Ethereum’s Black Flag Movement - TOKEN2049 Singapore 2022

hello everyone so I got 40 slides and 15 minutes to try to explain a pretty dense subject so let's start with a controversial statement the merge happened everyone was happy proof of stake is now live on ethereum but it almost didn't happen I'm gonna tell you why so there's been three in my opinion extremely severe situations that actually threaten the ethereum protocol first one was in 2016 the dial hard Fork everyone knows about that that was when ethereum's immutability was violated after a hack the people who lost their money got their funds returned to them through a hard Fork in 2016 in September the Shanghai hacked happened this was a time that was extremely intense for developers and ethereum's availability was threatened the network almost went down and ethereum developers remember this day very intensely now the third largest threat to ethereum and its history in my opinion actually happened last month and I call it the uh the Black Flag week of ethereum and this is when ethereum's neutrality came at risk in a very serious way by the way this image that you just saw something that's pretty interesting this is a drawing that I drew in paint and I asked the artificial intelligence engine to render this image from that painting and the the interesting thing is that so these ethereum miners that used to be making the blocks you see the frequency of blocks here after proof of stake now we're using uh clock to make blocks we're not not mining anymore so what happened to those miners are those miners just gone or are they still here with us actually this image was rendered by those eth miners instead of just throwing away their Hardware they're now Reaper they've repurposed that Hardware to render these kinds of images that helps me to tell the story so we know that there's a bunch of awesome things with proof of stake the there's less less issuance when we're mining like there's more there's less ether that is getting mined by the protocol and uh we're not hurting the environment anymore so what what's the danger well what you have to remember is that when proof of stake launched it was like trying to change the wheels on an airplane actually it was sort of like trying to change the wheels on five airplanes at five times because we have five different consensus clients that all need to do this in synchrony with each other and just one month before proof of stake was supposed to go live Alexei purtsev was jailed in the Netherlands for being a developer that built the uh tornado cash mixing service this means that the ethereum system is now under direct Threat by the US government so many D5 applications started to filter transactions that had anything any anything to do with tornado cash so you might see that there were ethereum influencers and Justin Sun actually couldn't use D5 applications anymore because someone dusted their wallets with some bit of ether that had interacted with the tornado cache system and we also found out that flashbots which is the primary uh block builder in ethereum is also censoring transactions from entering the protocol so we can see that the you know in right now in proof of stake the the uh the the amount of validators that use flashbots is increasing this is just one eight days apart we can see that these validators are increasingly using flashbots which is censoring transactions and I think it's going to reach 80 percent not long from now so an extremely worrying tweet in this context was from Brian Armstrong that said well we're obviously going to follow the law if there's sanctions we need to abide by that and what's what's the what's the issue with this well the issue is that coinbase runs one of the largest validators apart from being an exchange they're one of one of the largest validators in the ethereum network and we know that there are miners that already today don't include transactions from tornado cash but in when we use proof of work you look at this is the distribution of hash rate so there's a bunch of different pools and when we're using mining but in proof of stake what are the actors here so it's actually exchangers so we have coinbase Kraken by now and they are typically in regulated jurisdictions where they have to abide by various rules so right now this is an Epoch in proof of stake there's 32 blocks in each Epoch coinbase is making roughly six of those blocks binance is making one Kraken is making three that's ten blocks per Epoch that's actually enough blocks to censor you only need about a third of the validators improve of stick to censor the protocol and those three exchanges actually have enough stake in the system to send search transactions if they wanted to so when I would say that the merge almost didn't happen it's actually because we were going into a situation where there's enough validators in Cruel of the stake that may have to comply with ofac regulation and sensor transactions from entering the protocol and this would destroy the entire value proposition of ethereum as a decentralized censorship resistant platform for smart contracts and I usually describe crypto like it's an amazing like it's the most exciting movie that I've ever watched and we get to enjoy this really exciting movie on the front row seat but sometimes it feels like you just want to scream at the screen by the way this is also the reason that this image looks so horrible this is also one of these AI generated images um and the reason I want to scream at the screen is that we've always said that in proof of stake how we will deal with this type of attack is that we're going to remove the stake of a validator that is engaging in censorship in the network that is how vitalik has talked about it since 2017. this is the reason that I liked proof of stake is because we have the ability to selectively remove individual validators that are threatening the protocol so we usually say that in proof of stake we have this surgical weapon that we can look at which particular stake is censoring and we can remove that particular validator individually and we don't have to change the proof of work function and destroy the entire system so a lot of people will say well you know how can you slash an actor like coinbase that's like billions of dollars that actually don't all of it doesn't even belong to coinbase they belong to particular clients of coinbase so you would have to slash the stakes of individual retail people well there's some