Podcast Summary
Ethereum - A Decentralized Giant Computer Beyond Cryptocurrency: Ethereum’s decentralized structure sets the foundation for the future of technology and entrepreneurship. To build a successful internet business, consider creating a model that can thrive even without you in order to maximize its value.
Ethereum is more than just a cryptocurrency, it's a gigantic distributed computer that operates in a decentralized way, making it one of the most important inventions of the last decade. While it has had a wild year, with a market cap of $450 billion at its peak, it lays the groundwork for technology companies for the next several decades. For those contemplating selling their internet business, the biggest thing to consider is being replaceable as soon as possible, making the business still thrive without the seller. This season of Acquired covered a range of great technology companies and their stories and playbooks behind them, from Bitcoin to Berkshire Hathaway to Ethereum, and ended with a mini-series on building wonderful internet businesses.
The Story of Vitalik Buterin, the Genius Behind Ethereum: Vitalik Buterin, the founder of Ethereum, used his intelligence and determination to solve the scalability issues of Bitcoin and revolutionize the blockchain industry with the creation of smart contracts and decentralized applications.
Vitalik Buterin, the founder of Ethereum, joined the Bitcoin talk forums in March 2011 as a 17-year-old high school kid looking for ways to earn Bitcoin. Unlike other users who used pseudonyms, Vitalik used his real name, which was uncommon at that time. He was born in post-Soviet Russia in 1994 to intelligent parents who had to deal with the turmoil following the collapse of the Soviet Union, including hyperinflation and depression. Despite the challenges, Vitalik had huge opportunities, inheriting his parents' intelligence to become a genius. He founded Ethereum to solve the scalability issues of Bitcoin, which led to the creation of smart contracts and decentralized applications, revolutionizing the blockchain industry.
The Genius Behind Ethereum's Co-Founder: Vitalik Buterin's passion for math, computer, and Bitcoin started at a young age. His exceptional abilities, intensive studies, and early exposure to cryptocurrencies paved the way for his success in creating Ethereum.
Vitalik Buterin, co-founder of Ethereum, showed his exceptional abilities from a young age. Born to computer scientist parents, who got divorced amicably, they migrated to Canada for a better future for their son. Vitalik, a genius in math and computers, got enrolled in the gifted program of Toronto's public schools. Also, he joined the Abelard School, which offered an intensive curriculum and encouraged children to explore their passions. At 17, he came across Bitcoin, and instead of buying it, he chose to earn it by writing about it. He responded to a publisher's request on a Bitcoin forum and wrote an article for which he earned 5 Bitcoin, now worth over $150,000. Vitalik's exceptional writing skills and passion for Bitcoin paved the way for his future endeavors.
The Birth of Bitcoin Magazine: A Necessity-driven Success Story: A group of fans turned their promise into reality by creating Bitcoin Magazine, with Vitalik as the head writer, that became a game-changer for communication in the crypto world and provided him with opportunities to learn and explore more.
The inception of Bitcoin Magazine started with a promise made by fans of Vitalik's writing to give his work a new home, leading to the creation of a physical magazine. Necessity played a key role in the success of the project, with Mihai, Roxana and Vitalik committing to make it happen despite facing challenges and tight deadlines. The launch of the first issue of the magazine, with Vitalik as the head writer, marked a turning point in Bitcoin and crypto communication. Vitalik's involvement in the magazine and his growing crypto reputation, alongside his studies and internship, presented him with an opportunity to explore and learn more about the world of crypto beyond Bitcoin.
The Birth of Ethereum from Crypto Community Collaboration: Vitalik Buterin's meeting with Amir Chetrit in 2013 and the collaboration efforts led to the creation of Ethereum, which is now a platform for decentralized applications and smart contracts.
Vitalik Buterin, the co-founder of Ethereum, took a year off from college in 2013 to focus on the crypto community and attend Bitcoin meetups and conferences. During one of these conferences, he met Amir Chetrit, who was working on a project in Israel called Colored Coins. Colored Coins aimed to bring real world assets onto the Bitcoin blockchain and securitize them. Amir invited Vitalik to Tel Aviv to meet the Bitcoin 2.0 group and start building on top of Bitcoin's chassis to turn it into a Swiss Army knife. This collaborative effort led directly to the birth of Ethereum, which now serves as a platform for decentralized applications and smart contracts.
