1 00:00:00,040 --> 00:00:03,040 Speaker 1: Hello everyone, and welcome to the latest episode from the 2 00:00:03,080 --> 00:00:07,040 Speaker 1: midweek edition of the coin bureau podcast. Every week, I 3 00:00:07,080 --> 00:00:09,680 Speaker 1: pick out two of my favorite videos from coin bureaus 4 00:00:09,680 --> 00:00:13,160 Speaker 1: YouTube channel to present to you in podcast form. The 5 00:00:13,200 --> 00:00:15,880 Speaker 1: audio you're about to hear is from those videos I've 6 00:00:15,960 --> 00:00:18,599 Speaker 1: chosen this week. Many of you have been in touch 7 00:00:18,680 --> 00:00:20,919 Speaker 1: to ask whether it's possible to listen to our videos 8 00:00:20,920 --> 00:00:24,560 Speaker 1: in podcast format, and so your wish is my command. 9 00:00:25,200 --> 00:00:27,680 Speaker 1: This week, I've selected our videos on the proof of 10 00:00:27,680 --> 00:00:30,920 Speaker 1: work versus Proof of steak debate and the recent sanctioning 11 00:00:31,000 --> 00:00:35,279 Speaker 1: of the Tornado cash mixing protocol by the US Treasury Department. 12 00:00:36,120 --> 00:00:39,720 Speaker 1: As ethereums merge approaches and the network prepares to switch 13 00:00:39,760 --> 00:00:42,760 Speaker 1: to proof of steak, many will be wondering about what 14 00:00:42,920 --> 00:00:46,040 Speaker 1: differentiates proof of steak from the famous proof of work 15 00:00:46,159 --> 00:00:49,920 Speaker 1: consensus mechanism that powers Bitcoin and has everyone in the 16 00:00:49,960 --> 00:00:53,440 Speaker 1: mainstream media up in arms about its energy usage. Well, 17 00:00:53,479 --> 00:00:56,480 Speaker 1: the good folks at the Crack and Cryptocurrency Exchange have 18 00:00:56,560 --> 00:00:59,720 Speaker 1: written a brilliant report on the differences between the two, 19 00:01:00,080 --> 00:01:02,800 Speaker 1: and in the first part of today's episode you'll hear 20 00:01:02,840 --> 00:01:05,440 Speaker 1: our summary of that report and a few of my 21 00:01:05,520 --> 00:01:08,520 Speaker 1: thoughts on the matter. Then, in the second part, we 22 00:01:08,600 --> 00:01:11,000 Speaker 1: take a look at the controversial sanctioning of a well 23 00:01:11,040 --> 00:01:14,240 Speaker 1: known crypto privacy tool that has sent shock waves through 24 00:01:14,280 --> 00:01:17,080 Speaker 1: the industry. Tornado Cash may have been used by North 25 00:01:17,160 --> 00:01:20,080 Speaker 1: Korean hackers to launder at stolen crypto, but it was 26 00:01:20,160 --> 00:01:24,080 Speaker 1: mainly used by law abiding citizens to maintain some degree 27 00:01:24,200 --> 00:01:28,240 Speaker 1: of financial privacy. So for a detailed explanation of what happened, 28 00:01:28,440 --> 00:01:32,240 Speaker 1: what it means, and what could come next, keep listening 29 00:01:32,319 --> 00:01:34,640 Speaker 1: to get the full low down. I hope you enjoy 30 00:01:34,760 --> 00:01:37,679 Speaker 1: listening to these videos, which were, as always a pleasure 31 00:01:37,680 --> 00:01:40,200 Speaker 1: to make. I'll be back talking crypto with Mike very soon, 32 00:01:40,319 --> 00:01:42,760 Speaker 1: so be sure to stay tuned, and if you want 33 00:01:42,840 --> 00:01:45,959 Speaker 1: even more content from coin Bureau, be sure to subscribe 34 00:01:45,959 --> 00:01:49,520 Speaker 1: to our YouTube channel and visit us on social media too. 35 00:02:00,040 --> 00:02:12,880 Speaker 1: M h as ethereums merge approaches, more and more people 36 00:02:12,960 --> 00:02:17,200 Speaker 1: are asking the obvious questions, what exactly are the differences 37 00:02:17,320 --> 00:02:20,200 Speaker 1: between proof of work and proof of steak and which 38 00:02:20,240 --> 00:02:23,919 Speaker 1: of the two is better? As it so happens, Kraken 39 00:02:24,200 --> 00:02:28,600 Speaker 1: recently released an incredible report which compares these two consensus 40 00:02:28,600 --> 00:02:33,079 Speaker 1: mechanisms and answers almost all the questions that crypto holders 41 00:02:33,120 --> 00:02:36,519 Speaker 1: are asking about them. That's why today I'm going to 42 00:02:36,600 --> 00:02:39,360 Speaker 1: give you a bit of background about the report, summarize 43 00:02:39,400 --> 00:02:42,200 Speaker 1: what it says in simple terms, and tell you what 44 00:02:42,240 --> 00:02:45,480 Speaker 1: it could mean for e once the merge is complete. 45 00:02:46,400 --> 00:02:49,120 Speaker 1: The report I'll be summarizing today was written by the 46 00:02:49,280 --> 00:02:53,800 Speaker 1: Kraken cryptocurrency exchange. Kraken is based in the United States, 47 00:02:53,880 --> 00:02:58,480 Speaker 1: and it was founded by entrepreneur Jesse Powell Inn. Kraken 48 00:02:58,600 --> 00:03:01,840 Speaker 1: has since become one of the top ten largest cryptocurrency 49 00:03:01,880 --> 00:03:04,840 Speaker 1: exchanges by training volume, and has come to support over 50 00:03:04,960 --> 00:03:09,560 Speaker 1: one and ten coins and tokens and counting. Fun fact in, 51 00:03:10,440 --> 00:03:14,520 Speaker 1: Kraken became the first cryptocurrency exchange to receive a crypto 52 00:03:14,639 --> 00:03:17,919 Speaker 1: banking license from the state of Wyoming, making it possible 53 00:03:17,960 --> 00:03:21,960 Speaker 1: for the exchange to offer traditional theat services alongside its 54 00:03:22,000 --> 00:03:26,919 Speaker 1: crypto services all in house. Shortly afterwards, the first krack 55 00:03:27,000 --> 00:03:31,280 Speaker 1: and Bank branch was established in Wyoming's capital of Cheyenne, 56 00:03:31,639 --> 00:03:35,400 Speaker 1: and Kraken is working towards extending its crypto banking services 57 00:03:35,560 --> 00:03:38,360 Speaker 1: to the rest of the country in accordance with the 58 00:03:38,400 --> 00:03:44,080 Speaker 1: exchange's explicit goal of accelerating crypto adoption. Krakens focus on 59 00:03:44,160 --> 00:03:47,080 Speaker 1: crypto adoption is also why the Exchange has put a 60 00:03:47,160 --> 00:03:50,880 Speaker 1: huge emphasis on crypto education, and in addition to having 61 00:03:50,920 --> 00:03:54,400 Speaker 1: some of the best articles about crypto projects, the Exchange 62 00:03:54,520 --> 00:03:57,880 