Webinar: EtherDelta And The Regulation Of Decentralized Systems, With Andrew Bull, ESQ.

This week, I was joined on a livestream by Andrew Bull, ESQ., to discuss the SEC settlement with the founder of EtherDelta. Andrew is the CEO and Founder of Bull Blockchain Law, Philadelphia’s first crypto centric law firm. We attacked this question from both a technical and regulatory perspective, and I learned a lot.


Here were my top take-aways from the discussion:

  1. The SEC exists for consumer protection and views each case from the perspective of the end user, not the developer or entrepreneur.

  2. How you describe and promote something you create— whether it’s a token, an exchange, or something similar— will have a big impact on how it’s classified and regulated by the SEC.

  3. A developer who created the interface for interacting with a decentralized protocol, even if they didn’t create or own the protocol itself, can still be culpable if they promote that interface to consumers. For example, someone that created and hosted a website for interacting with the EtherDelta smart contracts might still be charged with running an unregistered exchange.

  4. The SEC and other regulatory bodies make themselves available! If you’re building something and there’s regulatory uncertainty, you can get in contact with them.

  5. While code is classified as speech, there are limits even to our First Amendment rights, and these have not yet been tested in the judiciary with regards to decentralized systems. A developer shouldn’t assume that they’re not culpable for code they write, publish, and promote just because they didn’t deploy it or host it themselves.

The conversation is packed with other insights— I highly recommend giving it a full listen. For more from Andrew, follow him on Twitter @andrewbull1988.

A Striking Exchange From The Ethereum Core Dev Discussion Of Block Rewards

Today, the Ethereum Core Dev team held a meeting to discuss lowering the block reward given to Ethereum miners. The primary motivations for this seem to be:

  1. The cost to the network in the form of inflation
  2. The environmental impact of energy spent on mining

To their credit, the team invited a number of miners of varying sizes and scales to give their input on the various proposals on the table. One such person was Xin Xu, who represented a large, China-based mining operation. He made this point [1:20:07]:

I want to point out...it’s more of a network security level. I posted a link before in the chat about crypto51.app, which is a website that helps you to calculate how much it costs to actually, do a, do a 51% attack to the network. For Ethereum, it’s not that much. However, why is there no one attacking the Ethereum network?

I think from my perspective, or our study as a whole team, is there isn’t any hashrate you can use in the market to attack the Ethereum network…. So, like there are a lot of people [saying] on the internet, “What if we cut the issuance? How much hashrate will go out?” However, at least to me, it’s not like if you’re going to cut [the block reward from] 3 to 2, only 1/3rd of the hashrate will go out, or maybe we’ll cut the Ethereum network’s security to 2/3rd.

It’s more like now we have 100 soldiers, and that’s all the soldiers we have in the world. But if we cut 40 of them out, then it’s not about if the enemy or the bad people have enough soldiers to attack us. Because before they had 0. Now they have 40.

They have the chance, once they have the capital, they always have the choice to hire those soldiers, or those hash rate, to attack, then. So my major point is, the Ethereum network has been secure or safe to now. It’s not because attacking Ethereum costs too much, it’s simply because now all the hashrates are on the Ethereum network, and no one has extra hashrate to attack it. So even if you have enough money, it’s not going to happen.

The issue he brings up is rather interesting. Essentially, he's arguing that attacking the Ethereum network is difficult today primarily because the world is hardware constrained. There literally aren't enough GPUs for you to buy, or hire, to achieve the hash rate needed to attack.

Thus, when considering the security effect of forcing some percentage of miners off the network, one can't simply look at the hash rate reduction. One also has to consider that a bunch of GPUs suddenly become available for attack that weren't before.

I'd take this a step further and point out that new GPUs will continue to be manufactured. If these are no longer profitable for mining, they won't be bought up for mining, and will become less expensive and more widely available. This makes it significantly easier and cheaper for a would-be attacker to acquire the hardware that would actually be needed to attack the network.

In short, Xin Xu is making the case that considering security to be equivalent to the hash rate is naive. The network hash rate must be put in context of the global supply of GPUs and other mining hardware, and that supply is itself effected by the issuance rate.