How Smart Contracts on Blockchain Platforms can Revolutionize Contract Law: Smart contracts on blockchain platforms offer a revolutionary way to execute contracts without the need for human compilers or traditional legal systems, thanks to the use of code and Turing completeness.
Smart contracts are self-executing contracts with terms and conditions written in code that can execute if and only if certain conditions are met. By combining smart contracts with a blockchain platform like Bitcoin that has a ground truth, where nobody can argue over whether conditions are met or not, we can have contracts that will probably do what we think they are going to do. This innovation can eliminate the need for human compilers and the real-world legal system. The beauty of programming lies in Turing completeness, where a programming language can do anything by creating a developer that doesn't need any permission or set functionality. It's the way any software technology works, where at the highest user-facing layer, there is an application designed for a specific purpose, often for a specific type of user performing certain business logic.
Vitalik Buterin's Vision for Ethereum's Universal Scripting Language: Vitalik Buterin's innovative vision for Ethereum's universal scripting language led to the development of a new type of assembly language, creating endless possibilities for building applications on top of what Bitcoin was offering.
Vitalik Buterin's big idea was to build a computer that would allow for further levels of abstraction and applications to be built on top of what Bitcoin was offering. This required a universal scripting language, which appeared to be a difficult undertaking and required intense security. While the Mastercoin team hesitated to go along with Buterin's vision, he believed in it so much that he left for San Francisco to work on the Ethereum white paper. The white paper he produced was not easy to read, but it provided an instruction set architecture for a new type of assembly language, opening up new possibilities for applications. He used the term ether in honor of the ancient Greeks who believed it to be a substance that permeated the universe, similar to the force in Star Wars.
The Power and Potential of Ethereum: Ethereum is a decentralized computer network with its own currency and global reach, enabling the creation of smart contracts and almost limitless possibilities for processing data and applications. Despite limitations in efficiency and power, it represents a groundbreaking model for decentralized internet computing.
Ethereum is a programmable computer with native currency, where code has its own money. The network is a world distributed computer, making it hard to take down once deployed. Smart contracts are replicated on all nodes in the Ethereum network, making it powerful but inefficient for some stuff. The power of the computer that is Ethereum is roughly equivalent to a Raspberry Pi on home broadband. Vitalik's vision was to create a base layer for everything, a computer living in all nodes of a global network that could process anything without downtime or interference, like an infinite machine. A core group of five people started working together to make this ambitious project happen.
The Accidental Decision that Shaped Ethereum's Early Days.: Ethereum's stability was boosted by the accidental decision to have redundancy in the implementation team. Vitalik's announcement of Ethereum at the Miami Bitcoin Conference marked the beginning of a decentralized autonomous organization.
Ethereum, a concept originated by Vitalik, brought together a bunch of people including Anthony Di Iorio, Charles Hoskinson, and Gavin Wood to work on a decentralized autonomous organization. Though they lacked technical expertise to implement the project, they managed to bring on board Gavin and Jeff Wilcke, who worked on their respective Ethereum client implementations. The early days of Ethereum were characterized by uncertainty and a lack of planning, but it was the accidental decision to have redundancy in the implementation team that proved to be a boon for the platform's stability. Ethereum was first announced at the Miami Bitcoin Conference in 2014 by Vitalik, who was still a writer for Bitcoin Magazine at the time.
The Birth and Early Conflicts of Ethereum Founders: Ethereum co-founders postponed the crowd sale of ether due to high demand for funding. The debate between becoming a for-profit or non-profit company created a schism within the team, with some supporting Silicon Valley funding and others opposing it to uphold the crypto movement's principles.
