#25 Paradigm’s Thesis – w/ Charlie Noyes, Georgios Konstantopoulos and Hasu [+transcript]

Su is sitting out today, and I instead welcome Charlie Noyes and Georgios Konstantopoulos of Paradigm, one of the largest investment funds in crypto.

We cover a lot of ground in this episode, including

• How Paradigm can so consistently identify and back the category-defining protocols and companies in crypto
• MEV and how it can be mitigated, including some actionable advice on how you can avoid getting sandwich-attacked today.
• The new features and remaining challenges of Uniswap v3
• Paradigm’s thesis for Cosmos and why each blockchain should adopt the IBC protocol
• Whether Bitcoin’s value proposition is still intact at a time where Bitcoin dominance is at an all-time low
• Our personal “wishlists” for Bitcoin improvement proposals, and whether Bitcoin will ever go to PoS

Hasu 0:00
Welcome to Uncommon Core, where we explore the big ideas in crypto from first principles. The show is hosted by Su Zhu, the CEO and Chief Investment Officer of Three Arrows Capital. And me Hasu, a crypto researcher and writer. Su, my regular co host, is sitting out today, and I welcome instead on the show Charlie Noyes and Georgios Konstantopoulos, of Paradigm, one of the largest investment funds in crypto. We covered a lot of ground in this episode, starting with how Paradigm can so consistently identify and back the category defining protocols and companies in crypto. Next, we talked about MEV and how it can be mitigated, including some actionable advice or you can avoid getting sandwich-attack today. Then we moved on to Uniswap V3, discussing its new features and remaining challenges. We also discussed Paradigm’s thesis for Cosmos, and why each blockchain should adopt the IBC protocol. Finally, we had a really interesting and spirited conversation about the value proposition of Bitcoin, and whether it is still intact at a time where Bitcoin dominance in the market is at an all time low. This led us to compare our personal wish lists for Bitcoin improvement proposals, which was a lot of fun. Enjoy.

Please introduce yourselves, maybe starting with you, Charlie.

Charlie Noyes 1:28
I’m Charlie. I’m on the investment team here at Paradigm and have been for about the last three years now. Before that, I worked at another crypto focused investment fund called Pantera. And before that, I was at MIT.

Georgios Konstantopoulos 1:41
Hey, everyone, I’m Georgios, I do research at Paradigm where I also work very closely with our portfolio companies. Before that, I worked with many crypto companies doing their architecture code, code reviews, so anything on the technical side, and before that I did some security.

Hasu 2:00
Paradigm is, I would say, the fund in crypto that more than any other fund has the image of being able to predict the future. For example, you have been early to the AMM space, the lending space, the stable coin space. And now layer two and MEV. What is your secret?

Charlie Noyes 2:33
So I don’t think there’s any secret recipe. I do think that Paradigm is unique in affording everyone here the opportunity to go as deep as they want in any rabbit hole that they want to jump down. So I think maybe the best example would be like Dan Robinson met Hayden really early on, just as Uniswap was getting the Ethereum Foundation grant in like early 2017, late 2018. And basically fell in love with xy=k. And, you know, over the last three years, I think Dan did basically did everything from helping to formalize, you know, the initial protocol spec, do a lot of analysis on it. And, and there were some opportunities for other folks on the team to collaborate with him on that, like the fee paper I published with Tarun Chitra at Gauntlet and Dave White’s solution to the problem we posed, and then finally got culminating in in Dan’s Uniswap’s v3 contribution, you know, basically designing that protocol. And I think that represented that was, you know, really like the culmination of three years spent down that rabbit hole, which is pretty incredible. Also on the team, like I spent a good amount of time on on MEV myself. And, you know, we were able to translate that into Flashbots. Dave White, who we brought on for after he solved that Uniswap fee problem, recently, has been spending a lot of time on perpetual products and funding rate based products. Published, like a pretty fantastic overview, perpetual futures that actually clarified for me some of the things I wildly misunderstood about how they worked. And and yeah, so just generally, I guess, like, you have to spend time down rabbit holes. And I think that makes Paradigm pretty unique.

Hasu 2:51
So what are some rabbit holes that you’re going down right now that haven’t led to any investments yet?

Charlie Noyes 2:51
So Well, I guess one really interesting thing that came out recently was Dave White just published, basically a new financial product called Everlasting Options based on funding rates, and to reroll options, rather than needing to exercise them at discrete points in time. It was interesting for a couple of reasons. First, you know, a deep rabbit hole that he came out of with, potentially an entirely novel financial product, and drawing on some of the concepts that we as a firm have spent a lot of time thinking about, like in Maker’s case, you know, the funding rate, the interplay between the DAI stability fee and the DAI savings rate is, is, is an argument that Dan and I have had many times.

Hasu 2:51
It’s also one of the first arguments that we ever had, like the argument about negative interest rates, one of my absolute contact points with Paradigm.

Charlie Noyes 2:51
I forgot, yeah, you’re actually there for that. Yeah, so that was super fun. And then, you know, after last summer, we made an investment in, in a protocol called Reflexer, which has sort of an automated control theory based interest rate component. And I think that was sort of a prepared mind, you know, having spent a lot of time thinking about stability fee in the context of Maker and what could make sense there. And now with Dave’s Everlasting Option proposal, perhaps there will be the opportunity to draw on sort of all these various different concepts, you know, in areas that folks on the team have spent time rabbit holing down over the last three years.

Hasu 3:27
And I would say you’re probably also one of the most hands on companies. So can you give an example of how you would work with a with a portfolio company?

Charlie Noyes 3:36
We help a lot of portfolio companies with mechanism design, Georgios helps with writing code. I do not. Sam is like an audit God. So I think we are pretty hands on. It kind of depends on the needs of the project. Like, we have everything in our portfolio from super early stage, and like kind of far out there very crypto native things to like, what you might call traditional companies. And, you know, I think we just try to help out however we can.

Georgios Konstantopoulos 4:13
Yeah, exactly. And this kind of very hands on approach either helps us make sure that the companies that work with us get the optimal result out of their effort.

Hasu 4:22
Recently, you have been working with Optimism. What have you done for them?

Georgios Konstantopoulos 4:27
Yeah. So in Optimism’s case, what happened was that there was lots of organizational complexity due to having working on multiple code repositories. So I undertook like a project where we could combine all of these repositories into a mono repo, and automate completely the versioning and deployments of Optimism systems. And this kind of lets us minimize errors that occur from manual processes, where you know, some developer runs a command locally. And this was an example for example, which the company was kind of resource constrained at the time. So many things happening. Everybody wants to build something on Optimism. And basically, there was nobody available in their team that could do it. And I said, Okay, why? Let me do it. I’ll work with you for 2-3-4 weeks, however long needed to get the job done.

Hasu 5:19
Did that produce any like generalizable learnings or processes that could be applied to other portfolio companies?

Georgios Konstantopoulos 5:27
Definitely. So throughout that the whole automation and kind of organizational aspect of complex code bases like Optimism’s, definitely carries over to towards, you know, making sure that these mistakes are not repeated in other cases.

Hasu 5:42
So to take a turn here and dive a bit into the future of crypto because I feel like that’s sort of what what our listeners would most like to hear from you sort of hear the future from you before it happens. And a big topic that you saw coming years ago, both of you, is MEV. Could you maybe give a short into about what MEV is?

Charlie Noyes 6:08
Yeah, MEV is miner extractable value. And its the idea that there are profitable opportunities to order transactions in specific ways. And alternatively, I guess you could think of it as that certain orderings of transactions on a blockchain are more profitable for the sequencer than others. And this creates incentives for I think, on Ethereum today, we mostly see arbitrage bots, or we have mostly seen arbitrage bots competing in transaction fee auctions to be able to get, you know, their transactions in front of things like DEX trades, front running, and now we’re starting to see miners more directly participate in this. But I think generally, you can just think of MEV as like the profit opportunity, you know, of some transaction ordering, and that miners / sequencers / validators, depending on the context that you’re in, whether it’s proof of work or proof of stake blockchain, or even in layer two, can access given their power to order transactions arbitrarily.

Hasu 7:16
Yeah. And as I understand the extraction of this MEV, that’s something that’s very hard to avoid, but the way that it is extracted produces some negative externalities for the respective blockchain. Maybe Georgios, could you walk us through what those negative externalities are? And what options there are sort of to minimize them?

Georgios Konstantopoulos 7:39
Yeah, of course. So the main negative externality, which is a byproduct of MEV is that when there is many, let’s say, arbitrage bots, that would go after the same opposite arbitrage opportunity, only one of them will be able to take it. And while everything else ends up being a reverted transaction, the implication of that is that the blockchain ends up having lots of junk transactions, which don’t do anything. And that’s redundant computation. That’s redundant storage. It’s not great. So that’s the first one.