To my surprise, no one engaged Xin Xu on his point. In fact, the very next person to speak was Carl L., who had this to say [1:22:14]:

The point I wanted to make was that, going forward, I think we can sort of concern ourselves with the current hashrate and the current miners and their running efficiency. In order to….you know, do we need additional hashrate? Like are we talking about wanting to continue to grow the hashrate? Is that desirable?

In my mind, that’s absolutely not desirable. And in that case, looking at the kind of equipment cost, we want to be discouraging that equipment, that investment in new equipment. And one way to do that is to, you know, to lower the block reward, and that you know, worsens the economic argument for that investment.

In case it wasn't crystal-clear that discouraging investment in mining was an explicit goal, Tim Coulter had this to say [1:25:28].

If people are continuing to invest in mining, then I completely agree that we should de-incentivize that.

As I've said before, I'm rooting for the Ethereum Foundation to achieve it's goal and bring a secure, truly decentralized PoS network into the world, even though I remain skeptical.

While we wait for PoS to materialize, it seems prudent to tread carefully with regards to network security. I was disappointed today that no one engaged Xin Xu on this discussion of the second-order effects a reward reduction might have on hardware availability, and thus network security.

Ethereum, Proof-of-Stake, And The "Free Hard Fork" Problem

This post will outline an issue with the aspiration to move the Ethereum network to full Proof-of-Stake. Vlad Zamfir currently leads one team researching that effort, which is known as Casper "Correct By Construction", or CBC. Previously, a hybrid PoS system called Casper FFG had been planned-- this issue does not apply to such a system. To the extent new plans for a "beacon chain" involve a full PoS system, this issue might apply to said chain. (The technical details of that effort are still unclear to me, so I hesitate to make any pronouncements).

It's worth noting at the outset that it's entirely possible the point laid out in this post has indeed been made before and discussed, perhaps on the boards of ethresear.ch, for example. If it has, then I'll be happy to have someone point me toward that discussion. I've been unable to find it.

Still Nothing At Stake

Simply stated,  the "free hard fork" problem is the "nothing at stake" problem moved up to the level of pre-planned, possibly-contentious hard forks.

Proof-of-Steak. Get it!?

Proof-of-Steak. Get it!?


Casper CBC aims to solve the nothing at stake issue by slashing validator deposits for bad behavior. To greatly simplify a complex, work-in-progress protocol, the network will take funds from validators who vote on multiple chains. The goal is-- at a minimum-- to recreate the incentive structure of Proof-of-Work.

For the sake of this discussion, let's assume the CBC, or some other research effort, is successful in developing an algorithm that is secure, decentralized, and replicates the incentive structure of PoW within the network.

The issue is, tautologically, the network can only punish you for activity on the network. In a pre-planned hard fork, node software can be programmed to begin validating multiple chains that are invisible to each other at a given block height. The network parameters can simply be changed.

This is important. It means to execute a possibly contentious hard-fork, you don't have to convince miners to dedicate scarce resources (hardware & electricity) to your fork instead of the consensus chain. You need-only to convince validators to run software that will validate your chain in-addition to the consensus chain.

And why shouldn't they? There is no marginal cost to do so. Even if the fork ends up worth a small fraction of the main chain, this is "found money" to the validators.

Stated another way, when a PoW chain hard forks, it is (nearly) guaranteed that one chain will be significantly less secure than the other. In a post-PoS world, you can hard fork and end up with two chains which are equally as secure as the original.

Have we fully considered what that might mean for the ecosystem? Might we be headed down a path that results in a proliferation of Ethereum forks?


In the next section, I'll enumerate some objections to this point and respond to them. 

Validators won't bother to install and run specific software for hard forks

They probably won't bother to run any old software that purports to create a fork, true. But if a moderately prominent developer or company in the ecosystem decided to hard fork, my guess is a very sizable percentage would. Again, why not? This is found money for very minimal effort.