The original five become co-founders of Ethereum and get the largest personal stakes of ether in the pre-allocation before the network goes live. After Vitalik's presentation, demand for funding is high, and the team postpones the planned crowd sale of ether. They expand the group of co-founders from five to eight, including Gavin, Jeff, and Joe. The team faces a huge schism over whether to become a for-profit company like Google or a non-profit like Mozilla. Charles wants to go to Silicon Valley to raise money from venture capitalists, but the others are against it, considering it against the whole point of crypto land, which is to rage against the traditional financial system. Crowd sales of initial tokens for various projects are becoming more of a trend.
Ethereum's Legal Status and Internal Conflicts: Ethereum's commodity status allowed for successful token sales, but internal conflicts among developers highlight the importance of clear leadership and communication in blockchain projects.
The legal status of Ethereum as a security or a commodity was a major concern. But with opinions of various law firms including a former SEC commissioner Joseph Grundfest, Pryor Cashman wrote an opinion letter based on Grundfest's statement that Ether is a commodity and not a security. This opened doors for Ethereum to conduct an initial crowd sale of their utility token, paving the way for anyone to do so. However, deciding the direction to go became a major issue due to resentment among the developers towards the CEO Charles and Amir's role in the project. Vitalik, who was still traveling, was looked up to for a solution.
The Rise, Setbacks, and Resilience of Ethereum.: Vitalik Buterin's leadership and decision-making were crucial to Ethereum's success. Despite setbacks, Ethereum's original plan to transition to a more scalable and energy-efficient proof of stake blockchain remains a major goal for the network.
The success of Ethereum was largely dependent on Vitalik Buterin's leadership and decision making, which was evident when he ousted two members from the initial team and founded the Ethereum foundation to ensure its longevity. The crowd sale of Ether raised a record-breaking $18.3 million, which was unprecedented for a crypto crowd sale. However, the launch of the project did not go as planned, with the final fifth phase, Serenity, still not delivered as of June 2021. Despite the setbacks, the original plan to transition proof of work to proof of stake blockchain, which is more scalable and energy-efficient, remains a significant goal for the Ethereum network.
The Importance of ICOs in Discovering Killer Use Cases for Ethereum: While the ICO boom may have caused the price of ethereum to crash, it was instrumental in discovering innovative uses for blockchain technology, such as Slock.it, showcasing the value of exploring new ideas on emerging technologies.
The ICO boom played a pivotal role in bootstrapping the Ethereum network and while it was a bubble that caused the price of ethereum to crash by 90%, it was also instrumental in discovering killer use cases that the technology could be used for. One such project was Slock.it, a decentralized Airbnb and sharing economy platform that aimed to use blockchain to unlock hardware locks on doors, bikes, and cars, and was able to raise funds through an ICO. While it may have seemed like a crazy idea at the time, it's important to have a diaspora of enthusiasm to explore and execute ideas on new technologies.
The DAO and the Risks of Decentralized Systems: The DAO is a type of decentralized organization where resource allocation is done by token holders. The security flaw in Ethereum that led to a $150m theft from The DAO shows the risks of using a distributed system, but it remains an innovative concept offering new ways of resource organization.
The DAO, or Decentralized Autonomous Organization, is a type of organization where allocation of resources are done in a decentralized way by people holding the tokens of the DAO. The Slock.it team raised $150 million for The DAO through an ICO. However, there was a security flaw in Ethereum where an attacker could drain money out of the DAO. This could have been avoided if all the nodes in the network updated the client software. The event resulted in one of the biggest unforced errors in the history of the crypto community. It also highlights the risks of using a distributed system. Despite this setback, The DAO remains an innovative concept that offers a new way of organizing resources and making decisions.
The DAO hack and the hard fork dilemma in Ethereum: The DAO hack showed that contracts are not immutable and investing in them is risky. The hard fork decision revealed that Ethereum is not fully decentralized and raised philosophical questions about the power of the Foundation.
The DAO hack resulted in a soft fork of Ethereum, which proved to be ineffective and would have opened the network to big distributed denial of service attacks. This led to two options: to do nothing and let the attackers steal 14% of all the ETH or to do a hard fork and modify the underlying protocol itself to cut out the history. The hard fork option would essentially be a bailout and would raise philosophical consequences. This showcased the power of the Ethereum Foundation and the fact that the system is not truly decentralized as it can be rewound and rewritten by a few people. The hack proved that contracts are not immutable and betting on them is risky.