The second one is that due to MEV, and again, MEV creates these priority gas auctions. The bots end up paying exorbitant amount in gas prices for including the transactions. And this ends up pushing up the average gas prices on the network. So in a way, there’s a negative externality towards the user itself, the previous one was a negative externality to the protocol. And then there’s the final negative externality of just the peer to peer layer having lots of transactions that don’t end up mattering.

Hasu 8:49
What is sort of the downside of you know, having a flooded peer to peer layer?

Georgios Konstantopoulos 8:54
I mean, ideally, ideally, you don’t, your node just ends up using more bandwidth.

Charlie Noyes 9:01
Okay, yeah, to like the debate that’s happening that has been had in the Bitcoin community in the past around like the costs of running a full node. And like the cost of decentralization within a network, there’s, I think there’s some argument that like p2p layer congestion, it does raise those resource costs. And then depending on like the form of MEV, it kind of can get more extreme. Like in the past, we saw something called back running, which was basically like, if you have a bunch of transactions with the same gas price, the one that’s that ends up getting included directly behind another is functionally random, or was at the time based on like the default gas config. So you end up getting people basically spamming transactions actually on chain. So rather than just competing directly, you know, on the transaction fee as you can with like a front running style of MEV. So the exact negative externality depends on the context. But there are a bunch of interesting ones.

Hasu 10:03
Hmm, this may be my subjective experience, but I feel like it has also become harder to make, like low fee paying transactions on Ethereum. Because I feel like those, then you broadcast them, but it’s no longer possible to wait for three days, and then that will get executed. I feel like, like when you send them to the infura node or whatever, it gets booted from the mempool. And if your own node doesn’t rebroadcast it, then you know, it’s just never gonna get executed. And would you say that’s also a negative externality of having just too many transactions flying around relative to the capacity?

Georgios Konstantopoulos 10:35
It’s a UX degradation for sure.

Charlie Noyes 10:37
Yeah. And I think it highlights, like, a lot of the infrastructure just was not really designed with like eventuality in mind, like, put another way, like, you know, we have a high degree of reliance on infura, like across the ecosystem, and some other folks like them, and I don’t think it’s their fault in any way. But I but like the MEV stuff has just kind of exposed a lot of like gaps in in the architecture. And in sort of, you know, they get worse at scale.

Hasu 11:08
Yeah. And there’s one project that’s actually trying to improve this infrastructure and mitigate the negative externalities, and that is Flasbots.

Georgios Konstantopoulos 11:18
Flashbots is basically a research collective with the mission of democratizing MEV and reducing its negative externalities, which we already talked about. Flashbots projects, let’s say, our MEV-Geth, which is a fork, or a patch, on top of the normal Go-Ethereum client implementation, which allows users to submit transactions to a kind of like overlay mempool, not the one where everybody competes for gas prices, but one, which is only for MEV transactions. And so what’s happened, what’s been happening with Flashbots is that they have gotten miners on board right now they have over 85% of the hash rate on boarded. And this means that traders are able to submit transactions to miners and compete with each other without having to at the same time kind of compete with normal non-MEV extracting users for inclusion.

Hasu 12:24
How does the auction mechanism work that’s used in the MEV-Geth mempool?

Georgios Konstantopoulos 12:32
it’s a sealed bid auction, you bid on a bundle of transactions. So and basically your bid is the average gas price multiplied by whatever you consume. And you we allow users to submit bundles of transaction. So you know, it’s not just you submitting one transaction, you can submit 10, or 20, or 30 transactions. And this has an interesting implication that by being able to submit more than one transaction, you can either do something like account abstraction on Ethereum, where you can send a transaction with a zero gas price from one wallet. But you can have a follow on transaction from another wallet that pays the fee. You can also do sandwich attacks more efficiently, which is a kind of attack that you can do on automated market makers to force traders to get the worst execution price that they can

Hasu 13:24
Let me interrupt you there for a second. Is that because you can see the trade that you sandwich in the mempool. And it’s already signed. So you can take it and you can take it and put it in your own bundle?

Georgios Konstantopoulos 13:34
Exactly, exactly. So it’s basically like the bot checks the mempool, picks up the transaction at once, creates the sandwich and serves the sandwich to Flashbots.

Charlie Noyes 13:44
It might be worth saying like, I think the DEX sandwiching example is probably the best to like build up from like to build up from like, quote, unquote, simplistic extraction to like the maximum that you could possibly do and like how it changes in different contexts. So like, you know, we started with, I make a DEX trade and like Georgios an arbitrage bot gets in, gets into a gas auction to get his trade directly in front of mine and frontrun me. That’s something that you can do without being a miner or without being like a Flashbots bundle. And we’ve seen that for the last year. Now ideally you would be able to get a trade both in front of and behind the DEX transaction right, not just in front. However, there is no like there’s no way to to compete for that priority in like the native Ethereum gas auction it just like it doesn’t work that way. At one point like I mentioned earlier, like the default geth config, randomized transactions basically that were of the same gas price so you started to see people competing in auctions on the front and then just spamming transactions on the back to try to do sandwiches without Flashbots. But with Flashbots gives you the ability to do is that within the bundle you can just say okay, like my for you first transaction here trade and then the background without needing the the auction or the spam,

Hasu 15:06
A crucial part or attribute of the bundle is that it has to be either executed completely or not at all.

Georgios Konstantopoulos 15:13
Yes.

Hasu 15:14
Could this also be used to, let’s say set a very low slippage tolerance on a DEX trade, and then this next thread only executes when sort of the trade can actually get filled? Because you know, otherwise? Yes, that’s the problem, right? why people don’t set lower slippage tolerance, because then their transactions fail too frequently.

Georgios Konstantopoulos 15:33
Yes, transaction on Flashbots does not like – if it does not get picked for a bundle, it remains in the pool of bundles. So yes, what you said, definitely is possible. And I think that like most traders, MEV traders or not, should just use Flashbots.

Hasu 15:51
So you would have to make the bundle conditional on the DEX trade being executed successfully.

Georgios Konstantopoulos 15:57
You have would have to add a smart contract to execute your trade…

Charlie Noyes 16:02
Which I think ArcherDAO does this, right?

Georgios Konstantopoulos 16:05
Yeah, yeah,

Hasu 16:06
I don’t fully understand what they do. It’s not the same as Flashbots I think

Georgios Konstantopoulos 16:10
in a way all of these application layer MEV mitigations, they work by introducing a smart contract, which kind of encodes all the rules about when the MEV opportunity should be fired. And if that transaction, and if that condition does not pass the transaction never gets minded.

Hasu 16:33
Couldn’t you just do it like this: You have one transaction that that is like zero slippage DEX trade, and then the fee is paid in the in the currency that you buy on the DEX. So that’s how the that you have just two transactions, no smart contract needed? Wouldn’t that also satisfy the condition?

Georgios Konstantopoulos 16:51
That is possible, but right now, the profit calculator only uses ETH.

Hasu 16:57
Okay, but when you buy ETH on a dex, then you can do it this way.

Georgios Konstantopoulos 17:01
Yes, yes.

Hasu 17:02
Okay, cool. So DEX takers, actually, regular DEX traders should also use Flasbots already. Nice. I feel like nobody knows about this.

Georgios Konstantopoulos 17:11
I think this has to do with the fact that most of them user interfaces, right now. They are built around the experience of sending a single transaction. Whereas this experience that you described, the gasless one, involves two transactions. So you’ll need some sort of service that detects the transaction gets submitted, and then lets you do it. This is like literally some infrastructure that needs to be built.

Hasu 17:35
Okay. So if I want, I trade a lot on DEXs, if I want to do this, like later today, what, what do I have to do? Is it too difficult right now?

Charlie Noyes 17:44
Call Georgios?

Georgios Konstantopoulos 17:46
I think, yeah. If somebody likes this idea and wants to build it, yeah, we can talk.

Hasu 17:53
Okay.