A parallel can be seen in Dogecoin, which is merge mined with Litecoin. Litecoin miners happily run software that mines both, because they can do so for free. I doubt many care about Dogecoin. But why not take free money?

No one in the ecosystem with any credibility will attempt a contentious hard fork

This is incredibly naive and obviously wrong. In fact, not only is it inevitable that multiple hard forks will eventually be attempted due to pure community disagreement, the ability to hard fork for free also brings up some interesting legal and moral questions.

One example: in a world where it's shown hard forks can be executed with shallow consensus, might Parity have a fiduciary duty to create and champion a hard fork that unlocks customer funds lost in their multi-sig wallet fiasco? Many customers had significant amounts of money lost. If executing a fork can result in even a small percentage of that value being returned, ought they not try to do it?

Validators won't support contentious hard forks because it would hurt the ecosystem, devaluing their investment

This is a silly argument which is clearly false from a game-theoretic perspective. If it were true, Proof-of-Stake would already work in a fully decentralized way, and we wouldn't need efforts like CBC in the first place.

Validators will only run the software the Ethereum Foundation approves

If this is true, then the detractors who claim Ethereum is centralized because of the Foundation's outsized influence are right. We might as well shut the thing down and just let the Ethereum Foundation run some servers for us. It will certainly scale better.

We can find a way to punish validators who vote on other networks

There are a few things that you might mean by this, so let's take them one at a time:

1. A centralized oracle controlled by [some group] will report dishonest validators

Seriously? Just get out!

2. A decentralized oracle, something like an Augur market, will report dishonest validators

Well, I guess this is theoretically possible, but boy, we're adding whole new layers of complexity to the game theory involved-- let alone the technical challenges.

3. We'll use [magic cryptography] to punish validators when they vote on other networks

The idea here would be some form of cryptographic mechanism which would force the validator to reveal some information on the non-consensus chain that could be used by a self interested party on the main-chain to claim a chunk of the validator's stake.

I'm not aware of any mechanism that could accomplish this, but I admit to being far enough out of my league on advanced cryptography to know it's definitely impossible. zkSnarks still feels like magic to me, so maybe it can be done.

OK let's assume you're right. Who cares? Is having lots of forks actually a problem?

This is a good question. I don't know, and the truth is nobody does. It'd be an experiment in game theory at a grand scale, thats for sure.

My instinct tells me that if you make it much easier for a community to fracture, then it will probably fracture. A lot.

Protestantism might be an odd-but-interesting historical analog. Because it made it theologically painless to create a new church, a single splinter off the Roman Catholic Church has subsequently self-divided into 30,000+ unique denominations.

Do we care if that happens? What happens to Ethereum(s) in that case, in a world where Bitcoin and other cryptonetworks also exist?

Basically ¯\_(ツ)_/¯

So...what? I'm not sure. Am I missing something obvious that makes this a non-issue? Maybe! Has this issue been discussed and resolved by folks smarter than me already? Possibly!

Do we just proceed full steam with PoS, recognizing this limitation but hoping it turns out not to matter too much? Well, maybe...but that sure makes me nervous.

I don't have a profound conclusion here. Basically...¯\_(ツ)_/¯

The Two Views Of Crypto: Sound Money Vs. Global Computer

Each of us has a unique personality and history that influences the way we perceive the world-- our own set of lenses through which we view reality.  It turns out, those lenses can result in dramatically different conceptions of the same phenomenon.

It will Shock some of you To Learn all three versions look 100% Gold & White to Me ¯\_(ツ)_/¯

It will Shock some of you To Learn all three versions look 100% Gold & White to Me ¯\_(ツ)_/¯


In the crypto world, amongst those who believe this technology to be lasting and important, there seem to be two dominant viewpoints. In this post, we'll elucidate these two lenses, explore what each perspective gets right and wrong, and seek to unify the two if possible.

A World Computer

Many people view blockchain networks as giant, decentralized, global computers. Henceforth, we'll call people who tend toward this perspective "Computerians". (It's a dumb name, but I really don't want to type "people who have this perspective" over and over, so let's go with it).

