV recently participated in a financing for Dune.xyz and we plan to start using it to observe and analyze blockchain-based systems that we are involved in and interested in.

It makes sense to me that analytics tools for blockchain-based systems will be open, community-driven, and composable. And that describes Dune.xyz.

#blockchain#crypto

The Opening

I like to think of investing in new things a bit like a football running play. Imagine you are the running back. You’ve been handed the football and you are looking for a hole to open up and run through. What you really want is some running room beyond the opening.

We’ve known for a while that crypto is the next big tech architecture. We’ve known that once the wave breaks on the shore, there will be enormous opportunities unleashed. Like the web. Like mobile. Like the PC.

But what has been hard to see is the opening. It wasn’t trading/speculating, although that has been huge. Coinbase announced yesterday that 68 million verified users. It wasn’t DeFi, although that has also been huge.

What we have been looking for is the consumer opportunity to emerge. Until you have billions of consumers around the world using a technology, you don’t have a new wave to ride. So like the running back, you wait and hope you don’t get hit.

But in the last few months, the opening is emerging. In slow motion. I can see the left tackle move his man off the line. I can see the left guard move his man off the line. And there is running room. The defensive backs are on the other side of the field.

I’ve always thought the opening would be at the intersection of gaming, online communities, and social networks. Why? Because those are the mainstream consumer experiences where geeks tend to be the first adopters.

But it is hard to take on the existing gaming companies with a new architecture. The user experience around new stuff always sucks and who wants to play a game with a shitty UI? It is also hard to take on the existing social nets. Why would someone with a million followers on Instagram or TikTok or Twitter leave those behind for a new social net? So the existing incumbents are the defensive line. They look impenetrable. Until they aren’t. That’s when the opening emerges.

The opening is emerging around NFT experiences, something we’ve been excited about for quite a while now. But not the NFTs that Sothebys sells for $69mm. Not even the CryptoPunk that sells for $7.5mm. But when a party emerges online that anyone is invited to attend and the 500 person group picks up a punk with a party hat and they all change their social network avatar to this, well that got my attention.

PartyBid is cool. That’s why I wrote about it on Friday. TopShot is cool. And so is Axie. And so is the Bored Ape Yacht Club. But what is cooler is that these NFT experiences are operating at the interaction of gaming, communities, and social nets. And they are not taking on any of the incumbents directly. They are building on top of them all.

I am not saying NFTs are the next big thing. I am saying that consumer experiences built on a crypto stack are the next big thing. I am saying that NFT experiences are showing the way. They are the left tackle that you can run behind into the opening. Where enormous opportunity exists.

#blockchain#crypto

Crypto and the Infrastructure Bill

I mentioned the infrastructure bill here last week. I continue to be impressed by the way Senators and the White House are working across the aisle to get a very big piece of legislation across the finish line. It is not done, but it sure looks like it will get done.

As I mentioned in the post last week, there is language in the initial draft of the bill requiring crypto “brokers” to report gains and losses to the IRS. The Treasury expects this provision to produce upwards of $30bn in new tax revenues over the next ten years.

I personally have no issue with crypto gains and losses being treated the same as stock gains and losses and we have been doing that at USV for quite a while now. But I do have concerns that the way “brokers” are defined in the context of crypto is very different than how it is defined in the traditional financial sector. The language in the initial draft is overly broad, infringing on privacy, and technically unworkable. Crypto industry participants like miners, wallets, smart contracts, and other kinds of hardware and software cannot carry the same obligations as “brokers” like Coinbase and Square Cash.

But here is the good news. The crypto sector has come together to get the language changed in a way that I have never seen before. Everyone in crypto is working together, staying on message, working all of the avenues, and creating the appropriate amount of pressure on the process. And while we do not yet have the language we need, we are getting there and I am hopeful that we will land in a good place.

It is also the case that when a government decides that a sector is an important producer of revenues, that is a sign that it has arrived. Many out there think these new regulations are bad for crypto but I think they are a bullish sign. Crypto is here to stay and is a mainstream industry now.

For these reasons, I think this is a watershed moment for crypto in the US. The industry has come together like never before and is acting in concert, professionally and productively. It is on message and effective. And the government is getting in business with the crypto sector to finance it’s own needs. That sounds like a win to me.

#blockchain#crypto#policy#Politics#Uncategorized

Anti-fragile Systems

The Internet was developed by the US Defense Department to create a network that was capable of surviving a military attack. They accomplished that with a design where no part of the system was central to its operation. You can take out any part of the Internet and it will still operate.

When I read the Bitcoin White Paper for the first time, I was struck by the similarity of its design to the Internet.

And we are watching an “attack” on the Bitcoin system right now, in the form of a purge in China.

Over the last three months, the government in China has moved to rid the country of Bitcoin mining. You can see the effect of the purge on the chart of Bitcoin Hashrate:

This is a significant reduction in the processing power of the Bitcoin network and the result has been slower transaction clearing times:

It will take time for miners outside of China to pick up the slack and get the hashrate and transaction times back to where they were, but that will happen. There are economic incentives for that to happen. What would be even better, and could happen, is for this new mining capacity to get built on clean/renewable energy.

I believe the Chinese purge of Bitcoin mining is short term bearish but long term bullish for Bitcoin and crypto more broadly. It shows that a powerful government can take its best shot at a cryptonetwork and the only thing that will happen is capacity will move elsewhere.

Anti-fragility is a beautiful thing to behold.