Charlie Noyes 17:55
So do your original question Hasu. On, on, on, why is MEV inevitable? So one other interesting anecdote, you know, with the slippage tolerance, stuff that you can set on Uniswap trades natively, or on DEX trades natively, ignoring Flashbots, in the last couple months, we actually started to see arbitrageurs intentionally causing them to fail and revert IE saying, well, this person sent a 1% slippage limit, and it only cost me like a few dollars to you know, force their trade to fail. And I expect that if I do this, they’re then going to come back and set a higher a higher slippage limit, and then I’ll be able to profit off of it. So like, that’s a pretty that’s that’s a that’s a very interesting situation. It’s not an instantaneous profit. It’s, it’s, it’s, I don’t know, I think I think it speaks to kind of like the nature of MEV. The reason to me that it feels inevitable is that like, there is sort of an unknown upper bound on like, how much potential profit is available from doing this. And then there’s like pressure that builds up over time. As people get better at like the market gets larger and larger, arbitrageurs get better and better at extracting this, our understanding of MEV improves, and it becomes clearer what you could do. So like with the back running example, again, there was like the geth, config randomized transactions at the same gas price. This caused people to spam transactions because, you know, the raise the probability that we’ll be able to backrun, some given one, then the config got changed, such that this was no longer like the spam was no longer incentivized. And, like, very quickly, you started to see adoption of, of alternatives.

And like, over time, I think, you know, it’s sort of like, there is some, hopefully stable equilibrium at which, like, the network doesn’t just completely degenerate to like, In unusable state or like something ridiculous like like infinite time bandits, and and then there’s sort of like a very naive state in which you assume that like, people in general aren’t going to do this thing, or do these kinds of things. And we’re going to be honest, I think that hypothesis like the honesty hypothesis has been basically definitively proven false at this point. Like, we know that people, miners, arbitrageurs, whatever, you know, are going to want to go do this to some extent. And then I think the question becomes, like, can we find some stable equilibrium? Or is it going to degenerate, and there’s no real option to like, stick on the current because we’re already, you know, sort of trending further and further in that direction.

Hasu 20:40
What you described, where someone, especially a frontrunner or sandwich attacker, who has like very tight grip on a certain trading pair, where they then make deliberately make a trade fail, make a second trade fail, just an add on the third one to then sandwich based on the highest slippage tolerance? I would say like, that’s a multi block sandwich-attack. Right. And we have seen very little of that so far. What do you describe what I would say that’s maybe one of the first examples. However, when we are moving to proof of stake, after the merge Ethereum’s consensus will change in a very fundamental way, namely, who will produce a certain block will be known in advance. So basically, you can have, I know, the next like, I’m next to make a block. And then it’s Georgios’ turn. And then it’s Charlie’s turn. And if we cooperate, then we basically control the next three blocks. And there’s no like probabilistic thing there at all right, the Poisson process that we have in place today, that makes this harder will be completely gone. So how does this change the, you know, the nature of MEV?

Charlie Noyes 21:54
That’s a great question.

Georgios Konstantopoulos 21:55
There’s two angles here. Right. So firstly, there’s the angle that because if validators are known ahead of time, there is an incentive to collaborate and try to to collude, and so on. So I think that’s a valid point. If validator ordering is known, that’s not great. And so the only thing right now, I don’t think that’s supported by Ethereum 2. But there is, like, an arm of a branch of research that does that is on secret, private, like election of validators. And so if you were to apply that, you would bypass that limitation. In a similar vein, Tendermint and other chains have like a VRF module, which allows them to randomize validator election.

Charlie Noyes 22:48
I’ll give you an unsatisfying answer. I think I think we have to make, we have to hope the same thing that we do currently with Ethereum miners, which is that they’re not going to intentionally reorg blocks. So far, they haven’t. But I would say that with respect to, you know, known block producer, election in a proof of stake world at least before to Georgios point we implement, like a secret election scheme, hopefully it doesn’t happen, or if it does happen, we very quickly have a way to randomize that. That’s a great question I actually haven’t heard someone ask that before.

Hasu 23:21
Georgios, I have a bit of an operational question, since you are very familiar with the EIP-1559. So after this, sort of many gasless transactions won’t really be possible anymore that are possible today. Because then every transaction will have to burn some amount of ETH. What is sort of the interaction with Flashbots and these kinds of gasless transactions?

Georgios Konstantopoulos 23:47
What you said is correct. So post EIP-1559, each transaction will need to burn some ETH from the sender’s balance. Their short answer, which is more immediate is that there is an another EIP-3074, which would allow you to authorize another account to pay your fee. So if that the EIP were to be adopted in the presence of EIP-1559, then you would still be able to pay from any other account. And the process for Flashbots, would be that the trader would authorize the miner to pay the fee for them.

So that’s the one part. The other part is that you, instead of having the current model where each user has to pay ether from their wallet, the model could in the future change to the block producer needs to burn some ETH from their wallet. And that’s it. And then the block reducer individually negotiates with its users on how they will cover his costs. But the block producer ends up being like the central party that has to pay them the fee. And that kind of makes the issue with EIP-1559 non existent.

Hasu 25:06
Yeah, I actually tried a while ago to make a trade with zero gas that had some slippage tolerance. So I tried to get a try to pay via worse execution on Uniswap but it didn’t yet work.

Georgios Konstantopoulos 25:19
You wanted to get intentionally front run so that they … Right, right,

Hasu 25:24
Correct. I didn’t have I didn’t have any ETH in that in that account. So I thought, why not give it a shot.

Georgios Konstantopoulos 25:30
There is a nice blog post on ETHresearch by Lakshman Sankar, who explains like this kind of technique that you can frontrunners into putting your transaction on chain.

Hasu 25:42
Yeah, yeah, we’ll link to that in the show post. That’s a great call. So we talked about MEV. And the biggest source of MEV is actually the decentralized exchanges on Ethereum. And especially like liquidity being spread across multiple exchanges, which then allows for these arbitrage opportunities between them, where front bots basically front run the price on one exchange, where trade happened to be out of line with the other exchanges. You guys have incubated Uniswap, which is the biggest, the biggest decentralized exchange by far and not just in terms of adoption, I saw, you could say, so they made the DEX space. And Uniswap has a new version coming out now. Georgios, could you describe what’s new in Uniswap v3?

Georgios Konstantopoulos 26:33
Uniswap, V3, its biggest feature, or rather difference from v2 is that when you’re providing liquidity, you get more capital efficiency. What this means is that instead of providing liquidity to the entire price range, as was in Uniswap V2, Uniswap V3 allows liquidity providers to provide liquidity between a certain range. And they’ve been calling that concentrated liquidity. And what this implies is that if you have, let’s say, 1000… a pool let’s say with $1 million worth of liquidity. In Uniswap V2, you, you would be able to make, you know, some trade off whatever, like depending on the x, y equals k formula. But in v3, if the liquidity is concentrated between, let’s say, 0.99, and 1.01, such as would be in the case of a stablecoin pair, perhaps like Curve, then maybe then you can get the same amount of like, price impact, like for some for some trade, but with much, much less liquidity. And this directly translates to capital efficiency. So that’s one big feature of Uniswap V3. Another feature, is the rework on the oracles, which allows you to statelessly get arbitrary sliced TWAPs over the last week, I believe, or sorry, whatever 65,000 blocks, attributes do. So better price oracle’s using Uniswap V3’s liquidity. And we like we think that’s one of the most understated features of it. And one or one could say that with Uniswap V3, basically, you you start to approximate something that looks like an order book at time. So basically, instead of having an AMM curve, which is very smooth and follows a certain equation, now it is made up of like many smaller curves between all the ticks that get covered.

Hasu 28:40
Okay, so when I’m in an LP in Uniswap, and let’s say like the price of ether goes up by $500, then how do I ensure that my liquidity is the centered around the market price, and I’m not left behind.

Georgios Konstantopoulos 28:52
So it doesn’t, it cannot get down automatically. Right now, if you’re a liquidity provider, and the price moves outside of the ranges that you’re providing, you would need to kind of poke your smart contract your position and reposition it around the new price. As a result, it could be probably expected that yield aggregators or other sorts of outsourced infrastructure would exist, and start to kind of do these services for you. So in a way, the v3 construction, and the fact that positions may need to be more actively managed means that there will be a whole new ecosystem implosion on top of it.

Hasu 29:33
Do you see any risk that Uniswap V3 will sort of kill the lazy liquidity providers?

Charlie Noyes 29:40
I think it’ll become more competitive, and there’s gonna be a gap between, you know, the most sort of efficient and competitive liquidity providers and those that don’t want to put as much thought into it. And I think there already is, to some extent, like you see people taking, you know leveraged positions to be able to provide more liquidity For a given capital base in Uniswap v2, but But obviously, v3, like the delta is going to get much bigger. And I think that probably, there will be, Well, hopefully, there will be a proliferation of new types of aggregators that basically like impro, implement, you know, LP strategies for different pools that are more competitive than just sort of like the bog standard x, y k, full spectrum default, I think that’ll be quite interesting. And, and it’ll mean that, you know, it’s, it’s not like, like, quote, unquote, normal users are kind of just stuck with, with one option relative to a bunch of much more competitive market makers. I think it’ll be more interesting than that long term. You know, I think it’s hard to say, though, like, how the split will work out, hopefully, it’ll still be, like, less, hopefully, it’ll still give more of an opportunity for for normal folks to participate, then you see on like centralized limit order books, where, and like, you know, back in 2015, I was like market making on on GDAX, or at Coinbase Pro now. And I’m certainly no longer doing that. I don’t think that any normal person really is. And, and hopefully, that will still be possible, to an extent on Uniswap long term.