The Importance of Immutability and Pragmatism in Blockchain: Lessons from Ethereum and Ethereum Classic.: Immutability is crucial in blockchain, but so is the need for pragmatism and good leadership. Ethereum Classic reminds us of the vulnerability of decentralized systems, while Ethereum's scalability issues highlight the challenges of network growth.
The hard fork of Ethereum and the creation of Ethereum Classic demonstrated the importance of immutability in blockchain, as well as the need for pragmatism and a benevolent dictatorship in the development of decentralized systems. While Ethereum may have a $200 billion market cap and greater success than Ethereum Classic, the existence of the latter serves as a reminder of the system's vulnerability to bugs and hacks. The slow scalability of Ethereum is also a major challenge as the network struggles to keep up with the explosion of activity and scalability issues. Ultimately, the Ethereum community and its development rely heavily on the leadership of Vitalik and the benevolent dictatorship of the foundation and mining pools.
Slow Progress of Ethereum 2.0 and Competition from Other Blockchains: Despite Ethereum's ability to process multiple transactions per second, the slow progress towards Ethereum 2.0 and network congestion leading to high gas fees have led to competition from other blockchains. However, developers are still creating innovative projects on Ethereum.
The Ethereum network's ability to process up to 100,000 transactions a second is a game changer, but progress towards Ethereum 2.0 has been slow. Network congestion has caused gas fees to skyrocket, with DeFi involving a lot of transactions leading to spikes of over $70 per transaction. However, other blockchains have popped up to compete with Ethereum, but most of them haven't even shipped. In the meantime, developers are building cool stuff despite the slow performance of the network. NFTs became a thing before DeFi with CryptoKitties introducing the concept of NFTs, making every token unique and collectible. Ethereum's cryptocurrency community is known for cats and rainbows.
The Emergence of NFTs and the Growing Complexity of DeFi on Ethereum.: Ethereum's DeFi industry is growing at an exciting pace, allowing people to trade without centralized exchanges and fees. The financial services industry is transforming, and new professionals and instruments are needed. Ethereum offers new directions for value creation and innovation.
CryptoKitties in 2017 generated a new wave of innovation in the blockchain world and led to the emergence of NFTs. However, the big set of applications that are happening on Ethereum today is DeFi, decentralized finance, which allows people to trade without a centralized exchange and fees. The speed at which the complexity of DeFi is growing is exciting but still a challenge to stay up to date with. Financial services industry is a meaningful percent of US GDP, and new type of money and rails needs new instruments and professionals in this ecosystem too. Ethereum is not just a world of computers but a code with money, giving a new direction to innovation and value creation.
The Potential of Ethereum for Future Growth: Despite price fluctuations, Ethereum's expanding use cases, the upcoming 2.0 upgrade, and the growing DAO space indicate its long-term potential for businesses and projects to build on its blockchain.
The bull case for Ethereum is based on more demand and less supply. Despite the volatility in its price, the Ethereum blockchain continues to expand with more use cases like DeFi, NFTs, and DAOs being developed. Ethereum 2.0 upgrade with proof of stake consensus will significantly improve the scalability of the network. Many developers are still building on Ethereum despite the price fluctuations indicating the potential of the network in the long term. The explosion in the DAO space is especially noteworthy. The future of Ethereum looks promising with more businesses and projects being built on top of its blockchain.
How ETH is Like Amazon Stock for Using Ethereum Network: To use Ethereum network, you need ETH and with the introduction of EIP-1559 and Eth2's change to proof of stake, the supply of ETH is decreasing making it potentially deflationary. Staking ETH allows earning yield but bad voting can result in losing the stake.
ETH is like Amazon stock to use AWS. To do anything on the Ethereum network, you need ETH. With gas fees being split into base fee and tip, EIP-1559 and Eth2's change to proof of stake, the supply of ETH is effectively decreasing, potentially making it deflationary. The switch to proof of stake removes sell pressure for ETH and adds buy pressure, because staking means that all of the value created on top of Ethereum will start accruing to ETH holders. This means that ETH holders will start earning yield by staking their ETH, but they'll lose their stake if they vote in a way that's bad for Ethereum. Proof of stake is how value accrues to ETH because you need ETH to stake to secure the network.
