My first story in MIT Tech Review with added ramblings on Web3 and Ethereum’s Beacon Chain

I just wrote my first story for MIT Tech Review. 

It is an explainer piece on Ethereum’s move to proof of stake. What follows are notes from the story — along with additional ramblings and quotes from your favorite crypto skeptics.

When NFTs became a big thing in 2021, that drew a lot of attention to Ethereum, where most NFTs are traded. It also brought a lot of attention to the environmental horrors of proof of work.

Bitcoin and Ethereum both rely on proof of work to add new blocks to the chain. Together, they consume as much electricity as the entire country of Italy, according to Digiconomist

Meanwhile, venture capitalists are shoveling cash at companies building Web3 — a supposedly new iteration of the internet where apps will run on permissionless blockchains, mainly Ethereum. 

The problem is that permissionless blockchains — those that are open to the public and depend on a cryptocurrency to incentivize miners and maintain their security — are incredibly inefficient. They are sluggish. They can’t handle much data, and they don’t scale.

Case in point: CryptoKitties slowed the entire Ethereum network to a crawl in 2017. 

In his article “The Web3 Fraud” Nicholas Weaver, a researcher at the International Computer Science Institute at Berkeley, explains that Web3 is “a technological edifice that is beyond useless as anyone who attempts to deploy a real application will quickly discover.”

Andreessen Horowitz (a16z), one of Silicon Valley’s top venture capital firms, is a big promoter of Web3. It has invested heavily in at least a dozen platforms that support NFTs alone, among them: Dapper Labs, OpenSea, Manifold, and soon, possibly, Bored Ape Yacht Club. Ethereum is crucial to a16z’s Web3 story.

Clearly, that story needs something more to support it. It needs a rocket-boosted ETH 2.0.

Scaling to the moon

In a proof of stake system, validators replace miners. Instead of investing in expensive ASIC systems that eventually end up in landfills, you invest in the native coins of the system.

Ethereum Foundation, the nonprofit behind Ethereum, says its proof of stake will consume 99.95% less electricity than proof of work. Ethereum currently handles roughly 15 transactions per second. Its founder Vitalik Buterin said ETH 2.0 could potentially handle a whopping 100,000 transactions per second. That would beat out Visa, which claims 65,000 transactions per second.

Ethereum was supposed to be a proof of stake blockchain from the start, according to its whitepaper. But in 2014, Buterin concluded that developing a proof of stake algorithm was non-trivial. So Ethereum settled for proof of work instead, while it went to work developing a proof of stake algorithm. Ethereum’s switch to proof of stake has been six months away for years. 

Now, supposedly, the big moment is soon to arrive.

Ethereum is currently testing a proof of stake blockchain called the Beacon Chain. This will be the heart of ETH 2.0. So far, 9.7 million ETH ($25 billion) is staked on the Beacon Chain. To become a validator, you have to lock up 32 ETH. If you don’t have that much ETH on hand, you can join a staking pool.

In an upcoming event called “The Merge,” which was supposed to happen in Q1 2022 but got pushed to to Q2 2022 in October, Ethereum will combine the Beacon Chain with the Ethereum Mainnet.  

After The Merge takes place, the next step is sharding — splitting the Ethereum chain up into 64 separate chains, so the network can scale. Sharding won’t happen until 2023. This is where the network reaches toward that theoretical number of 100,000 transactions per second.

Critics, however, doubt sharding will be any more efficient than a single chain. 

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, told me: “Almost every transaction will require updating two shards in an ‘atomic’ way (either both are updated or neither is updated). That will be the job of the central (Beacon) chain. I doubt very much that they can do that more efficiently than the current single-chain scheme.”

Ethereum, a centralized system

Scaling isn’t the only issue at hand in Ethereum’s move to proof of stake.

Proof of work’s decentralization suffers from economies of scale. Large mining operations are better able to maximize profits while lowering costs. This resulted in five mining operations controlling more than half of Bitcoin’s hash rate in 2020.

Like proof of work, proof of stake will naturally tend toward centralization.

Those who have the deepest pockets and stake the most coins will have the best chances of “winning the lottery,” thus reaping newly minted coins in the form of the block reward.

The big staking validators are already getting themselves into position. US crypto exchanges Coinbase and Kraken hold 78,000 out of 296,000 validators on the Beacon Chain.

A16z is also getting in on the action. It invested $70 million into staking provider Lido and is using Lido to stake an undisclosed portion of its venture arm’s ETH holdings on the Beacon Chain.

Proof of work and proof of stake both aim to get rid of a central gatekeeper, but that comes at a huge cost. One wastes electricity; the other wastes coins, which get locked up and pulled out of circulation.

“Whatever Sybil defense they use, economics forces successful permissionless blockchains to centralize; there is no justification for wasting resources in a doomed attempt at decentralization,” David Rosenthal said in a recent blog post. Rosenthal is known for co-creating Stanford University’s LOCKSS technology for the distributed preservation of digital content. 

The one advantage of proof of stake that we can count on? At least it won’t destroy the planet.