Speaker 1: also has some of the best crypto reports the industry 63 00:03:57,920 --> 00:04:01,880 Speaker 1: has to offer. Now. Today's report is titled quote proof 64 00:04:01,880 --> 00:04:05,280 Speaker 1: of Work versus Proof of Stake Securing the Chain and 65 00:04:05,320 --> 00:04:08,280 Speaker 1: I'll leave a link to the full document in the description, 66 00:04:08,520 --> 00:04:11,120 Speaker 1: along with a link to micrack and tutorial if you're 67 00:04:11,160 --> 00:04:15,240 Speaker 1: interested in learning more about the Exchange Now. The report 68 00:04:15,320 --> 00:04:18,479 Speaker 1: begins with a brief introduction and the first sentence is 69 00:04:18,520 --> 00:04:22,120 Speaker 1: too good not to repeat. Quote At the heart of 70 00:04:22,279 --> 00:04:26,680 Speaker 1: every blockchain lies a protocol that defines how pseudonymous individuals 71 00:04:26,880 --> 00:04:30,800 Speaker 1: reach consensus in a globally distributed network. Now, if you 72 00:04:30,839 --> 00:04:33,960 Speaker 1: watched our video about crypto consensus mechanisms, you'll know that 73 00:04:34,000 --> 00:04:37,760 Speaker 1: consensus in crypto is no different from consensus, say between 74 00:04:37,920 --> 00:04:40,359 Speaker 1: you and a group of friends deciding where to go 75 00:04:40,440 --> 00:04:43,680 Speaker 1: for dinner. The only difference is that crypto consensus is 76 00:04:43,720 --> 00:04:48,039 Speaker 1: digital and you're deciding on which transactions are valid. The 77 00:04:48,080 --> 00:04:52,120 Speaker 1: authors then explain the importance of civil resistance in cryptocurrency. 78 00:04:52,600 --> 00:04:55,400 Speaker 1: This is a fancy term for potential attacks on a 79 00:04:55,440 --> 00:05:00,240 Speaker 1: cryptocurrency blockchain, such as convincing consensus participants that an invalid 80 00:05:00,279 --> 00:05:04,440 Speaker 1: transaction is valid, or spamming transactions so that no real 81 00:05:04,480 --> 00:05:08,719 Speaker 1: transactions can be processed. Civil resistance is why proof of 82 00:05:08,720 --> 00:05:11,360 Speaker 1: work and proof of steak exists at all. They are 83 00:05:11,520 --> 00:05:15,240 Speaker 1: fundamentally a means of making it very difficult to corrupt 84 00:05:15,279 --> 00:05:20,160 Speaker 1: a cryptocurrency blockchain by incentivizing minors or validators to process 85 00:05:20,200 --> 00:05:24,120 Speaker 1: transactions correctly, and in some cases punishing them for not 86 00:05:24,279 --> 00:05:27,599 Speaker 1: doing so. The authors go on to make it clear 87 00:05:27,680 --> 00:05:31,799 Speaker 1: that neither of these two consensus mechanisms is perfect. Each 88 00:05:31,800 --> 00:05:36,839 Speaker 1: one comes with its own trade offs regarding decentralization, scalability, security, 89 00:05:37,120 --> 00:05:40,720 Speaker 1: and of course sustainability, which has been an especially hot 90 00:05:40,720 --> 00:05:44,520 Speaker 1: topic among proof of work critics. The authors argue that 91 00:05:44,560 --> 00:05:48,800 Speaker 1: the correct consensus mechanism ultimately depends on what the cryptocurrency 92 00:05:48,960 --> 00:05:52,000 Speaker 1: in question is trying to do, as this will determine 93 00:05:52,040 --> 00:05:55,400 Speaker 1: which trade offs need to be made naturally. These trade 94 00:05:55,400 --> 00:05:59,680 Speaker 1: offs are what the report examines in detail. The second 95 00:05:59,680 --> 00:06:02,159 Speaker 1: part the report gives a bird's eye view of the 96 00:06:02,240 --> 00:06:06,800 Speaker 1: quote anatomy of blockchain protocols. This includes things like how 97 00:06:07,000 --> 00:06:11,160 Speaker 1: minors or validators are selected, how frequently blocks are produced, 98 00:06:11,400 --> 00:06:15,919 Speaker 1: and when transaction finality is achieved. The authors reiterate that 99 00:06:16,000 --> 00:06:19,560 Speaker 1: the purpose of a crypto consensus mechanism is to deter 100 00:06:19,720 --> 00:06:23,760 Speaker 1: cibil attacks, and they provide a detailed definition of this 101 00:06:23,960 --> 00:06:28,880 Speaker 1: term quote. A sibil attack is an exploit against an 102 00:06:28,920 --> 00:06:32,640 Speaker 1: online network whereby a small number of entities as few 103 00:06:32,680 --> 00:06:35,880 Speaker 1: as one, attempt to take control of the whole network 104 00:06:36,000 --> 00:06:40,919 Speaker 1: by leveraging multiple accounts, nodes, or computers. The author's point 105 00:06:41,000 --> 00:06:44,240 Speaker 1: to one of the most popular civil attacks in cryptocurrency, 106 00:06:44,279 --> 00:06:49,279 Speaker 1: and that's a fifty attack. Without getting too technical, a 107 00:06:48,440 --> 00:06:53,440 Speaker 1: fifty attack involves contributing or more of the computing power 108 00:06:53,520 --> 00:06:56,440 Speaker 1: to a proof of work cryptocurrency so that transactions on 109 00:06:56,480 --> 00:07:00,280 Speaker 1: its blockchain can be manipulated. The authors then exp lane 110 00:07:00,360 --> 00:07:04,239 Speaker 1: that every crypto consensus mechanism requires some sort of skin 111 00:07:04,279 --> 00:07:07,440 Speaker 1: in the game from miners or validators to ensure they 112 00:07:07,440 --> 00:07:10,960 Speaker 1: remain honest i e. Process transactions correctly, and that this 113 00:07:11,080 --> 00:07:15,200 Speaker 1: honesty is typically achieved in three ways. The first way 114 00:07:15,320 --> 00:07:18,760 Speaker 1: is by quote encouraging participants to reach a consensus on 115 00:07:18,800 --> 00:07:21,920 Speaker 1: the state of the blockchain through a competitive process such 116 00:07:22,000 --> 00:07:25,320 Speaker 1: as mining or staking the second way is by quote 117 00:07:25,360 --> 00:07:28,240 Speaker 1: punishing bad actors that try to stall the network from 118 00:07:28,280 --> 00:07:31,920 Speaker 1: reaching a consensus, and the third way is by quote 119 00:07:32,080 --> 00:07:36,120 Speaker 1: rewarding some or all participants for behaving honestly and coming 120 00:07:36,160 --> 00:07:39,480 Speaker 1: to a consensus, be it through transaction fees, block rewards, 121 00:07:39,560 --> 00:07:43,200 Speaker 1: or both. The authors go on to provide this incredible 122 00:07:43,200 --> 00:07:46,560 Speaker 1: infographic which shows you half a dozen different crypto consensus 123 00:07:46,640 --> 00:07:51,480 Speaker 1: mechanisms and how they ensure network participants process transactions correctly. 