Hasu 31:31
So Georgios mentioned that yield aggregators could sort of provide active LP management strategies for people. What are some other infrastructure projects that you would like to see built on top of Uniswap, that you think are low hanging fruits right now?

Georgios Konstantopoulos 31:47
Generally, there should be tooling around managing liquidity, whether that is for following the price, or whether that is for adjusting your quotes as they are their relative market changes. Right now, the basic smart contract only lets you input like a specific one, like a specific range. And that will be for one position, but it does not let you, for example, create the full distribution of your records that you want to do, but to participate in the market with. So that kind of tool would be something that’s missing. Something that does like more extensive simulations on LP returns, maybe there’s work to be done on how LP returns, the optimal LP returns for uniswap change with v3. And that might build on Charlie, and and Dave’s previous work.

Charlie Noyes 32:38
I think also yield forming stuff. It goes from being one big, you know, homogenous pool, to very heterogeneous and and and the current uniswap. You know, liquidity mining, base liquidity mining programs. I think I think there’s gonna be very interesting stuff to be built around that. And Uniswap V3.

Hasu 33:05
Yeah, I mean, implementing yield farming on current Uniswap. Right, what they did when the uni token launched, is very trivial. But now, it seems to be much harder to even do the same thing, right? Is that a solved problem, or how to even do yield farming on top of Uniswap V3?

Georgios Konstantopoulos 33:23
So right now, there is no canonical yield farming contract that’s in the public, as far as I know. But and the main challenge rather, is that you need to figure out when a position is in range, so that you properly paid. And recently in the I think, less than a week ago, there was a PR merged on the Uniswap V3 periphery, v3 core repository, which changes the logic and enabled that so all the pieces are in place, and somebody has to build the canonical Uniswap V3 liquidity mining contract.

Another thing. Another thing that would be nice to be implemented as LP shares as collateral in lending protocols, like Maker or Compound. And pricing these is slightly harder than how you would price the normal v2 shares. So there is some work to be done on that.

Hasu 34:23
Right, that was actually one of my first questions when I saw the the white paper for Uniswap, V3 was whether this would make sort of leveraged yieldfarming obsolete. Sort of this like I feel like when AlphaHomora came out, just sort of so insane success that I wouldn’t have predicted at all. But then I realized after talking to Dan that basically Uniswap V3 makes leveraged yieldfarming obsolete anyway, because the police positions are already implicitly leveraged and way higher.

Georgios Konstantopoulos 34:57
Exactly, the tighter the range you’re providing liquidity to the higher your leverage.

Hasu 35:03
Yeah, that’s when I actually became bearish on AlphaHomora instead of an Uniswap, V3, when I realized that they are both competing in the same thing, which is concentrated liquidity, right, that’s all the leveraged funding actually gives you is concentrating your liquidity around the current market price. So you get more transaction fees, and more yet, yeah. Though I take it that Uniswap V3, it does require a lot of transaction overhead, right, you need to constantly message your.. like the Uniswap pool where your liquidity is in. Depending on market market conditions, and do you think this is even viable, on layer one, or will Uniswap V3, only, like fully, like, come into, you know, shape on L2?

Charlie Noyes 35:54
I think it’s certainly viable, because the base case is just as much interaction, as you see on uniswap. Today, if everyone you know, is just full spectrum, x, y k, and then in terms of the trade offs to like fees, costs of adjustment, frequency, and, and all that stuff, I think it’s just a like market discovery process. So it will definitely be more efficient, I think, fair to ask how much more efficient and probably difficult to say before, you know, we got some some kind of data in the wild.

Georgios Konstantopoulos 36:29
For sure, like lower latency and lower fees mean, that LPs will be comfortable with adjusting their positions more frequently.

Charlie Noyes 36:37
Yeah. Yeah,

Hasu 36:38
I am mainly trying to understand like, how big is the on-chain footprint of Uniswap V3 actually going to be? It feels like, there’s a lot of incentive for LPs to constantly update their positions, leading to a lot of transactions.

Charlie Noyes 36:54
I think that’s true. I think it’s also true, though, of many of the strategies that are implemented by like, yield farming aggregators today, like one of the biggest value propositions is socializing gas costs, and minimizing transaction overhead by pooling, I think I’ve also returned Uniswap, V3, like there will be a higher transaction footprint, and, you know, it’s like a question of like, how much higher, you know, relative to how efficient you want to get, and then I’m able to, you know, with much lower latency and much lower fees, like the markets will be more efficient. And then there’s some question of like, trade offs to, you know, whether whether you’re just there to simply trade or you want to buy the asset to use it in other protocols, and then need to, to move back to the main chain. So, I think there are a bunch of, I, I don’t really view any of those as, like, potential showstopper issues more. So just the kinds of things where like, we’re kind of going to have to see what the market prefers in practice, and like, perhaps, you know, like, a lot more usage comes from like, highly composable, like, main chain necessary activity, then we might guess, today, perhaps a lot more of it is just purely trading based, and really doesn’t care, you know, at all for anything other than speed and efficiency. And we’ll just prefer to know, you know, like, we make guesses, but it’s just, I think, the kind of thing where, like, it’ll be interesting to observe

Hasu 38:22
Based on what you set out. So realize that, we will probably see a lot of bundled liquidity in some sort of smart contract and then executes these active strategies. And it sort of puts it all bundled it all into one transaction. Yeah, though, have you thought about sort of the front running aspect of … providing liquidity to Uniswap V3, because the miners can obviously, like, put in, like, update their quotes? First and foremost, do you think this was sort of make miners as the primary liquidity providers?

Georgios Konstantopoulos 38:57
Miners? Flashbots users? TBD, I think,

Hasu 39:01
Yeah. Okay. But we can say that it’s getting harsher out there.

Charlie Noyes 39:05
It’s getting harsher out there. And I think the dynamics also, are, are so complex, that it’s, it’s, it’ll be interesting to see what happens.

Georgios Konstantopoulos 39:15
But I mean, it’s not bad necessarily, right? If the liquidity ends up being very concentrated, yes, you will end up taking a 2% slippage fee. But that might be you know that or whatever your transaction was. But maybe that means that there the base fee that you end up paying, like for every transaction ends up being, you know, the minimum acceptable slippage by the market.

Hasu 39:40
Yeah, right. I’m just for the LPs I’m concerned that, you know, for every trade that pays a fee, the miner can just almost fill it completely. And then for trade that moves in the other direction, they can always pull out the liquidity. Yeah, I guess I mean, for users, maybe this is great. I don’t know. I think it’s fascinating to speculate about, but I have no special insight and no strong intuition about how any of this is going to play out.

Georgios Konstantopoulos 40:06
And also, just to say the obvious, you know, all these attacks need to be weighted against all all the other benefits that you get. And it seems to me that the benefit here is it’s very much worth any additional complexity introduced the ultra. Yeah.

Hasu 40:20
Also staying with front running for a second. So we talked about one way that frontrunning is going to be mitigated and some people already mitigate it today on the peer to peer layer via gasless transactions. Do you see what are sort of the options that we have to further minimize this problem on on one the application layer, and to also maybe on the protocol layer in the future?

Georgios Konstantopoulos 40:48
Yeah, so we can think of the mitigation layers for MEV as three, three layers. Firstly, there is application layer, which is things that KeeperDAO and ArcherDAO are doing, then there’s the network layer, something like what Flashbots doing by introducing a new API endpoint for transactions. And then there’s also the protocol layer, which is basically introducing ordering introducing randomization in the transaction ordering, or kind of splitting the processes of ordering and execution. Where approaches here include either the threshold threshold cryptography, sorry, using a random beacon to kind of randomize your transactions, others are using a, you know, a VDF others, are we threshold signatures, you can get creative on that layer.

Are we going to see any of those in Ethereum? Maybe on layer two?

On layer two, I think that’s possible on layer one, may be some randomization based on an insecure random random number, maybe the previous block hash or something, maybe maybe it’s good enough. It won’t be a perfect solution. But maybe you do maybe like having something that’s half good. Is better lunch. That’s cool.

Hasu 42:09
Yeah. So we addressed the peer to peer layer. I became sort of curious what’s possible on the application layer? So maybe, are there any… can you construct the DEX in a way, for example, using batched auctions? or something of that? Yeah.