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News: ETC hacker returns some of the money, Constantinople will have to wait, and a new twist in the QuadrigaCX saga

Stealing money is not easy. So why go to all the effort if you’re not serious? Screen Shot 2019-01-20 at 12.41.31 AM.png

Earlier this month, Ethereum Classic fell victim to a 51% attack when someone got hold of the majority of the network’s computing power and used it to double spend coins, stealing $1 million in funds. Now the hacker has returned some of the money. 

Gate.io, which originally lost $271,000 worth of ETC said the hacker returned $100,000 worth. And YoBit reported it got back $61,000 of $65,000 worth of stolen ETC. 

“We still don’t know the reason [for the return],” Gate.io said in a blog post on January 10. “If the attacker didn’t run it for profit, he might be a white hacker who wanted to remind people the risks in blockchain consensus and hashing power security.”

If you are a crypto exchange, you’re probably not seeing the profits you did back in the crypto heydays of 2017 and early 2018. So how do you make up for that? One option is to start listing lots of questionable coins. Another is to set the stage for the long-hoped-for influx of institution money.

Along those lines, Bittrex announced an over-the-counter (OTC) desk on January 14. The service handles trades of $250,000 or greater for the nearly 200 coins already offered by the exchange. In doing so, Bittrex joins other U.S.-based exchanges in launching OTC trading desks, including Coinbase and Poloniex.

Ethereum’s Constantinople upgrade has been delayed yet again. Shortly before the scheduled January 17 release, smart contract audit firm ChainSecurity found vulnerabilities in one of five ethereum improvement proposals (EIP). ChainSecurity describes the vulnerability in detail here. Ethereum core developers are now weighing late February as a time to move ahead with the upgrade—sans the buggy EIP.

A new twist has emerged in the saga of QuadrigaCX, one of the largest crypto exchanges in Canada. The saga began in January 2018 when the Canadian Imperial Bank of Commerce froze about $22 million in US dollars in an account opened by Quadriga’s payment processor. The majority of the frozen funds were released in December, but customers still aren’t getting their money.

Now, after waiting more than a month to post the news, Quadriga says that its CEO and founder Gerald Cotten is dead. Usually, when the CEO of a company dies, that is something you want to tell people right away.   

The announcement (archive) on the company’s website appears to come from Cotten’s wife, Jennifer Robertson, who explains that Cotten went to India to build an orphanage for needy children. While there, he died of complications to Crohn’s disease.  

“Gerry cared deeply about honesty and transparency — values he lived by in both his professional and personal life. He was hardworking and passionate, with an unwavering commitment to his customers, employees, and family,” Robertson wrote. [Emphasis mine.]

Several of Quadriga’s customers went to Reddit asking for proof of Cotten’s death. Some wondered how Cotten found time to travel to India when his company was in the midst of major litigation. 

Binance, one of the world’s largest crypto exchanges by trading volume, has launched a  fiat-to-crypto exchange in Jersey. A tiny 5-by-9-mile island in the English Channel, Jersey is one of the world’s wealthiest offshore tax shelters.

In October, Binance also set up a fiat-to-crypto exchange in Uganda. And it is planning to set up more of these entities in countries like Singapore, Malta, South Korea, Liechtenstein, Argentina, Russia, Turkey, and Bermuda.

Tron’s accelerator developer contest is looking like a big scam. The event was supposed to offer $1 million in prizes, with the first prize being $200,000. After the competition ended on January 4, developers took to Twitter and Reddit to complain that something “fishy” was going on. Apparently, Tron changed the prize amounts, and the main prize went to some vague company nobody has ever heard of.  

Brave browser, the project run by JavaScript creator and former Mozilla CEO Brendan Eich, claims that is is no longer fundraising on behalf of others, after releasing version 0.58.21 of the browser. David Gerard wrote an update and posted some pics of the new interface. If you get a chance, tip Gerard some BAT via his YouTube channel, so he can continue to test out the platform.  

Also, Brave browser has started allowing developers and testers to view ads. You can’t earn BAT for viewing the ads yet, but all that is coming. Eventually, Brave says, “users will then be able to earn 70% of the revenue share coming from those ads.”

The business model has gotten a ton of criticism. Essentially, the browser strips all ads and add trackers — which is how most publishing sites make their money — and then substitutes its own Brave-approved ads.

There’s been some important developments in the Tezos class-action litigation. Next up, likely the court will rule on whether the Tezos initial coin offering—which raised a record-setting $232 million in mid-2017—was an unregistered securities offering.

A ransomware threat known as Ryuk has pulled in $3.7 million in bitcoin over five months.

The Winklevoss Twins still think Bitcoin will be worth more than gold, maybe in the hopes they will be billionaires again. “The only thing gold has over bitcoin is a 3,000 year head start,” Cameron told Fortune.  

Brock Pierce, who got into cryptocurrency in the early days, and his wife Crystal Rose Pierce are expecting a child in March. They are naming the baby Crypto Pierce.

About 5% of daily Bitcoin transactions involve tether (USDT), according to a Medium post by Omni, the platform that tether operates on.  

Despite competition from a slew of new stablecoins, tether still dominates the stablecoin market, according to the latest report from CryptoCompare.

In case you missed it, I published a complete Tether timeline. I’m continuing to to update the story based on whatever new info I stumble upon. So keep checking back—and if you have information to add, send me details!