124 00:07:51,880 --> 00:07:54,120 Speaker 1: I definitely suggest pulling up this page and having a 125 00:07:54,120 --> 00:07:57,400 Speaker 1: closer read if you have the time. What's awesome is 126 00:07:57,560 --> 00:08:00,440 Speaker 1: the authors provide a breakdown of how much of the 127 00:08:00,440 --> 00:08:04,240 Speaker 1: crypto market cap is being secured by each consensus mechanism. 128 00:08:04,720 --> 00:08:07,520 Speaker 1: For those who can't see or are just listening, around 129 00:08:07,720 --> 00:08:10,880 Speaker 1: six of the crypto market is secured by proof of work, 130 00:08:11,160 --> 00:08:14,120 Speaker 1: twelve percent by proof of steak, and thirty percent by 131 00:08:14,160 --> 00:08:19,520 Speaker 1: other consensus mechanisms. This will obviously change once Ethereum transitions 132 00:08:19,560 --> 00:08:22,440 Speaker 1: to proof of steak, as the author's count tokens as 133 00:08:22,480 --> 00:08:25,360 Speaker 1: part of this calculation, and most of the largest tokens 134 00:08:25,360 --> 00:08:28,120 Speaker 1: by market cap are e r C twenty tokens circulating 135 00:08:28,200 --> 00:08:32,560 Speaker 1: primarily on ethereum namely stable coins. You can find out 136 00:08:32,640 --> 00:08:35,880 Speaker 1: more about what Ethereum will look like post merge using 137 00:08:35,960 --> 00:08:39,520 Speaker 1: the link in the description. Next, the author's turn to 138 00:08:39,640 --> 00:08:44,360 Speaker 1: consensus methods, which are slightly different from consensus mechanisms. Whereas 139 00:08:44,360 --> 00:08:49,280 Speaker 1: consensus mechanisms describe always to prevent attacks on transactions, consensus 140 00:08:49,320 --> 00:08:53,480 Speaker 1: methods refer to how minors, validators, or nodes actually agree 141 00:08:53,600 --> 00:08:58,840 Speaker 1: on the accuracy of transactions. Cryptocurrencies like Bitcoin and Cardano 142 00:08:59,160 --> 00:09:02,760 Speaker 1: used the longest chain consensus method, meaning that minors and 143 00:09:02,840 --> 00:09:06,439 Speaker 1: validators assume the longest version of the blockchain is the 144 00:09:06,480 --> 00:09:09,679 Speaker 1: most accurate. In the case of proof of work, this 145 00:09:09,800 --> 00:09:13,280 Speaker 1: is because the longest blockchain took the most energy to create, 146 00:09:13,600 --> 00:09:15,680 Speaker 1: and in the case of proof of steak, this is 147 00:09:15,720 --> 00:09:21,080 Speaker 1: because the longest blockchain received the most votes. Meanwhile, cryptocurrencies 148 00:09:21,120 --> 00:09:25,600 Speaker 1: like Ethereum and conflux use the heaviest chain consensus method, 149 00:09:25,840 --> 00:09:28,480 Speaker 1: which is like the longest chain consensus method, except that 150 00:09:28,520 --> 00:09:32,199 Speaker 1: it includes orphaned blocks valid blocks which were rejected because 151 00:09:32,200 --> 00:09:35,120 Speaker 1: they were proposed at the same time as another valid block. 152 00:09:36,000 --> 00:09:40,160 Speaker 1: The authors underscore the significance of these so called Nakamoto 153 00:09:40,200 --> 00:09:43,600 Speaker 1: style consensus methods because they make it possible to increase 154 00:09:43,640 --> 00:09:47,360 Speaker 1: the threshold of corruption for a distributed system from thirty 155 00:09:48,080 --> 00:09:53,160 Speaker 1: to while simultaneously removing the trust that's often required for 156 00:09:53,240 --> 00:09:57,920 Speaker 1: a distributed system to function. The tradeoff of Nakamoto style 157 00:09:57,960 --> 00:10:02,680 Speaker 1: consensus methods is that transaction are never truly final. Instead, 158 00:10:02,880 --> 00:10:07,080 Speaker 1: transactions are probabilistic, meaning the likelihood of a transaction being 159 00:10:07,120 --> 00:10:10,760 Speaker 1: final increases with every block that's added to the blockchain, 160 00:10:10,960 --> 00:10:16,040 Speaker 1: but that likelihood never actually reaches If you watched our 161 00:10:16,120 --> 00:10:19,480 Speaker 1: video about the fastest cryptocurrencies, you'll know that what counts 162 00:10:19,520 --> 00:10:22,960 Speaker 1: as a final transaction varies from coin to coin and 163 00:10:23,040 --> 00:10:26,200 Speaker 1: depends on the number of confirmations, which can be simply 164 00:10:26,280 --> 00:10:29,120 Speaker 1: understood as the number of blocks that have been added 165 00:10:29,160 --> 00:10:33,320 Speaker 1: to the chain since the transaction occurred. For reference, a 166 00:10:33,360 --> 00:10:37,679 Speaker 1: BTC transaction on Bitcoin is considered final after six confirmations 167 00:10:37,760 --> 00:10:41,600 Speaker 1: i e. Six blocks. Since it takes around ten minutes 168 00:10:41,640 --> 00:10:44,200 Speaker 1: to add a block to the Bitcoin blockchain, this means 169 00:10:44,280 --> 00:10:47,599 Speaker 1: it takes around one hour for the average BTC transaction 170 00:10:47,679 --> 00:10:51,240 Speaker 1: to be considered final i e. Irreversible, even though it's 171 00:10:51,280 --> 00:10:57,160 Speaker 1: technically not. The authors then provide another incredible infographic which 172 00:10:57,200 --> 00:11:00,520 Speaker 1: breaks down all the different types of crypto consense as methods, 173 00:11:00,520 --> 00:11:03,600 Speaker 1: and even gives an overview of the consensus methods and 174 00:11:03,679 --> 00:11:09,880 Speaker 1: consensus mechanisms used by Cardano Ethereum, Ethereums, beacon chain, and Selana. 175 00:11:10,800 --> 00:11:14,080 Speaker 1: The authors end the section by emphasizing the importance of 176 00:11:14,200 --> 00:11:17,920 Speaker 1: knowing the difference between a consensus method and a consensus 177 00:11:18,000 --> 00:11:21,720 Speaker 1: mechanism when discussing proof of work versus proof of steak. 178 00:11:22,840 --> 00:11:25,280 Speaker 1: This ties into the third part of the report, and 179 00:11:25,360 --> 00:11:28,240 Speaker 1: that's the tradeoffs of proof of work and proof of steak. 