A blockchain computer is everywhere and nowhere. Code IS run and State is Replicated across Thousands of Nodes

A blockchain computer is everywhere and nowhere. Code IS run and State is Replicated across Thousands of Nodes


Computerians tend to be developers and software people. They recognize blockchains as a new place to run their code and store their data. Compared to traditional computers, blockchain computers are wildly inefficient, expensive, and hard to program safely.

Despite this, Computerians are excited to write software for these global computers, and believe this software will change the world. Thats because they recognize a host of new capabilities these computers bestow on software, namely:

  • Digital scarcity
  • Data storage that is immutable, auditable, and censorship resistant 
  • Code that is unchangeable once deployed (i.e. the ability to provide guarantees to users about how a system will behave)

To put it succinctly, Computerians believe software is eating the world-- blockchain computers enable them to write new kinds of software and thus devour parts of the world previously thought indigestible.

Sound Money

In contrast to the Computerians, there are a group of people who view blockchain as primarily a monetary innovation. For these folks, "blockchain" is an implementation detail. We'll call them the "Fiscalites."

Is Bitcoin a Better Gold Than Gold?

Is Bitcoin a Better Gold Than Gold?


Fiscalites are more likely to have a background in economics, finance, or political science. They understand that, historically, things that become money-- like shells or precious metals-- have had certain properties, such as:

  • Durability and secure-ability
  • Measurability and divisibility
  • Forgery resistance

Looking at cryptocurrencies, Fiscalites recognize them as a revolutionary new form of sound money. Fiscalites tend to be skeptical of fiat money, that is, money issued and controlled by a government. They view centrally controlled, inflationary monetary policy as dubious.

Concisely, Fiscalites see cryptocurrencies as an ascendant new form of global money and the antidote to the questionable modern experiment of fiat currency.

Each Side's View Of The Issues

Unsurprisingly, viewing the world through these different lenses leads to different conclusions regarding various matters. Let's examine how each side perceives:

  1. The concept of cryptocurrencies
  2. Altcoins and other tokens
  3. Scaling and network upgrades


It should be self evident that to a Fiscalite, cryptocurrency is the whole ball game. The underlying blockchain technology is an afterthought. It's the sound money it enables that matters.

A Computerian views cryptocurrencies as a fundamental component of blockchain computers, but not as their singular end. A network's currency underpins the incentive structure that allows it to function in a decentralized manner, and it enables powerful use cases in the form of programmable money. While Computerians recognize the importance of these functions, the currency doesn't conclusively define the utility of the network.

Altcoins and Tokens

Fiscalites tend to be Bitcoiners. Since Fiscalites are focused on sound money, they see the network effects of Bitcoin as unstoppable. The more people who store their wealth in Bitcoin, the more its value increases, and the more likely others are to use it to store their wealth.

To a Fiscalite, unless a large number of people are willing to store their wealth in a given coin or token, it's useless. Most believe only one asset can accrue such broad social trust. An open minded Fiscalite might be interested in altcoins that improve on the money-ness of cryptocurrencies, such Zcash and Monero, but thats about as far as it goes.

Fiscalites Put Bitcoin On A Pedestal.

Fiscalites Put Bitcoin On A Pedestal.


As engineering minded folks, Computerians are more open to new projects which experiment, add features, and explore the blockchain tradeoff-space. As such, many of them are excited about Ethereum, but not exclusively so. They're multicoiners.

Computerians can envision a world where multiple blockchain networks see mainstream adoption, and where technologies like decentralized exchanges and atomic swaps allow users and software to transact seamlessly between them. Many Computerians even envision a world where a multitude of tokens and assets are implemented in code on top of these networks, each providing some narrow utility or incentive structure.

Scaling and Network Upgrades

Fiscalites don't want to change the network. Period. If the network can be changed, then theoretically it could be censored, broken, or have its monetary policy altered. This would damage its social credibility as money. For Fiscalites, intractable governance deadlock is a feature, not a bug, and suggesting a change to the network for scaling purposes is like proposing we alter the atomic composition of gold to make it easier to carry around.