Georgios Konstantopoulos 42:26
Yeah, exactly. I think the best way to think about it is that when trading on a simple AMM like Uniswap, there’s only two variables that kind of determine your execution price, it’s the reserve one and the reserve of the other token, you, in order to mitigate MEV, you need to reduce the overlap between two users transactions. And this, you know, in uniswap, if there’s two users, they always touch the same to deserve values, because they’re always trading on one pair. Whereas if you have, for example, an order book. Now, again, in an order book, like in an order book to user still can go after the same transaction. But in a batch auction, everybody gets the same price independent of the order that they submitted their transaction. So here is another example of ordering and then executing.

Hasu 43:22
Wrapping up the next topic and changing gears here a little bit. Paradigm is pretty known to be big supporters of Ethereum. And in general, this has been the only other blockchain that you support, apart from Bitcoin. But there has been one exception, and that is Cosmos. So Charlie, could you walk us through your thesis to Cosmos and where you see it? Also in comparison to Bitcoin and ETH.

Charlie Noyes 43:51
So I think Cosmos is one of the few maybe the only project that is trying to enable like a vibrant application ecosystem with practical interoperability and sort of the other the other features that that have allowed DeFi to grow up on Ethereum to enable that kind of ecosystem without sort of providing like a new platform style blockchain. So if you think about Ethereum and many of the L2s that are coming out for it, and sort of like alternative, quote, unquote, smart contract blockchains. Essentially, all of them try to augment or offer like an alternative platform to Ethereum.

Cosmos is a bit different. It’s not like one blockchain. It’s essentially a set of tools in developer tooling and in various protocols that enable projects to launch on their own blockchain. And the reasons that you might want to do this are that it gives you more fine grained control over your environment, like both the execution environment and the incentives of the system. And I think that we’ve seen like with Ethereum that certain protocol layer issues like MEV, kind of necessitate like an application layer response. And that’s only possible to some extent, when you’re running on top of a shared platform, like no Ethereum application, at least not without great difficulty, can re architect like, you know, the fundamental sort of transaction ordering model of Ethereum. And Cosmos gives you the opportunity to do that.

Hasu 45:33
So is that something that you would do use Cosmos for? I would love to hear like one or two examples, maybe of applications that lend themselves specifically were to using an application chain on Cosmos instead of building on top of Ethereum.

Charlie Noyes 45:48
Yeah, and so maybe a few different examples, I think, like the Cosmos hub, and a few other Cosmos zones, how they refer to block individual block chains that run on top of the stack, that have DEXs like batch trades. And like enforced batched execution of trades in each block. So this is like, essentially a transaction ordering constraint that’s, like specific to the application, and effects front running. Like it’s, it’s a dynamic that, like you can’t accomplish on Ethereum. Today, at least not without VDF and a bunch of other like very fancy tricks. I think that would be like an obvious example of, of something that’s enabled by Cosmos.

Hasu 46:32
Right. But you do give up a lot in return. Right? So let’s say you build a DEX on an application chain on Cosmos. Is a simple way to explain how it is possible that you might use assets from other application chains on Cosmos, for example, the Cosmos hub?

Charlie Noyes 46:45
Yeah, so Cosmos provides the first generalized interoperability protocol that we’ve seen in crypto actually called IBC, the inter blockchain communication, protocol, and essentially, any blockchain with finality and efficient light client proofs. So most proof of stake blockchains everything within Cosmos, substrate based Ethereum, etc, can all adopt IBC and use it to implement like various different modes of interoperability, one of which, and it’s actually live today our cross blockchain asset transfers, so you can kind of think of it as a generalized bridge. If I want to build for example, a lending market within Cosmos like I can deploy that application to its own blockchain, perhaps I’m the only validator perhaps I pay some people to do that for me, whatever. And any user that wants to send, like, for example, atoms, from the Cosmos hub, or like Luna from Terra’s Cosmos zone, to my lending market is able to do that without really any without sort of by default.

Hasu 47:53
You said it’s basically like a generalized bridge. How How does this work in comparison to a trusted bridge, you know, one like WBTC, where we all know how it works on Ethereum?

Charlie Noyes 48:05
I guess a couple of thoughts on that. The first we I think it’s probably better to think about it just in terms of like IBC as a generalized bridge, versus like idiosyncratic implementations, whether they be custodial in nature or not. So like WBTC, or like Solana’s bridge to Ethereum, or any of the Ethereum L2’s bridges to the main chain, or to BSC, or whatever, are all kind of like idiosyncratic protocols. They have different trust assumptions. Some of them are more decentralized than others. Some of them are more custodial and centralized. But like, broadly speaking, they are not like generalized or shared. And this makes it quite difficult to get, like efficient interoperability across a wide variety of platforms, you frequently have to route through, you frequently have to route through sort of like hubs. And you end up with multiple versions of the same asset on different platforms, depending on sort of the route that you’ve taken. IBC, in contrast, provides you the ability to, in a generalized fashion, basically make pairwise bridges with minimal trust assumptions.

Hasu 49:25
Cosmos does have a native token, ATOM, but it’s not necessary to use ATOM to create your own application chain using the Cosmos SDK. It’s also not necessary to adopt IBC and you know, to communicate with another blockchain in the Cosmos ecosystem. So one thing that I hear a lot is that value proposition of of ATOM is basically it springs from the Cosmos hub, which is a special blockchain, special zone, inside the ecosystem. Could you say something about the what is the The basically the thesis for the Cosmos hub?

Charlie Noyes 50:03
So there’s nothing inherently special about the Cosmos hub. And maybe that is what’s special about it. Sort of unlike in any other project, the Cosmos hub is not privileged by the protocol. It’s on an equal footing to any other zone, it does happen to sort of have natural centrality, or be a natural selling point for the development of the protocol. And for users and developers of other Cosmos SDK chains. And so today, it’s imagined that, or I guess, I should say, in the in the short to medium term, the Cosmos hub plans to provide like certain functionality that requires a high degree of trust and credible neutrality. So some examples of these would be bridges to like Ethereum, and Bitcoin. And then in the future, it’s imagined that the Cosmos hub will adopt a shared security model and […] towards a, an end state that looks likely broadly similar to like a roll up based ETH2 or Polkadot’s main chain, the mechanism for it just hasn’t been decided yet. They decided to build the rest of the protocol on the interoperability spec first, rather than like a main chain first. So it’s kind of just a different approach.

Hasu 51:31
What do you mean by shared security?

Charlie Noyes 51:33
Shared security in Well, the literal sense, like many blockchain protocols, I guess, many smart contract blockchains, like start with either a generalized execution environment that anybody can deploy applications to, or in the case of something like Polkadot where, sorry, in which case, like, you know, within that an environment, they sort of all share the same security that the Ethereum of the security of all Ethereum applications, you know, is uniform across the platform. And there are other examples of blockchains like Polkadot, which, although it doesn’t provide, like a generalized execution environment, or smart contract functionality, on its main chain directly, it does provide like a built in auction mechanism to allow different applications to bid for the rights essentially, to share security with that main chain, you know, which in theory has sort of like the most credible validator set and like highest degree of security. Cosmos in contrast to these approaches, like rather than starting with a shared platform, or an architecture, for shared security started with interoperability. And then, you know, it’s going to build towards, like, whatever long term vision makes the most sense, with respect to sort of like the network security topology. And so I think of them as just kind of like working towards likely the same end state from from sort of opposite sides of the problem.

Hasu 53:18
Aha. Okay, so we established that applications can build their own blockchain using the Cosmos SDK, but they are usually they are proof of stake blockchains. Right. So they need in order to generate security and finality. They need validators and how are they going to get those? And I think what you suggested is that they can basically buy validators from, for example, from the Cosmos hub, but also maybe from other, you know, other places.

Charlie Noyes 53:51
Yeah, I mean, I think that that’s like a, like a simplistic and like reasonable model for security sharing. Like in the short to medium term that doesn’t require life, sort of deep cryptographic or, you know, incentive design work. I think like long term, there is sort of an open question as to like, what an ideal, you know, like shared security layer for all cryptocurrency applications or different ecosystems of applications. You know, potentially different niches, depending on their use case. Looks like whether that’s a generalized execution environment, whether that’s a sharded execution environment, whether that’s like a roll-up centric ETH2 to whether it’s something like Polkadot, you know, with its parachain auctions, and things like the guys will have a likely experiment with multiple different models. One of the first will probably be leasing validator sets, without like, sort of more direct incentive engineering around it.

Hasu 55:03
What this then mean that sort of so I have my app chain, I need validators, I go to the Cosmos Hub. And I basically, they they already have their ATOM staked. And I just say, please validate my chain as well. And then that ATOM becomes exposed to double staking risk, basically. Right?