180 00:11:28,920 --> 00:11:32,240 Speaker 1: The authors start by giving one of the best explanations 181 00:11:32,320 --> 00:11:35,600 Speaker 1: of proof of work that I've ever read, so quote. 182 00:11:36,640 --> 00:11:40,480 Speaker 1: In proof of work blockchains, miners must gather information and 183 00:11:40,520 --> 00:11:44,800 Speaker 1: try to guess a solution to a cryptographic puzzle. Once 184 00:11:44,840 --> 00:11:48,160 Speaker 1: minus solve the puzzle, they share their results with other 185 00:11:48,240 --> 00:11:51,960 Speaker 1: nodes to verify their work before adding the block to 186 00:11:52,040 --> 00:11:56,160 Speaker 1: the chain. Because miners must consume energy in the proof 187 00:11:56,200 --> 00:12:00,000 Speaker 1: of work process and nodes can easily verify any blocks validity, 188 00:12:00,440 --> 00:12:04,360 Speaker 1: malicious miners who try to add an invalid block waste time, 189 00:12:04,800 --> 00:12:09,840 Speaker 1: energy and resources. Conversely, the protocol rewards honest miners that 190 00:12:09,920 --> 00:12:14,280 Speaker 1: successfully mine a valid block. And for some extra clarity, 191 00:12:14,360 --> 00:12:18,880 Speaker 1: I'll add that each block contains BTC transactions. Now. As 192 00:12:18,880 --> 00:12:21,280 Speaker 1: far as benefits go, the author's note that proof of 193 00:12:21,280 --> 00:12:25,079 Speaker 1: work cryptocurrencies have been battle tested at scale, though they 194 00:12:25,120 --> 00:12:29,200 Speaker 1: acknowledge that there have been a few attacks on smaller 195 00:12:29,360 --> 00:12:32,960 Speaker 1: proof of work cryptos, notably Ethereum Classic. You can learn 196 00:12:32,960 --> 00:12:35,680 Speaker 1: more about Ethereum Classic using the link in the description 197 00:12:35,760 --> 00:12:39,040 Speaker 1: I digress now. The authors add that at this point 198 00:12:39,040 --> 00:12:43,160 Speaker 1: in time, purchasing the computing power required to conduct a 199 00:12:43,200 --> 00:12:47,760 Speaker 1: fifty attack against a cryptocurrency like Bitcoin would be so 200 00:12:47,880 --> 00:12:51,200 Speaker 1: expensive that it would make no sense to do unless 201 00:12:51,200 --> 00:12:54,560 Speaker 1: you're a government trying to protect your national currency against BTC. 202 00:12:54,640 --> 00:12:58,040 Speaker 1: Of course, what's crazy is that the authors actually took 203 00:12:58,040 --> 00:13:01,080 Speaker 1: the time to calculate how much it would cost to 204 00:13:01,240 --> 00:13:06,120 Speaker 1: corrupt Bitcoin and other major proof of work cryptocurrencies. For Bitcoin, 205 00:13:06,360 --> 00:13:09,640 Speaker 1: it would cost over eight point six billion dollars in 206 00:13:09,760 --> 00:13:15,520 Speaker 1: hardware costs plus twenty million dollars in energy costs per day. 207 00:13:16,160 --> 00:13:19,360 Speaker 1: The authors then touch on the infamous New York Agreement 208 00:13:19,400 --> 00:13:24,559 Speaker 1: of seventeen, wherein fifty companies, including cryptocurrency exchanges, tried to 209 00:13:24,600 --> 00:13:28,560 Speaker 1: convince the crypto community to double Bitcoin's block size. Their 210 00:13:28,600 --> 00:13:32,400 Speaker 1: initiative failed because bitcoin nodes refused to implement the change 211 00:13:32,480 --> 00:13:35,719 Speaker 1: the institutions wanted to see. Now, the authors note that 212 00:13:35,760 --> 00:13:39,880 Speaker 1: this resistance to institutional influence would have been difficult, if 213 00:13:39,920 --> 00:13:43,480 Speaker 1: not impossible, if bitcoin had been proof of stake, because 214 00:13:43,679 --> 00:13:46,640 Speaker 1: the institutions would have been able to simply buy up 215 00:13:46,679 --> 00:13:49,959 Speaker 1: the stake they needed to implement changes they wanted at 216 00:13:49,960 --> 00:13:53,640 Speaker 1: the blockchain level. Another pro proof of work argument the 217 00:13:53,640 --> 00:13:58,760 Speaker 1: authors identify is the huge incentive for geographical decentralization due 218 00:13:58,760 --> 00:14:02,240 Speaker 1: to crypto minors trying to find the cheapest electricity sources, 219 00:14:02,400 --> 00:14:06,600 Speaker 1: which are often located in remote areas. The authors acknowledge 220 00:14:06,720 --> 00:14:10,800 Speaker 1: that this geographical decentralization is less apparent in practice, as 221 00:14:10,880 --> 00:14:14,559 Speaker 1: China did in fact become a crypto mining hub. However, 222 00:14:14,679 --> 00:14:18,439 Speaker 1: the authors also note that bitcoin mining operations were beginning 223 00:14:18,440 --> 00:14:21,760 Speaker 1: to migrate out of China even before the country's famous 224 00:14:21,840 --> 00:14:26,600 Speaker 1: crypto ban last spring. Today, bitcoin's hash power is much 225 00:14:26,680 --> 00:14:29,680 Speaker 1: more decentralized, though if you ask me, it looks like 226 00:14:29,720 --> 00:14:33,400 Speaker 1: the United States could soon become the new point of centralization, 227 00:14:33,720 --> 00:14:36,280 Speaker 1: and something tells me that the US government will be 228 00:14:36,400 --> 00:14:39,560 Speaker 1: more thorough in its surveillance of the crypto mining sector 229 00:14:39,720 --> 00:14:44,320 Speaker 1: than the CCP. The last two advantages of proof of work. 230 00:14:44,360 --> 00:14:47,680 Speaker 1: The author's cover are the natural resistance to blockchain forks 231 00:14:47,760 --> 00:14:50,400 Speaker 1: due to the high costs of forking and the fact 232 00:14:50,520 --> 00:14:54,120 Speaker 1: that it's much harder to bribe minors than it is validators, 233 00:14:54,240 --> 00:14:57,880 Speaker 1: at least on paper. As far as drawbacks to proof 234 00:14:57,880 --> 00:15:00,160 Speaker 1: of work go, the authors note that there are any 235 00:15:00,200 --> 00:15:04,400 Speaker 1: concerns about the carbon footprint associated with proof of work cryptocurrencies, 236 00:15:04,400 --> 00:15:07,160 Speaker 1: but if you watched our video about coin Shares crypto 237 00:15:07,200 --> 00:15:10,640 Speaker 1: mining report, you'll know the bitcoin mining accounts for less 238 00:15:10,640 --> 00:15:14,600 Speaker 1: than zero point one percent of global carbon emissions. The 239 00:15:14,640 --> 00:15:17,880 Speaker 1: second drawback is similarly straightforward, and that's the inability of 240 00:15:17,960 --> 00:15:23,120 Speaker 1: smaller proof of work cryptocurrencies to effectively protect themselves from attacks. 