Proof of Stake vs Proof of Work in Ethereum and Bitcoin: Proof of Stake in Ethereum creates cash flow while Proof of Work in Bitcoin is more democratic. However, owning a certain amount of ETH is required, and there's a fear of takeover if one entity holds the majority. Sharding is used to ease network congestion.
Proof of stake in Ethereum makes it a cash flowing asset as opposed to proof of work in Bitcoin which is more democratized and fair. This shift ultimately transfers power from labor to capital. However, owning a certain amount of ETH is required in proof of stake, but smaller amounts can also be staked through projects like Coinbase. The fear is if one entity gets 51% of ETH in circulation, they can take over the network. Ethereum's geographically distributed nature makes it censorship resistant, but not collusion resistant because the possibility of collusion remains. The longer Ethereum exists, the more it attracts money and becomes secure, thereby increasing its Lindy effect. Sharding is an interesting approach to alleviate congestion in the Ethereum network.
Sharding and Side Chains as Solutions to Ethereum's Scalability Trilemma: Sharding and side chains offer potential solutions to Ethereum's scalability issues, but the success of the Eth2 switch over is crucial for maintaining their lead in the corresponding network effect.
The proposed solution to the scalability trilemma of Ethereum is sharding, where transactions get batched off the main chain into shards and come back as one transaction which decreases congestion. Side chains can also be used for ticky-tack transactions that do not need the same level of security or decentralization as the main Ethereum blockchain. Ethereum will still be the base layer for web 3.0, but other chains like Solana can also be used. The current financial system's low bandwidth connection between banks and different transaction mechanisms can be used as an analogy. However, the big bear in the room is the possibility of the Eth2 switch over not happening or going poorly, which can blow their lead in the corresponding network effect.
The Complexities and Challenges Facing Ethereum Network: Despite challenges with scalability and gas fees, Ethereum's value proposition lies in network economies created by the growth of applications and platforms built on it, however, its strength is also its potential downfall as demand shifts to other blockchains.
The Ethereum network faces challenges with scalability and gas fees, which may lead to developers and users switching to other blockchains that offer lower fees and congestion. However, the value of Ether is still a key factor in defining the persistent differential returns of the Ethereum network. Ethereum's power may lie in its network economies, as more applications and platforms are built on it, creating a self-reinforcing cycle of growth. The complexity and multi-layered nature of Ethereum also make it difficult to define a clear power, unlike Bitcoin's simplicity. The potential downfall of Ethereum is its strength, which comes from its supply-demand match, but is also vulnerable to shifts in demand to other blockchains.
Ethereum's network effects, challenges, and potential improvements: Ethereum's network effects make it hard for competitors to overtake, but challenges like high gas fees remain. EIP 1559 and Eth2 could address these limitations, allowing Ethereum to strengthen its position as the market leader.
Ethereum's network effects, including security, high value, and the development of applications, make it challenging for competitors to overtake it. Additionally, ETH holders and HODLers are a cornered resource that contributes to the scale economies of the mining network. ETH is a liquid asset and the primary coin trading pair that is used for NFT and other transactions. The complexity of switching to a different blockchain and the transaction costs associated with it, also make Ethereum more attractive for developers. Negative network effects of Ethereum include gas fees, which can be prohibitively high when there are too many people using the network. EIP 1559 and Eth2 could improve these shortcomings while continuing to strengthen its position as the market leader in cryptocurrency and blockchain technology.
The Success of Ethereum hinges on Network Effects, Branding, and Legitimacy.: The value of Ethereum relies on its ability to attract users, developers and investors through new technologies and applications. Its success is based on branding power, trust and legitimacy in the market.