#blockchain#crypto

Regulating Software

I understand that regulators and elected officials need to raise concerns about new technologies and their impact on society. It is their job or at least part of their job. But I am also dismayed regularly by how poorly many elected officials and regulators understand the technologies they are talking about.

In particular, I am deeply concerned with how poorly many elected officials and regulators understand blockchains, smart contracts, and decentralized applications and organizations. They assume that these things are run by companies and people and can be regulated with traditional corporate regulatory activities.

What people need to understand is that blockchains, smart contracts, and decentralized applications and organizations are not companies. They are software. And they can and do run without any company operating them.

Let’s look at Bitcoin. There is no Bitcoin Inc. There is no company to sue. The founder is unkown and may not exist. So she can’t be sued either. There is nobody to call before Congress. There is no entity to make regulatory filings.

AMMs are smart contracts. These smart contracts operate liquidity pools that allow for decentralized trading of assets without any company operating them, controlling them, or managing them. Once these software programs are published on a decentralized blockchain, they just keep running without any intervention by anyone.

I could go on and on, but I expect you get the point.

So when someone says that one or many of these decentralized software applications needs to be regulated or, god forbid, shut down, I wonder the heck they are talking about. I don’t even know what that means.

Of course, using this decentralized technology could be deemed illegal in places and I fully expect that we will see that happen. But we won’t see it happen everywhere. And the places that embrace these new technologies will benefit immensely from them. So, like the criminalization of alcohol and gold, those approaches will eventually fail and will harm those regions that try it relative to the regions that embrace it.

I believe the more productive path for regulators and elected officials is to take the time to understand how this stuff actually works and think about new ways that society can mitigate the risks while gaining the benefits. That’s a harder path but a better path.

#blockchain#crypto

ENS

ENS stands for Ethereum Name Service and it is a decentralized domain name system built on the Ethereum blockchain. You can get domains with the .eth extension by going here, connecting a wallet, and searching and purchasing a domain.

I have purchased fredwilson.eth and avc.eth and a bunch of other .eth domains for my family. It does not cost a lot of ETH to register a domain, but you need to remember to go back and renew it as there is no company/registrar operating a business to do that for you.

An interesting angle on ENS is that the .xyz extensions are interoperable with ENS and that is explained here.

So if you own .xyz domains, you can participate in the ENS system. I also bought fredwilson.xyz and avc.xyz and a bunch of other .xyz domains for my family.

It is interesting to me to see blockchains and smart contracts being used to replicate many of the things we use to build applications on the Internet. Slowly but surely a decentralized infrastructure that mirrors the centralized infrastructure is getting built out.

While there aren’t a lot of things you can do with a ENS domain today, I expect that there will be a lot of things you can do with one in the future. And that is why I think it is a good idea to purchase ENS domains for the ones you own in the .com world.

#blockchain#crypto

Digital Asset Mining In New York State

Digital Asset Mining is shorthand for “proof of work consensus validation of public blockchain infrastructure”. Thankfully we have the shorthand. But it is important to understand what digital asset mining is.

Public blockchains, like Bitcoin and Ethereum, store data securely but publicly in a cooperative ecosystem that is not controlled by any company or government. When you store data on a public blockchain, it is your data, secured by your keys, and nobody can do anything to it without your approval.

That is a big deal and it is the future of all internet data. In time, all software systems will operate on top of secure public blockchains.

The consensus mechanism in public blockchains is the method that they use to cooperatively validate transactions without a controlling party.

Proof of work consensus is when computers all over the world run software (called nodes) and validate transactions and are rewarded with digital assets (tokens).

So proof of work mining and its cousins like proof of stake validating is the foundational infrastructure for the coming architecture for internet data.

Think of Bitcoin mining operations as the next Amazon, Google, and Microsoft Cloud offerings except that they are owned by everyone.

That’s a huge deal. As big of a deal as anything in tech and tech policy right now.

Ok. Now that we’ve had that discussion, let’s talk about a bill under consideration by the New York State Legislature that would put a three-year moratorium on proof of work mining in New York State. I had thought that this bill was going nowhere as of last weekend, but it seems to be back on the table now.

I am a fan of regulation on the emerging blockchain and crypto sectors. Anything as important as the next generation of internet data architecture needs regulation.

But this New York State bill is like using a sledgehammer when what is needed is a scalpel.

Three years is a long time in a fast growing emerging tech sector. The foundational infrastructure for public blockchains is being built now and regions that get going now will have long lasting businesses that provide good jobs and lots of growth. Who wouldn’t want Google, Amazon, and Microsoft operating their data centers in their state? This is the next generation of that.

The issue that has everyone up in arms is the carbon footprint of proof of work mining and that is something that is important to discuss and using regulation to address it makes sense. It may well be that proof of work consensus has no larger carbon footprint than the data centers of the cloud era, but that’s not really the point. We can and should do better. We can have a climate-neutral data architecture when we build the next-generation tech stack.

So here is what I think would be better policy for New York State:

1/ Apply a tax surcharge to digital mining operations in New York State that use fossil fuels to power them.

2/ Use those tax revenues to subsidize digital mining operations in New York State that use clean (renewable, nuclear, etc) energy to power them.

3/ Encourage digital asset mining in New York State with other policies that will bring the data centers here vs elsewhere.

4/ Become the home to the cleanest and largest digital asset mining operations in the world.

We can do that New York State. We just need to want to.

#blockchain#crypto