241 00:15:23,760 --> 00:15:26,160 Speaker 1: The third drawback is one that I alluded to earlier, 242 00:15:26,200 --> 00:15:29,520 Speaker 1: and that's the possibility that mining could become centralized among 243 00:15:29,600 --> 00:15:33,320 Speaker 1: the most well capitalized entities, who could then work together 244 00:15:33,520 --> 00:15:37,240 Speaker 1: to change the blockchain to their benefit. Note that the 245 00:15:37,320 --> 00:15:42,320 Speaker 1: three largest bitcoin mining pools have of the hash power. 246 00:15:43,040 --> 00:15:45,240 Speaker 1: The fourth drawback is a little bit funny, and that's 247 00:15:45,280 --> 00:15:49,680 Speaker 1: the quote. Since nodes can operate anonymously, blocking a malicious 248 00:15:49,680 --> 00:15:52,880 Speaker 1: miner from participating in the network is impossible, and there's 249 00:15:52,920 --> 00:15:57,320 Speaker 1: no way to confiscate their mining equipment for misbehaving. This 250 00:15:57,520 --> 00:15:59,880 Speaker 1: is obviously meant to be in contrast to proof of steak, 251 00:16:00,000 --> 00:16:03,560 Speaker 1: where misbehaving validators sand to lose some of their steak, 252 00:16:03,640 --> 00:16:05,760 Speaker 1: but it's still funny to imply that it would be 253 00:16:05,840 --> 00:16:09,760 Speaker 1: ideal if malicious miners could have their mining equipment confiscated. 254 00:16:10,600 --> 00:16:13,600 Speaker 1: The fifth drawback is the possibility of a so called 255 00:16:13,760 --> 00:16:17,800 Speaker 1: selfish mining attack, which was apparently discovered by Avalanche founder 256 00:16:17,840 --> 00:16:21,720 Speaker 1: Emin Gun Sarah and another Cornell University professor. Back in, 257 00:16:22,880 --> 00:16:27,040 Speaker 1: a selfish mining attack involves secretly creating a longer chain 258 00:16:27,360 --> 00:16:31,680 Speaker 1: and introducing it late to steal crypto. The final drawback 259 00:16:31,720 --> 00:16:34,760 Speaker 1: is also peculiar, as it has to do with transaction fees, 260 00:16:34,800 --> 00:16:38,240 Speaker 1: which are often higher for proof of work cryptocurrencies. The 261 00:16:38,280 --> 00:16:41,640 Speaker 1: authors point out that higher fees aren't always a bad thing, 262 00:16:41,920 --> 00:16:45,640 Speaker 1: as they protect against spam, something that's plagued low cost 263 00:16:45,680 --> 00:16:49,680 Speaker 1: cryptocurrencies like Nano and Salana. On that note, you can 264 00:16:49,720 --> 00:16:52,200 Speaker 1: find out what Salana has been up to using the 265 00:16:52,240 --> 00:16:56,280 Speaker 1: link in the description. Anyways, when it comes to proof 266 00:16:56,320 --> 00:17:00,480 Speaker 1: of steak, the authors don't provide an elaborate explanation of 267 00:17:00,520 --> 00:17:04,359 Speaker 1: how this consensus mechanism works because it really is quite simple. 268 00:17:04,760 --> 00:17:07,760 Speaker 1: Validators must lock up a certain amount of a cryptocurrency 269 00:17:07,800 --> 00:17:10,680 Speaker 1: coin for a certain amount of time to get selected 270 00:17:10,760 --> 00:17:14,600 Speaker 1: to produce a block. This selection is pseudo random based 271 00:17:14,680 --> 00:17:17,399 Speaker 1: on stake, and if the validator tries to cheat the 272 00:17:17,440 --> 00:17:21,280 Speaker 1: selection or try and manipulate transactions, some or all of 273 00:17:21,320 --> 00:17:25,640 Speaker 1: their steak is slashed I destroyed. Note that not all 274 00:17:25,760 --> 00:17:29,360 Speaker 1: proof of state cryptocurrencies have slashing enabled, nor do they 275 00:17:29,440 --> 00:17:33,000 Speaker 1: all have lock up times for validators. As far as 276 00:17:33,000 --> 00:17:36,240 Speaker 1: benefits go, the author's note that proof of state consensus 277 00:17:36,240 --> 00:17:40,760 Speaker 1: mechanisms require next to no energy to protect against CIBIL attacks, 278 00:17:40,800 --> 00:17:45,280 Speaker 1: with Ethereum's post merge energy use estimated to be nine 279 00:17:45,280 --> 00:17:49,000 Speaker 1: percent less than what it is now. The second benefit 280 00:17:49,160 --> 00:17:52,880 Speaker 1: is that validators do not need to constantly upgrade their hardware, 281 00:17:52,920 --> 00:17:56,639 Speaker 1: as miners often do. The third benefit is that misbehaving 282 00:17:56,720 --> 00:18:00,119 Speaker 1: validators can be punished via slashing. The fourth benefit it 283 00:18:00,320 --> 00:18:03,880 Speaker 1: is that proof of state cryptocurrencies are much faster, and 284 00:18:04,040 --> 00:18:06,960 Speaker 1: the fifth benefit is that participating as a validator on 285 00:18:07,000 --> 00:18:10,080 Speaker 1: a proof of state cryptocurrency is much easier than becoming 286 00:18:10,119 --> 00:18:14,160 Speaker 1: a minor, as it requires less capital and less specialized hardware, 287 00:18:14,200 --> 00:18:16,600 Speaker 1: though it's important to note that this is not the 288 00:18:16,640 --> 00:18:20,879 Speaker 1: case for all proof of stake cryptocurrencies. As far as 289 00:18:20,960 --> 00:18:24,520 Speaker 1: drawbacks go, the author's note that proof of state cryptocurrencies 290 00:18:24,560 --> 00:18:27,879 Speaker 1: are not nearly as battle tested as proof of work cryptos, 291 00:18:27,920 --> 00:18:31,159 Speaker 1: and are also not secured with nearly the same amount 292 00:18:31,200 --> 00:18:35,320 Speaker 1: of capital. The second drawback is one that's unfortunately quite 293 00:18:35,359 --> 00:18:38,800 Speaker 1: common among proof of state cryptocurrencies, and that's that the 294 00:18:38,840 --> 00:18:42,640 Speaker 1: initial distribution of the crypto coin can cause the concentration 295 00:18:42,760 --> 00:18:47,120 Speaker 1: of stake among a handful of participants. The third drawback 296 00:18:47,440 --> 00:18:50,600 Speaker 1: relates to the crypto consensus methods