Ethereum's value is tied to its network effects, branding power, and legitimacy. Its scalability and process power have held it back. However, a perma burst on the entire crypto bubble can occur if it doesn't find useful applications and if Bitcoin, to which it is connected, crashes. The existence of a forked Ethereum, Ethereum Classic, also emphasizes Ethereum's branding power and legitimacy. The psychology of investing in Ethereum is also affected by the trust it accrues, despite its volatility as an asset. Overall, the success of Ethereum lies in its ability to continue to attract users, developers, and investors through new applications and technologies.
Real-world use cases and flexibility make Ethereum stand out from Bitcoin in the crypto market.: Building successful cryptocurrencies requires finding real-world use cases, allowing for flexibility and adjustments, and bootstrapping the network with initially illegitimate use cases.
The success of cryptocurrencies like Ethereum is dependent on finding enough real-world use cases to provide real value to people and enable cross-border payments, so that it becomes too popular for governments to ban successfully. Ethereum's ability to evolve through adjustments of underlying software and contracts also sets it apart from Bitcoin's more rigid structure. Additionally, the crypto industry's ability to generate value outside of traditional US C-corporations using foundations may change the way projects and companies are structured in the future. Bootstrapping the network with initially illegitimate use cases is a key playbook to building successful cryptocurrencies.
Strategies for Gaining Widespread Adoption in Crypto: For successful adoption of crypto, focus on enabling new possibilities for specific groups and building internal use cases. Tokenomics and incentive design are crucial for coordination, as seen in the example of BitClout.
The playbook for gaining widespread adoption in crypto starts with enabling something that wasn't possible for a certain group of people before, rather than just focusing on illicit use cases. Building internal use cases within the network can also contribute to initial activation energy before going out and taking over external use cases. The primary function of Web 3.0 and crypto internet involves the transfer of value between people, and tokenomics and incentive design play major roles in coordinating groups of people in ways that might otherwise be impossible or have significant friction. BitClout is an excellent example of Twitter with money, allowing users to invest in someone they believe is underfollowed and criminally underrated for their content.
Capchase for SaaS Funding and Ethereum's Growth Story: Capchase provides upfront cash for SaaS growth, while Ethereum's market cap growth is impressive but execution mistakes were made. Ethereum Foundation's storageship over the years gets an A-.
Capchase can help SaaS companies get all of their cash upfront for investment in growth, R&D, etc. Founders who worked with Capchase have extended their runway up to eight months and spared 16% or more on delusion. Ethereum Foundation has created over $200 billion of market cap in six years, which is remarkable and outpaces basically every hyper growth startup. However, the execution is not ready for primetime yet, and there are things that could have been done better. Vitalik himself has said that there are many things he would go back and change about the beginning of Ethereum and the trajectory that it's been on. The Ethereum Foundation gets an A- for storageship of the Ethereum network over the past seven years.
The Role of Skill and Luck in Ethereum's Success and Literature.: The combination of skill and luck paved the way for Ethereum's success and exploring diverse perspectives through literature can spark imagination and open up new possibilities.
Ethereum's success and world-changing potential can be attributed to the right combination of skill and luck. The platform's human team, while slow in decision-making, made the right tradeoffs and decisions to stand out as the number two blockchain. Arthur C. Clarke's Rendezvous with Rama and The City and the Stars are excellent sci-fi picks, while Marvel's Loki is a must-watch for those who love clever and fascinating storytelling. The non-digital future imagined in Neal Stephenson's The Diamond Age offers a refreshing and unique view of what's to come. Luck and timing play significant roles in both tech and literature, and exploring different perspectives can broaden one's imagination.
Book Recommendations, End of Pandemic Excitement, and Being Part of the Acquired Community.: Joining the Acquired community offers a chance to learn about VC fundamentals, pricing and packaging, hiring, and team building. Express gratitude and share the podcast for a chance to gain new perspectives.
The hosts recommend The Diamond Age by Neal Stephenson and NieR:Automata by Square Enix. They also share their excitement about the end of the pandemic and being able to record in person again. Becoming a part of the Acquired community is an opportunity to learn more about VC fundamentals, pricing and packaging, hiring, and building great teams. The hosts express gratitude for the listeners and encourage them to share the episode with a friend or on social media. It's a privilege to be able to do this, get incredible feedback and comments, and form new perspectives.