Charlie Noyes 55:21
Yeah, it’s essentially sharing the slashing risk. I mean, there’s multiple different, like modes you could imagine, one is purely social, which is, if a validator on the Cosmos hub, or a set of validators from the Cosmos hub, which have, like significant money and credibility at stake, you know, come and validate your chain, or you pay them to do that, and they become malicious. Like, that’s going to have social consequences. And I think is, you know, honestly, not that dissimilar of an assumption to, like weak subjectivity. But you can take it a step further, and you can actually couple their slashing conditions such that if those validators, you know, violate or like make an invalid state transition on on your blockchain, then they get slashed on the hub too. And you can tie the incentives together directly. And there’s like a very broad spectrum of potential protocols. In this vein, I think that like, probably many of them will make sense in many different contexts. And the Cosmos hub is like an interesting vehicle for their exploration.

Hasu 56:34
Yeah, it’s pretty interesting to think about a blockchain where, you know, the validators are not paid in… they don’t stake the blockchains native token. So it feels like they might maybe, you know, less incentivized to protect the health of the blockchain, if the token that they stake is not exposed to, you know, it’s not basically a bet on behalf of the blockchain.

Charlie Noyes 56:58
I’m not sure that I would fully agree with that. And but to the extent that that is true, it’s an incentive security issue that shared by like, well, any shared security layer, whether it be a generalized execution environments, or one that’s directly leased. I think that’s probably more of a general comment about non application specific security layers.

Hasu 57:23
Maybe the bigger point would be that this, you know, just the idea of application layers, doesn’t this force, application developers to be protocol developers as well?

Charlie Noyes 57:34
Well, I think they’re already forced to be protocol developers, I mean, in practice.

Hasu 57:38
And that is because they have to understand all the idiosyncrasies of the blockchain they’re building on or why?

Charlie Noyes 57:44
Well, they have to understand all the idiosyncrasies of the blockchain, they’re building on, like building on something like Ethereum doesn’t obviate MEV, or, you know, you know, sort of prevent your applications exposure to it, or other things like, you know, the communication layer. Like we have all the infura stuff, you know, we now have various different private memory pools and this type of thing. So like those, those are all sort of features that have like meaningful implications at the application layer, and that application developers are probably going to have to contemplate, like if they choose not to, it’s at the detriment of users. So I think they’re already kind of forced to be protocol developers, and many of them may want like more control over their environment and the ability to, you know, fit the protocol to their applications.

Georgios Konstantopoulos 58:39
I agree with what Charlie said, and I think that they a underestimated aspect of the Cosmos ecosystem is the SDK, which allows you to very easily build these chains, by using all the kind of community made modules for providing very common features that you will need when building a blockchain instead of having to rebuild them on your own.

Charlie Noyes 59:02
Yeah, and, you know, I might get in trouble for saying this, but like, even to the extent that you don’t like the Cosmos thesis, and and you’re not interested in building like a Cosmos based blockchain like, there are still many parts of the protocol that are probably going to be purely additive to everything in crypto like IBC as a generalized communication layer. Is the interoperability protocol that should be adopted by essentially everything. Like every, every, every blockchain and and so I think like, when you reframe the conversation that way, you can maybe start with like, are certain applet, certain applications going to want to build their own blockchain or have their own blockchain and design their own protocols? And if your answer to that is like, feasibly yes, then Cosmos is probably your best bet right now.

Georgios Konstantopoulos 59:54
In the same vein, I think it would be valuable for us to eventually have a Solidity contract or an Ethereum precompile for accepting IBC type messages.

Charlie Noyes 1:00:04
Yeah.

Hasu 1:00:05
On, what is the way that you would use IBC on Ethereum? Right now?

Charlie Noyes 1:00:08
Well, every single L2 and every single non-Ethereum platform right now has its own bridge. That doesn’t need to be the case if you adopt IBC. And any protocol […] can. So those should all most likely be replaced with IBC as as like a generalized spec,

Hasu 1:00:27
is this viable, Georgios?

Georgios Konstantopoulos 1:00:29
I think so currently, all the rollup systems, they, they either don’t have an interoperability protocol or plan right now for talking with each other. And they will either have to roll their own bespoke one, which will have to follow some kind of message format. Or they could try to leverage one of the existing ones. And I think that using IBC would be a good choice. Similarly, I think that interoperating, for example, with the Polkadot ecosystem, I think it would be valuable to adopt IBC over the XCMP protocol that they’re currently using.

Hasu 1:01:12
And is this a case of “there are 20 different standards? This is not sustainable. So here, let me make the 20… You know, the 21st standard?”

Georgios Konstantopoulos 1:01:21
I think that this is not the this is not a case of there’s 20 standards, and let’s make the 21st. This is the first or second interoperability standard that has been has always been the expectation, my opinion, that this should become the one thing for chains to communicate over?

Hasu 1:01:41
Why is it that all of those Ethereum layer twos don’t adopt IBC? Now, what is their, what is their thinking?

Charlie Noyes 1:01:47
I mean, it’s just relatively new.

Georgios Konstantopoulos 1:01:49
Because there’s so many things to do, and so little time, and it’s still very little very new as Charlie said, as a protocol,

Hasu 1:01:57
How difficult is it for an existing layer two to rip out their protocol and replace it with IBC?

Georgios Konstantopoulos 1:02:05
I think trivial because you would implement it as a smart contract. That’s the beauty of using smart contracts. They don’t require protocol changes, you just define it in your smart contract, which implements whatever you want. Well, for IBC, it is just a message format, more or less, and some validation rules on that message format. And that’s about it. And you would then need to maybe adjust your client code on how they would interpret that these messages. But I don’t think it’s a it’s a large overhead, assuming that you have clear semantics around the protocol.

Hasu 1:02:43
If we entertain this idea and say that IBC will be adopted by more blockchains in the future. What is the impact on the Cosmos ecosystem? Does it just, you know, do the borders disappear? Or what happens?

Charlie Noyes 1:02:58
I think it’s very possible that the borders disappear. I mean, there’s some joke that like everything is a Cosmos chain. That’s like not really a joke. Because Cosmos doesn’t privilege any chain. Like we said, at the hub, it’s not special in any way. And neither neither is Ethereum. If Ethereum, or any application developers on top of it decide to support IBC and interoperate in that way. I think like, again, philosophically, you know, if Cosmos works, yeah, it won’t have borders, and it will make it possible for the first time to like in a reasonable and practical manner interoperate between different blockchains without like, a bunch of idiosyncratic middleware. And I think that’s that’s not a question of like dissolving Cosmos borders as a question of dissolving like borders between all blockchains

Hasu 1:03:53
so Cosmos is like a bet on blockchain globalism?

Charlie Noyes 1:03:57
Sure. Yeah.

Hasu 1:03:59
I guess it doesn’t privilege any blockchains but what about Bitcoin for example? I mean, could Bitcoin ever adopt IBC? Or will it forever?

Charlie Noyes 1:04:08
No. No, I want Bitcoin could choose to adopt IBC by having like a, like a precompile. And like, like choose to, you know, sort of process the consensus mechanism, or the consensus messages of remote blockchains like Ethereum or the Cosmos hub or whatever, but like Bitcoin will almost certainly never choose to do this. There’s like like near 0% probability, I would guess, perhaps, you know, as unlikely as Bitcoin supporting smart contract functionality generally. And you know, Bitcoin is unique in that it doesn’t matter have finality, and unable to like understand the consensus mechanism, messages of remote blockchains so it is unable to adopt any interoperability protocol. And that’s why every Bitcoin bridge that you see, essentially needs to build like the crypto is either custodial or needed to build the crypto economic incentives to secure the interoperability mode, like on the remote blockchain, so whether this is like in WBTC’s case, obviously, it’s just custodial, in KEEP, which uses collateral. You have? I don’t know, I guess other, you know, forms of interoperability, but notably, none of them really involve Bitcoin it’s all, you know, building scaffolding around it, because the Bitcoin protocol is blind to the world around it,

Hasu 1:05:38
I would say that sort of the sentiment around Bitcoin, especially with regards to you know, Ethereum is, even though Bitcoin is trading at like 50k, or something, it’s pretty low. And that’s because Ether has, you know, made some advances to becoming more a store of value, like with EIP-1559 and proof of stake, could reasonably in a year have lowered inflation than Bitcoin. And that, of course, you know, has made a dent with a lot of people who now see it as much more desirable. And even to the point where some people, you know, expect a Flippening this cycle. And I don’t want you to, I don’t want you to comment on the price, because I know that’s not really possible. But I do want to sort of leverage the fact that you are known to have an extremely long time horizon, when it comes to, you know, your allocations to crypto. And I just want to hear from you. If you think that your thesis for Bitcoin is still as intact?