I mentioned earlier, and 297 00:18:50,640 --> 00:18:54,040 Speaker 1: that's that many proof of state cryptocurrencies do not use 298 00:18:54,200 --> 00:18:58,640 Speaker 1: Nakamoto style consensus mechanisms and can therefore be corrupted if 299 00:18:58,760 --> 00:19:02,159 Speaker 1: malicious validators control a third of the total stake. A 300 00:19:02,280 --> 00:19:07,159 Speaker 1: much lower threshold than the fourth drawback relates to the second, 301 00:19:07,200 --> 00:19:10,200 Speaker 1: and that's that proof of state cryptocurrencies are more vulnerable 302 00:19:10,240 --> 00:19:14,680 Speaker 1: to centralization because quote, those with large amounts of coins, 303 00:19:14,720 --> 00:19:19,560 Speaker 1: such as earlier adopters, exchanges, and custodians, can overwhelmingly influence 304 00:19:19,680 --> 00:19:23,760 Speaker 1: the rules of the network. Moreover, quote, they can also 305 00:19:23,920 --> 00:19:27,440 Speaker 1: accumulate more of the coin via staking, causing a positive 306 00:19:27,440 --> 00:19:31,960 Speaker 1: feedback loop that can increase centralization. Now it's safe to 307 00:19:31,960 --> 00:19:35,320 Speaker 1: say that this is becoming a bigger and bigger concern 308 00:19:35,480 --> 00:19:38,919 Speaker 1: as large asset managers like black Rock enter the crypto space. 309 00:19:39,720 --> 00:19:44,320 Speaker 1: The fifth drawback is that validators could easily process incorrect transactions, 310 00:19:44,359 --> 00:19:47,679 Speaker 1: particularly for proof of state cryptocurrencies that don't have strong 311 00:19:47,720 --> 00:19:52,600 Speaker 1: deterrence mechanisms like slashing enabled. The sixth drawback is something 312 00:19:52,640 --> 00:19:54,919 Speaker 1: that I mentioned a few moments ago, and that's that 313 00:19:55,040 --> 00:19:59,240 Speaker 1: staking requirements can still be prohibitively high, particularly on the 314 00:19:59,280 --> 00:20:03,080 Speaker 1: hardware side it. To accompany their point, the authors give 315 00:20:03,119 --> 00:20:06,840 Speaker 1: an infographic about the hardware requirements to run a validator 316 00:20:06,880 --> 00:20:10,120 Speaker 1: node on popular proof of stake cryptocurrencies, and you can 317 00:20:10,160 --> 00:20:14,600 Speaker 1: see that Salana is an outlier, extremely difficult to run 318 00:20:14,680 --> 00:20:18,720 Speaker 1: a validator node there. The seventh drawback is a bit odd, 319 00:20:18,800 --> 00:20:22,359 Speaker 1: and that's that staking presents an opportunity cost for validators 320 00:20:22,400 --> 00:20:25,000 Speaker 1: because their money is locked up and can't be used. 321 00:20:25,640 --> 00:20:28,920 Speaker 1: This is odd because there are many liquid staking protocols, 322 00:20:28,960 --> 00:20:31,879 Speaker 1: such as Lido finance that make it possible to freely 323 00:20:31,920 --> 00:20:36,200 Speaker 1: trade your staked coins. Some crypto projects like Phantom also 324 00:20:36,280 --> 00:20:39,280 Speaker 1: have liquid staking at the layer one level, meaning there's 325 00:20:39,320 --> 00:20:43,080 Speaker 1: no need to trust a third party protocol. The eighth 326 00:20:43,200 --> 00:20:46,040 Speaker 1: drawback is that proof of steak doesn't protect as well 327 00:20:46,080 --> 00:20:50,840 Speaker 1: against blockchain forks, and cryptocurrencies leveraging this consensus mechanism without 328 00:20:50,960 --> 00:20:55,919 Speaker 1: slashing risks are again vulnerable. I'm surprised the authors didn't 329 00:20:55,960 --> 00:20:59,520 Speaker 1: add another evident drawback, and that's that it's incredibly difficult 330 00:20:59,560 --> 00:21:02,159 Speaker 1: to get a proof of state cryptocurrency off the ground 331 00:21:02,480 --> 00:21:07,400 Speaker 1: without lots of centralization. That's because any fairly launched proof 332 00:21:07,400 --> 00:21:10,399 Speaker 1: of state cryptocurrency would be easy to corrupt, as the 333 00:21:10,520 --> 00:21:12,760 Speaker 1: value of its coin would be close to nothing, and 334 00:21:12,840 --> 00:21:15,480 Speaker 1: that would make it easy for a malicious actor to 335 00:21:15,560 --> 00:21:20,240 Speaker 1: acquire a third of the stake and manipulate transactions. As such, 336 00:21:20,359 --> 00:21:22,840 Speaker 1: the only option would be to conduct an i c 337 00:21:22,920 --> 00:21:26,200 Speaker 1: O to create a baseline value for the coin, potentially 338 00:21:26,240 --> 00:21:29,199 Speaker 1: support its price with the capital raised, and ensure that 339 00:21:29,400 --> 00:21:33,120 Speaker 1: enough of its supply is held by and ideally staked 340 00:21:33,160 --> 00:21:35,880 Speaker 1: by the team and early investors so that it's next 341 00:21:35,880 --> 00:21:38,840 Speaker 1: to impossible to acquire the stake required to corrupt it. 342 00:21:39,600 --> 00:21:43,040 Speaker 1: Besides the centralization this would create would also attract the 343 00:21:43,040 --> 00:21:46,399 Speaker 1: attention of regulators like the SEC who would almost certainly 344 00:21:46,440 --> 00:21:49,840 Speaker 1: consider this kind of cryptocurrency to be a security and 345 00:21:49,920 --> 00:21:52,920 Speaker 1: you can find out what criteria the SEC is using 346 00:21:52,920 --> 00:21:56,159 Speaker 1: to crack down on cryptocurrencies using the link in the 347 00:21:56,240 --> 00:22:00,000 Speaker 1: description any who. In terms of which of these two 348 00:22:00,040 --> 00:22:04,280 Speaker 1: consensus mechanisms is better, the authors frame their conclusion in 349 00:22:04,320 --> 00:22:08,760 Speaker 1: the context of the blockchain trilemma and state the following quote, 350 00:22:09,480 --> 00:22:11,840 Speaker 1: It is our take that proof of work tends to 351 00:22:11,920 --> 00:22:18,040 Speaker 1: offer better security and decentralization guarantees, sacrificing scalability in the process. 