Fiscalites want to scale the network on the second layer-- i.e. by leaving the base protocol untouched, but building on top of it, even if that comes with some tradeoffs. A historical analog would be government issued gold notes. They made using "gold" easier, albeit with some tradeoff towards trust. This was acceptable as long as there was an easy way to opt out of that trust by exchanging notes for physical gold.


Gold Notes Could Be Redeemed For Gold On-Demand


Computerians see scaling as an engineering problem, and one that must be urgently solved. If blockchain networks are all about creating new kinds of software, then we need lots of people to be able to use that software. These networks need to scale. As such, Computerians don't take an either-or view of scaling when it comes to layer 1 vs. layer 2. Why not both?

Naturally, this means lots of changes to the network. "Fine, let's get to 'em," says the Computerian. Even changing the monetary policy is not off the table in service of making the global computer work better.

What Each View Offers The Other

As we've seen, Computerians and Fiscalites seem to disagree on quite a lot, despite both being bullish about the overall importance of crypto. The truth is, the two views are complimentary, and each is necessary to keep the other in check.

We are the proverbial blind men, each feeling a different part of the elephant while arguing over its nature. We ought to be triangulating our viewpoints.

The Blind Men and The Elephant, Via Wild Equus

My background lends me to a more Computerian disposition. I've come to realize there is much we should learn from our Fiscalite friends.

Computerians ought to take more seriously the history of money, and tread more carefully with regards to network changes as a result. The Ethereum DAO hardfork makes a good example of where this can go awry.

To an engineer, the hardfork felt like fixing a bug-- correcting a piece of software that had not behaved according to its design. In reality, the hardfork was a breach of social trust that damaged the credibility of the Ethereum's decentralized nature. For ETH to be money, this is unnaccetpable. Hopefully, history will view it as a one time event that is forgivable due to the network's nascency.

The Ethereum community also tends to have an unbridled optimism and confidence around fixing problems through engineering. This can be energizing, but it can also border on dangerous naiveté. The push towards Proof-of-Stake, for example, strikes me as more risky than the community admits.

Finally, while Computerians may always remain multicoiners at heart, they should probably recognize that at some point, consolidation to a small handful of networks is not only inevitable, it's desirable. We almost certainly don't need a token for every decentralized app under the sun.

For their part, I think Fiscalites could stand to learn a few things from Computerians as well.

For one, Fiscalites are painfully narrow-minded when it comes to anything other than sound money. In fact, this narrow-mindedness can turn to actual hostility towards those who suggest other use cases for decentralized networks. This is foolhardy, as these other use cases do not preclude cryptocurrency being used as sound money in any way.

Smart contracts are the most obvious example. Fiscalites downplay their importance or outright write them off, as Jimmy Song does in the piece linked below. But an army of tinkerers and builders are flocking to these platforms to see what they can create with the new capabilities they've been granted. Underestimate them at your own risk, but perhaps do a bit of research on the history of personal computers, open source, or the web before you do.


Finally, Fiscalites ought to at least consider the idea that multiple crypto-networks can coexist. Perhaps they'll be proven right in the long run and Bitcoin will dominate. Even if so, pretending to know right now, with certainty, that Bitcoin is the only coin that can possibly prosper is beyond presumptuous, it's preposterous. The world is simply too complex.

Can't We All Just Get Along?

If these two vantage points are to be reconciled, we must find common ground. The essential point of contact between the two ways of thinking is decentralization. Both sides deeply value the potential for crypto-networks to disintermediate entrenched central powers.

Fiscalites are focused on state-backed central banks who tinker with the economy through top down monetary policy. Computerians are concerned by the giant internet aggregators who increasingly control the web, wielding broad power to promote or censor what is seen. Both are rightly uneasy about deepening concentrations of power in the modern world. Both recognize the immense promise and importance of dispersing it.

This vision of a bottom-up, decentralized world, enabled by crypto-networks, is one worth fighting for. Hopefully, those who share it can be persuaded-- despite their distinct perspectives-- to work together to see it realized.

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