military Doctrine called um mutually assured destruction and this Doctrine assures that if we have a credible enough threat to the enemy we may never have to use it that's the hopeful idea that you if we make a credible enough deterrent to censor their protocol then we may never never even have to suffer censorship in the protocol but that that threat has to be credible we have to inform these exchanges that we do not tolerate censorship in the network in order and we have to make a credible description of how we're going to address the situation in which they're censoring the protocol because what's the alternative like what is the reason that ethereum has any value I think like a lot of people say well it's because you buy ether so that you can run smart contracts on the platform I actually don't think that that's the primarily primary driver of value in ethereum I think ether the asset is valued because Bitcoin is valuable Bitcoin is valuable because it's a non-government asset that you can transfer to anyone in the world it's not regulated by the government who you can transact with and the reason that ethereum is valuable is is because it's also addressing that use case so if we start censoring in the protocol what is even the what is even the value that is left in the ethereum system so I started a poll to see what's the how do other people in the ethereum community think about this so how should we act in a situation where binance coinbase cracking are censoring the protocol are we just going to let them censor or are we actually going to Fork the protocol and delete those validators take and you can see that 61 percent of the 10 000 people that participated in this poll actually thinks that we should slash those attackers even metallic buildering voted for x and X was the um option of actually slashing the stake of the attacker and this had pretty much immediate results like just one day after Brian Armstrong commented well if that's the situation then we're not going to censor the protocol we're actually going to remove our validators from the system to avoid this situation altogether so we're already seeing that by pressuring them by informing them that if they censor we will slash their Stakes they do take a more dovish approach and say that we'll remove ourselves from the staking situation altogether this is very good we need to see more of this and this is how the Black Flag movement of ethereum started this is a symbol of resistance that informs validators in the protocol that if they don't preserve the values that make ethereum valuable we will destroy their Stakes right now we have the benefit that the chief legal officer of um coinbase doesn't think that there's anything in the ofac law that necessarily requires them to censor transactions but this means that it's basically up to the interpretation of coinbase's legal team whether or not this is going to be a problem right now they don't think that they have the censor but what if ofac the US government makes a statement that you cannot you're not allowed to process transactions that have any involvement with mixing services that the issue here the reason that this has become such a problem is because those mixing tools they're supposed to provide anonymity in the protocol are also being used by say actors like North Korea so the U.S government doesn't like that North Korea are using the same mixing tools that give you and me privacy and therefore there's a big chance that we're going to have to fight this at the protocol layer but what's really important to remember here is that not even Swift applies ofac regulations at the validator level and the reason for that is pretty simple you can't have a cross jurisdiction messaging layer or transfer layer for transactions that applies each and every regulation of each and every jurisdiction because in the if that was the case oh well then the EU can't process transactions that the U.S thinks are sanctioned and the US can't process transactions that any other member thinks are not allowed because you can't filter you can't you can't accommodate the regulation of each and every jurisdiction if you think about okay okay so can how do we how do we comply with North Korean regulation and Chinese regulation and U.S regulation all at the same time you're going to end up with a network that can't transact at all so what but what you can do is that those individual institutions like exchanges and custodians that are in specific jurisdictions they can still apply uh kyc and and abide by whichever regulations that they are required to comply within their jurisdictions but we cannot have a network level type censorship that is trying to comply with all different countries at the same time that type of system doesn't work to make transactions on so there is really no alternative here we have to preserve the neutrality of the protocol and the way to do that is by giving a credible threat to validators that engage in censorship by informing them that we will throw Fork the protocol and remove those validator Stakes already now there are validators in ethereum there are censoring transactions this is a chart of blocks that are being made by specific validators in the ethereum system and these missing green bars here these are validators that are completely avoiding to include any tornado cash transactions and you remember that chart that I showed you previously that the flashbots block Builder that is relaying logs to all the other validators to include in in the system they censor of fact transactions offic sanctions transactions in the protocol and it's very likely that just a couple of months from now we're going to have around 80 censorship in the ethereum system and we need to make sure that that figure doesn't reach 100 percent and so I think this is a good time to think about like what is the reason that you're interested in ethereum what are the values that brought you to this movement wasn't it always that decentralization and censorship resistance was the Key properties that made these assets valuable that made these any different from the existing traditional Financial system that is why I think that you should talk to other people that you you should talk with investors you should talk with your Founders you should talk with your colleagues in this industry try to make a good argument for why we have to make a credible threat to validators in the system not to censor the protocol I'm out of time I made it thank you