352 00:22:18,560 --> 00:22:21,560 Speaker 1: On the other hand, proof of steake typically offers better 353 00:22:21,600 --> 00:22:27,560 Speaker 1: scalability in exchange for security and decentralization. However, the authors 354 00:22:27,640 --> 00:22:31,679 Speaker 1: immediately repeat that quote, the optimal choice ultimately depends on 355 00:22:31,720 --> 00:22:35,080 Speaker 1: a given block chain's use case and how developers implement 356 00:22:35,160 --> 00:22:39,040 Speaker 1: its civil resistance mechanism. Some blockchains are better suited for 357 00:22:39,080 --> 00:22:43,360 Speaker 1: proof of steak, while others should use proof of work naturally, 358 00:22:43,480 --> 00:22:46,240 Speaker 1: the authors argue that for cryptocurrencies which are meant to 359 00:22:46,280 --> 00:22:49,560 Speaker 1: be hard money, such as bitcoins BTC, proof of work 360 00:22:49,720 --> 00:22:54,480 Speaker 1: is preferable because security and decentralization are paramount for such 361 00:22:54,560 --> 00:22:58,800 Speaker 1: use cases. By contrast, cryptocurrencies that are aiming to become 362 00:22:58,840 --> 00:23:02,400 Speaker 1: the next generation of payment rails such as Salana are 363 00:23:02,440 --> 00:23:05,879 Speaker 1: better off using proof of steak, since scalability is paramount 364 00:23:06,119 --> 00:23:09,520 Speaker 1: for such a use case. What's interesting is that the 365 00:23:09,560 --> 00:23:13,119 Speaker 1: authors provide a few infographics showing the number of daily 366 00:23:13,160 --> 00:23:17,080 Speaker 1: transactions for popular proof of state cryptocurrencies, and I say 367 00:23:17,119 --> 00:23:20,320 Speaker 1: it's interesting because it reveals just how much and how 368 00:23:20,400 --> 00:23:24,560 Speaker 1: little use some of these cryptocurrencies are seeing. Not naming 369 00:23:24,640 --> 00:23:28,679 Speaker 1: names at the end of this section, the author's caution 370 00:23:28,800 --> 00:23:33,040 Speaker 1: that quote every blockchain still requires a deep understanding of 371 00:23:33,080 --> 00:23:37,080 Speaker 1: the protocol's measures to defend against civil attacks, achieve a 372 00:23:37,119 --> 00:23:40,080 Speaker 1: consensus on the state of the network and how its 373 00:23:40,080 --> 00:23:44,520 Speaker 1: measures balanced the trade offs within the blockchain trilemma. Now, 374 00:23:44,640 --> 00:23:47,800 Speaker 1: the final part of the report is the conclusion, wherein 375 00:23:47,880 --> 00:23:50,639 Speaker 1: the authors basically repeat everything they wrote, but with a 376 00:23:50,640 --> 00:23:56,119 Speaker 1: bit more punch. For example, quote, blockchains should adhere to 377 00:23:56,320 --> 00:23:59,080 Speaker 1: a proof of work mechanism if they want to retain 378 00:23:59,160 --> 00:24:05,480 Speaker 1: the ethos of crypto assets, decentralization, and security. Logically, this 379 00:24:05,520 --> 00:24:09,520 Speaker 1: implies that blockchains which use proof of state consensus mechanisms 380 00:24:09,680 --> 00:24:12,560 Speaker 1: will not retain the ethos of cryptocurrency, something that the 381 00:24:12,600 --> 00:24:15,840 Speaker 1: author's tacitly confirm in the next paragraph where they say 382 00:24:15,920 --> 00:24:19,119 Speaker 1: proof of steak is most appropriate for cryptocurrencies focused on 383 00:24:19,160 --> 00:24:23,480 Speaker 1: payments and smart contracts. This makes me wonder what consensus 384 00:24:23,520 --> 00:24:27,239 Speaker 1: mechanisms are appropriate for different types of crypto niches, and 385 00:24:27,400 --> 00:24:30,359 Speaker 1: you can learn more about those using the link in 386 00:24:30,440 --> 00:24:34,680 Speaker 1: the description. So this brings me to the big question, 387 00:24:34,800 --> 00:24:38,000 Speaker 1: and that's what the findings of this report mean for 388 00:24:38,080 --> 00:24:42,080 Speaker 1: Ethereum once it transitions to proof of steake. Well, I'll 389 00:24:42,080 --> 00:24:44,240 Speaker 1: start by saying that the authors hit the nail on 390 00:24:44,280 --> 00:24:47,360 Speaker 1: the head with their assessment that the appropriate consensus mechanism 391 00:24:47,560 --> 00:24:51,200 Speaker 1: depends on a cryptocurrency's use case. This is where things 392 00:24:51,240 --> 00:24:54,680 Speaker 1: get a bit complicated, because Ethereum's use case is probably 393 00:24:54,720 --> 00:24:58,879 Speaker 1: a bit different depending on who you ask. Ethereum was 394 00:24:58,960 --> 00:25:02,439 Speaker 1: initially pitched as the world's computer, but following the e 395 00:25:02,520 --> 00:25:06,400 Speaker 1: I P fifty nine upgrade last August, some have started 396 00:25:06,440 --> 00:25:11,520 Speaker 1: referring to EAT as ultrasound money. This and other developments 397 00:25:11,560 --> 00:25:14,960 Speaker 1: have led many to label Ethereum as a payments network, 398 00:25:15,080 --> 00:25:18,200 Speaker 1: which is objectively the case even if you don't buy 399 00:25:18,280 --> 00:25:22,080 Speaker 1: the ultrasound money narrative. And that's because Ethereum has become 400 00:25:22,160 --> 00:25:25,560 Speaker 1: the de facto base layer of the largest stable coins. 401 00:25:26,280 --> 00:25:28,960 Speaker 1: At the same time, Ethereum is home to not only 402 00:25:29,080 --> 00:25:33,679 Speaker 1: the largest defied protocols, but also other decentralized applications, the 403 00:25:33,800 --> 00:25:37,080 Speaker 1: largest n f T projects, and all the new ecosystems 404 00:25:37,200 --> 00:25:39,800 Speaker 1: that are being built on Layer two's that derive their 405 00:25:39,840 --> 00:25:44,120 Speaker 1: security from the Ethereum blockchain. This makes it incredibly hard 406 00:25:44,160 --> 00:25:48,119 Speaker 1: to say what the correct consensus mechanism for Ethereum should be, 407 00:25:48,600 --> 00:25:51,040 Speaker 1: and though proof of steak seems like a no brainer, 408 00:25:51,400 --> 00:25:55,320 Speaker 1: it's important to remember that the reason why Ethereum's ecosystem 409 00:25:55,440 --> 00:25:58,959 Speaker 1: got so big is precisely because of the security and 410 00:25:59,080 --> 00:26:03,840 Speaker 1: decentralization that came from its proof of work consensus mechanism. 