Charlie Noyes 1:06:44
if you think about it, in terms of use cases, I think bitcoins use case as like a maximally censorship resistance, store value or non sovereign asset is intact. Bitcoin has a function, the ANA purpose, and I think it fulfills that elegantly. It’s quite minimalistic, really where the theory, um, I think that up until relatively recently, like potentially sometime, you know, early in early 2020, and there was like, some broad question as to whether there were going to be use cases that had like, like, like that were meaningful. And then we had sort of the de fi Renaissance. And at this point, I think that there were like quite a lot of products that make, like fundamental sense and feel like they should exist and have like a purpose in the world that are on top of Ethereum. And that millions of people are using, and I think like, with respect to ether as the Ethereum network’s native money, it seems to be like gaining adoption in that use case. And I guess how I think about it less in terms of competition, and more. So just like ether is succeeding, because Ethereum is succeeding. It’s not obvious that there’s like near term competition, at least to me with Bitcoin.

Georgios Konstantopoulos 1:08:10
I agree with that. Also, Ethereum’s hard forks sometimes may make it hard for people to think about it on longer term horizons. So I think that this kind of difference in the governance layer kind of paints a very, like clear place for both of these to coexist for a very long time.

Hasu 1:08:30
Is there anything that you would like changed in Bitcoin? Or do you think that the way that it is it can, you know, carve its niche and survive alongside these other crypto assets that are more rapidly adapting to sort of them the demands of the market?

Georgios Konstantopoulos 1:08:46
For me, there’s two things. Firstly, I would like a minimal change to the scripting language, which would allow us to build more flexible protocols for off chain scaling, and for key management such as vaults. And I think that that may be hard to make the case today, but I think it may become a very popular discussion topic in the future, that we may end up needing a finality gadget on top of Bitcoin. I don’t know how that will look like if that will mean that there is some proof of stake component that ends up built being built on Bitcoin or something like that. But I think that we will need a finality gadget too as the block reward approaches zero.

Hasu 1:09:36
Okay, cool. I’d love to unpack those. So starting with the vaults. So what is it vault, Georgios?

Georgios Konstantopoulos 1:09:41
A vault is a system which allows you to maintain custody of your funds, even if one of your keys gets stolen. Basically, you have a hot key and the cold key and if your hot key gets stolen then you can always use your cold key to claw back your funds and recover them. And today, this kind of protocol can be implemented. But it is tricky to do. And it kind of has very specific limitations. Whereas by augmenting the scripting language, we could get a more easy to implement and more flexible protocol.

Hasu 1:10:26
Are vaults only useful to improve sort of custody solutions around Bitcoin?

Georgios Konstantopoulos 1:10:30
yes. There’s nothing I can do. vaults are an improved custody solution.

Hasu 1:10:37
Okay. What is what is difference between a vault and a covenant?

Georgios Konstantopoulos 1:10:42
Vaults are built using covenants.

Charlie Noyes 1:10:46
What are the hot keys used for in Bitcoin? Like in in Ethereum? You know, you would you would your hot key would normally be like a staking key or a voting key or whatever.

Georgios Konstantopoulos 1:10:54
Assuming there’s you want to do at transfer? Or that’s a lightning, maybe it’s a lightning wallet.

Hasu 1:11:01
I mean, an exchange needs a hot wallet

Georgios Konstantopoulos 1:11:04
or an exchange. I

Hasu 1:11:04
…because they need to process transactions.

Georgios Konstantopoulos 1:11:07
Exactly. So the one the one change is the vaults that would make that would be nice. And the other is the off-chain scaling solutions. Currently, it seems that lightning has had trouble with scaling the amount of assets inside of it. And it’s not clear if this is about usage, or if it’s due to a fundamental due to the fundamental limitations of payment channels around capital efficiency. Hence, I think that modifying the scripting language in a way that would allow introducing some kind of protocol that looks like the very popular rollups in Ethereum, would be a net positive for the system.

Hasu 1:11:50
Oh, so you could create a version of rollups in Bitcoin, and it requires only sort of minimal changes to the scripting language?

Georgios Konstantopoulos 1:11:59
I’m not claiming I can, I’m saying it would be nice. If that were the case.

Charlie Noyes 1:12:04
I mean, you could imagine like, like enshrining like a SNARK for only proof checking, like a UTXO off chain environment. I think historically, Bitcoin developers have said that, like the cryptography is too new. Yes. But you know, long term that seems like, like a minimalistic sort of change. And like, seems reasonable, I guess.

Georgios Konstantopoulos 1:12:29
Yes, exactly. So and OP_SNARK_Verify, or OP_STARK_VERIFY opcode in the future could be something which satisfies this condition. While we’re added, at the topic of the changes, I just had another thing come to mind, which is an EIP-1559 like mechanism could be also net positive.

Hasu 1:12:56
And by that, I guess you don’t mean to introduce permanent inflation, like EIP-1559 has, but rather to spread out the rewards maybe?

Georgios Konstantopoulos 1:13:06
Yes, there’s EIP-1559 defines there is, there’s various ways you can implement the fee burn. Yeah, or rather, the component where the miner does not get the entire reward of the block. And hence, like Ethereum cho.. Ethereum’s implementation chose to burn it. In this implementation, we could do something else, we could choose to distribute the block reward over the next 100 miners, for example.

Hasu 1:13:31
Yeah, I think that would be a good idea.

Georgios Konstantopoulos 1:13:34
So in general, these are the three kind of changes that I would… its scripting language related changes, final the gadget, EIP-1559. Just to be just to be very upfront. Yeah, I think that Bitcoin as is today. It’s, it’s fine. And I don’t, I don’t think that these are nice to haves, these are not must haves,

Hasu 1:13:55
Ah, let them and dream! So I was, I do want to talk about the finality gadget. So what does it mean?

Georgios Konstantopoulos 1:14:02
It would mean that you introduce an additional layer on top of the proof of work consensus that says, every, let’s say 100-200, whatever number of blocks, that becomes the last block in the system. Yeah. And reorgs cannot be triggered past that number.

Hasu 1:14:25
Is it just a different word for checkpoint?

Georgios Konstantopoulos 1:14:28
No, no, because a checkpoint is an overloaded term. When people say checkpoints, they seem to think that you can, that you start to discard the entire chain history and all that, which is not great. Whereas what we’re talking about is just disallowing reorgs past a certain threshold. You could argue that today there’s already some kind of implicit social consensus around the max reorg depth, which would be the time after which a coinbase is Is spendable? Yeah, which is 100 blocks. Um, but I think it would be nice if this detail could be enshrined in the protocol.

Charlie Noyes 1:15:10
Safety is already a collective hallucination.

Georgios Konstantopoulos 1:15:12
Yeah,

Charlie Noyes 1:15:13
I remember when the there was an inflation bug in Bitcoin and I made like a Twitter poll at the time. That was along the lines of, you know, if there were a certain number of Bitcoin that we knew to have been minted through it, like 100 blocks ago, would we be willing to unwind the chain? And go back? And I think, like, it’s a very tricky question in the same way that like, as of right now, to like, the collective hallucination of, you know, six block finality. Like if there is a 50, block reorg I don’t expect that it would be accepted by the network. You know, at a social layer, I just don’t think it would happen. And so I think like the finality gadget point is like, if you’re already kind of in that state, and this is already an assumption that you’re making implicitly, then, you know, if you have like, like some, like reasonable crypto economic mechanism to try and train it more directly, then seems like a reasonable idea.

Hasu 1:16:23
Yeah, I agree. So and the way that we do this would be just to tell our nodes not to accept reorgs deeper than x blocks, is that right?

Charlie Noyes 1:16:35
That would be one. I mean, it has like very, it probably has worse security properties than then one in which, you know, you make like a 12 month liveness assumption and have something like the CASPER FFG. Or finality gadget with like a proof of stake overlay.

Hasu 1:16:54
How does it work? Like? Where does the proof of stake come in? What does what do the stakers do?

Georgios Konstantopoulos 1:16:58
There would be a committee of validators elected pseudo randomly weighted by their stake where the stake would be denominated, let’s say in Bitcoin. And these validators would sign on a block hash, which would be considered the checkpoint … the point the point of no reorg.

Charlie Noyes 1:17:19
I don’t think the CASPER FFG had a suit had to have a pseudo random. Yeah, so I think it was a signature of all validators. Right? Like,

Georgios Konstantopoulos 1:17:28
it doesn’t matter. I didn’t, I did not call it Casper FFG. I just said that there’s there needs to be some collective signing via a committee.

Hasu 1:17:39
How, like, how deep would you personally put this point? Is it like every Is it like 100 blocks deep? Or?

Georgios Konstantopoulos 1:17:44
I don’t know, I think this is up for debate, simulation, and other things that are beyond my, my security clearance,

Hasu 1:17:52
Would have the interesting side effect that you would turn, you know, you could allow people to stake their Bitcoin, even if it’s just for a small reward. Yeah.

Georgios Konstantopoulos 1:18:01
Maybe if that allows you, for example, to end transaction fees, turning Bitcoin into a productive asset trustlessly?

Hasu 1:18:07
That would be nice.

Charlie Noyes 1:18:09
Yeah, I also like, I think there was some someone had thrown out an idea out there for charging transaction fees on the basis of coindays destroyed, which always to me, sounded, like potentially interesting long term you have like on on Bitcoin, much fewer, you have like very few ways to kind of game that system securely. Whereas like on Ethereum, it’s very hard to do. You know, for example, like charge a percentage transaction fee, because there are an infinite number of ways to implement a transaction and, like, avoid the constraint, right. So yeah, whereas on Bitcoin, it’s like, probably, I think, probably feasible within the existing protocol to like, charge that coin is destroyed based transaction fee without, like, you know, a secure way to game it.

Hasu 1:19:02
It’s a beautiful example of why soft forks can indeed be evil.

Charlie Noyes 1:19:09
Certainly, yeah.

Hasu 1:19:10
Yeah. I mean, this is a super interesting topic, this whole, you know, basically price discrimination. What do you what do you think about that, in general in blockchains, like should blockchains price discriminate? Because right now, there seems to be a strong consensus that they shouldn’t.

Charlie Noyes 1:19:28
I feel like they probably shouldn’t, you know, in some philosophical sense, but I in practice, it’s completely unsurprising they do.

Georgios Konstantopoulos 1:19:38
Objectivity at scale is hard, like, fundamentally.

Hasu 1:19:41
So, we mentioned the finality gadget, what about something like, you know, consensus before the full block has been mined, you know, like, 0.5 block finality like, it says, Is there a way to do this, you know, to get To give give us a bit like lower latency on Bitcoin, like a pre consensus thing?

Georgios Konstantopoulos 1:20:07
Like the type of proposal that was done for running the Avalanche consensus, for example, on Bitcoin Cash blocks?

Hasu 1:20:14
Exactly. I really liked that proposal to be honest, I wish Bitcoin cash would have done it at the time.

Georgios Konstantopoulos 1:20:20
I’m not well enough informed on that specific proposal to give you a good enough comment.

Charlie Noyes 1:20:25
Yeah, hypothetically, though, you could have like a, like a head chain, or like a header like how on ETH2 there’s a finality gadget, I believe, like a certain number of blocks back from the head. And you could do something similar on Bitcoin.

Georgios Konstantopoulos 1:20:41
I mean, the moment that you introduce an additional consensus, the first problem is getting people to agree that it’s okay to introduce an additional layer of consensus participants, other than the miners. If you do that, I think that we can go crazy with designing protocols, which improve finality, or which improve, like latency or anything like that. I don’t think that the hard problem is designing a protocol that would be useful like that, I think that the hard problem is actually getting everyone to agree on it. That and getting everyone to agree on the fact that there might be an overlay a consensus overlay layer, maybe one day.

Hasu 1:21:26
Okay, two questions as a follow up to this the first. Yesterday, Elon Musk has sent two tweets that basically criticized the energy usage of Bitcoin and this this strikes right at the thing that you just said, which is, you know, should we pay miners? Or should we, you know, get consensus via some other method. Do you see this as Do you see Bitcoin ever abandon proof of work? And if not, you know, do you think this will eventually become a problem?

Charlie Noyes 1:21:59
I think the environmental questions are worthwhile. But in general, I’ve found that the arguments are not super salient, like I think Nic Carter has, has written a lot on like bitcoins, you know, energy usage. And, like, so maybe the question, I would take it less as, like, should Bitcoin switch off of proof of work? Like, given the energy consumption, like on a substantive level? and more like, if this is going to be a common criticism of Bitcoin? Like, should it just switch off of proof of proof of work? So that to obviate the criticism? I would guess probably not, that’s probably not a good enough reason to get folks on board. But potentially long term and in concert with a declining block subsidy? You know, I don’t I think it’s possible to imagine that like 2050, Bitcoin, has adopted like, a hardened, tested proven proof of stake, consensus system or overlay.

Georgios Konstantopoulos 1:23:13
Taking the opposite side on this, I think that the whole approach of Firstly, using mining heat emissions to do other things inside the cyclical economy, I think that’s a very valid thing which we can use, let’s just assume that we cannot get rid of the proof of work, because it, it may be it has to stay because we value objectivity, a lot. So we have to, like figure out what to do with it. I think that only now, is the problem getting the dimensions that quote, unquote, deserves, and only now Are we going to see the proper measures or solutions, creative solutions developed to address or maybe utilize this effort. So for example, for me at least the the use case, where if there is excess energy, you use Bitcoin as a quote unquote, energy battery, maybe many people would call it like, not not a great idea. Personally, for me, I think that there’s lots of areas where we have a lot of sun, a lot of sun, and all that energy just doesn’t get used at all. Or, for example, when you want to transmit energy from A to B, like lots of energy gets lost along that cable. So you know, I’m not like posting like a or b, I’m just saying that it’s worth digging hard at the problem and seeing if it can be inverted in some way. Instead of just saying, you know, it’s bad. Let’s give it up. Let’s move to the next.

Hasu 1:24:53
By “inverted” you mean to actually turn it into a strength of Bitcoin right?

Georgios Konstantopoulos 1:24:57
In some way, or a new use case.

Hasu 1:24:59
Yeah. I mean, you do see like credible reports that you know, the the energy grid actually can be stabilized in many parts of the world.

Georgios Konstantopoulos 1:25:09
Yeah, so little known fact that I studied electrical engineering. And yes, all of this stuff like around the load balancing of the grid, when there is more load than then you turn on your Bitcoin machines to consume the load or the opposite or you turn off the machines. This, this is a very valid use case, okay? Or even just that simple, you have in Bitcoin miner, it emits heat, you use it to, you know, warm your greenhouse, the product that will utilize all these forces have not been created.

Hasu 1:25:42
I had a second question. And again, so I don’t want to comment on the likelihood of this at all. But if Ethereum or another coin was to flip in Bitcoin, and Bitcoin loses its number ones. But do you think I’m curious to explore what this means for Bitcoin in the culturural slash governance sense? So we talked about how it’s very difficult to change Bitcoin today, because he just wouldn’t get consensus on anything. And you know, people rightly have adopted this, like, very conservative mindset that the rules are set in stone forever. Do you think that this is something that could change if the Bitcoin community was to feel more competition and urgency? Do you think there could be like a quote unquote, cultural awakening?

Charlie Noyes 1:26:35
I mean, sure, but you know, we probably should title the episode. First, just to state it right? I’m sure we get tweeted at for this, but like, like, two Ethereum dudes talk and speculate about Bitcoin, like, I mean, I wouldn’t profess to be very deep in the Bitcoin community or have any special insight.

Hasu 1:26:54
Oh, you see yourself as an Ethereum dude?

Charlie Noyes 1:26:56
I don’t see myself as Ethereum dude. I just mean, I think that there is a defined subset of the crypto community that are very specifically Bitcoin people. And we’re now speculating on their social dynamics, which could be completely wrong. Oh, yeah. But, I mean, yeah, just for like, you know, say the disclaimer or whatever. That being said, like, sure. Yeah. I mean, it seems like if, you know, if Bitcoin felt less secure in its use case, then perhaps we’re forced to make chan.. or Bitcoin feels forced to make changes, like historically, I think, you know, probably the, the closest the issue has come to coming ahead, coming to a head was like, the block size stuff. And, you know, I think that was successfully argued, as unnecessary. And Bitcoin’s obviously been quite successful since then, and still feel secure in its use case. So I don’t know, perhaps, perhaps there’s never a problem that sort of moves the Bitcoin community’s setpoint. And it always kind of remains like, We’re fine. And, you know, this is unnecessary? And I don’t know, perhaps not. And, and at some point, you know, we see, I don’t know, we see Bitcoin proof of stake, I think it would be cool.

Georgios Konstantopoulos 1:28:17
But yeah, I think that I see myself as somewhere in between, because I follow all of the Bitcoin protocol development, although I don’t think that we are people that… nothing that we say kind of is about the community. It’s more about, like our independent thinking, as engineers, investors, protocol designers, and all that. So it’s more of an entertaining thought experiment.

Hasu 1:28:43
Thank you so much, guys, for coming on the show. I think it was a great discussion. Thank you. All right.