411 00:26:03,880 --> 00:26:07,640 Speaker 1: It's certainly true that Ethereum was losing Ground two competitors 412 00:26:07,680 --> 00:26:10,439 Speaker 1: because of its lack of scalability, but this is something 413 00:26:10,640 --> 00:26:14,440 Speaker 1: that was and still is being solved by scaling solutions 414 00:26:14,480 --> 00:26:18,919 Speaker 1: and side chains such as Polygon. It's also clear that 415 00:26:19,000 --> 00:26:23,040 Speaker 1: the obsession around scalability coming from crypto projects like Slana 416 00:26:23,119 --> 00:26:26,720 Speaker 1: has done serious damage to their security, and it's only 417 00:26:26,760 --> 00:26:30,280 Speaker 1: a matter of time before what's left of their decentralization 418 00:26:30,600 --> 00:26:34,720 Speaker 1: starts to suffer too. So in some what made Ethereum 419 00:26:34,800 --> 00:26:39,080 Speaker 1: stand out from its competitors was its decentralization and security, 420 00:26:39,359 --> 00:26:42,960 Speaker 1: and though this decentralization and security is likely to carry 421 00:26:42,960 --> 00:26:45,920 Speaker 1: over when it transitions to proof of steak, I find 422 00:26:45,960 --> 00:26:49,240 Speaker 1: it hard to see how these levels of decentralization can 423 00:26:49,280 --> 00:26:54,880 Speaker 1: be maintained indefinitely given the nature of this consensus mechanism. 424 00:26:54,920 --> 00:26:58,760 Speaker 1: It's also no secret that institutions are itching to get 425 00:26:58,800 --> 00:27:00,879 Speaker 1: their hands on EATH so that they can stake it, 426 00:27:01,040 --> 00:27:04,160 Speaker 1: and with asset managers like black Rock entering the ring, 427 00:27:04,320 --> 00:27:07,960 Speaker 1: it's only a matter of time before institutions are staking 428 00:27:08,200 --> 00:27:12,000 Speaker 1: enough to have the power to decide what happens at 429 00:27:12,040 --> 00:27:16,000 Speaker 1: the protocol level. What happens at that point is anyone's guess, 430 00:27:16,000 --> 00:27:19,200 Speaker 1: but the recent incident with Tornado Cash gives us some 431 00:27:19,320 --> 00:27:23,919 Speaker 1: insight into just how much it could change Ethereum's ecosystem. 432 00:27:23,960 --> 00:27:27,600 Speaker 1: More about that using the link in the description. Now, 433 00:27:27,640 --> 00:27:30,160 Speaker 1: for what it's worth, I know that Vitallic and other 434 00:27:30,200 --> 00:27:33,480 Speaker 1: Ethereum o g s are hyper aware of these risks, 435 00:27:33,520 --> 00:27:36,000 Speaker 1: and I have no doubt that they will do everything 436 00:27:36,080 --> 00:27:40,240 Speaker 1: in their power to ensure that Ethereum remains secure and 437 00:27:40,280 --> 00:27:44,639 Speaker 1: decentralized after it transitions to proof of steak. Let's just 438 00:27:44,720 --> 00:27:54,119 Speaker 1: hope they succeed. Last week, we witnessed one of the 439 00:27:54,240 --> 00:27:58,520 Speaker 1: biggest attacks to date on crypto privacy that came in 440 00:27:58,560 --> 00:28:03,280 Speaker 1: the form of the US tread juries sanctioning of Tornado Cash. Now. 441 00:28:03,400 --> 00:28:07,200 Speaker 1: This led to protocol's blocking addresses, funds being seized, and 442 00:28:07,480 --> 00:28:11,480 Speaker 1: one of the Tornado Cash developers being arrested. But this 443 00:28:11,680 --> 00:28:14,800 Speaker 1: story is far from over and its implications for the 444 00:28:14,920 --> 00:28:19,320 Speaker 1: broader crypto industry cannot be overstated. Today, I'm going to 445 00:28:19,400 --> 00:28:22,159 Speaker 1: give you everything you need to know about the situation 446 00:28:22,600 --> 00:28:26,359 Speaker 1: and what it could mean for you. On the eighth 447 00:28:26,440 --> 00:28:29,639 Speaker 1: of August, we learned that the Treasury's Office of Foreign 448 00:28:29,720 --> 00:28:35,040 Speaker 1: Assets Control o FAK had sanctioned the Tornado Cash mixing protocol. 449 00:28:35,400 --> 00:28:39,120 Speaker 1: A number of addresses associated with the mixer, containing around 450 00:28:39,160 --> 00:28:41,680 Speaker 1: four hundred and twenty four million dollars worth of crypto, 451 00:28:41,960 --> 00:28:46,040 Speaker 1: were also sanctioned. Now, for those unfamiliar, Tornado Cash has 452 00:28:46,120 --> 00:28:49,240 Speaker 1: long been one of the most well known mixing protocols 453 00:28:49,360 --> 00:28:52,760 Speaker 1: on ethereum, and what it would essentially do is obsfor 454 00:28:52,800 --> 00:28:57,760 Speaker 1: skate transaction history. This means that it would anonymize transactions 455 00:28:57,840 --> 00:29:01,720 Speaker 1: and remove all traces of where funds had originated from. 456 00:29:02,800 --> 00:29:05,760 Speaker 1: This was a privacy tool that was used by thousands 457 00:29:05,800 --> 00:29:09,960 Speaker 1: of people in the DeFi space. Unfortunately, it was also 458 00:29:10,200 --> 00:29:13,720 Speaker 1: used for laundering the proceeds of cybercrime, and that is 459 00:29:13,800 --> 00:29:16,840 Speaker 1: the use case that the Treasury honed in on. It 460 00:29:17,000 --> 00:29:20,800 Speaker 1: stated that Tornado was a favorite tool of North Korean 461 00:29:20,880 --> 00:29:23,400 Speaker 1: hackers and had been used to laund up more than 462 00:29:23,560 --> 00:29:27,240 Speaker 1: seven billion dollars. Now, on a side note, that number 463 00:29:27,440 --> 00:29:31,640 Speaker 1: is highly inflated for reasons I'll get into later. Anyways, 464 00:29:32,000 --> 00:29:35,400 Speaker 1: the moment Tornado was sanctioned, its website was taken down 465 00:29:35,640 --> 00:29:39,120 Speaker 1: and the code disappeared from git ub. Not only that, 466 00:29:39,560 --> 00:29:42,560 Speaker 1: but one of the contributors had his git hub account. 467 00:29:42,680 --> 00:29:47,600 Speaker 1: Band Circle blacklisted any USDC that was in the affected wallets, 468 00:29:47,800 --> 00:29:51,880 Speaker 1: and RPC providers such as Infuror and Alchemy started blocking 469 00:29:52,000 --> 00:29:55,920 Speaker 1: calls to the Tornado Cash smart contracts. And if that 470 00:29:56,200 --> 00:30:01,040 Speaker 1: wasn't bad enough, a number of decentralized applications also began 471 00:30:01,160 --> 00:30:04,240 Speaker 1: to restrict access to their front ends for wallets which 472 00:30:04,280 --> 00:30:08,120 Speaker 1: had interacted with the Tornado Cash smart contract. For example, 473 00:30:08,360 --> 00:30:11,120 Speaker 1: both are they and d y d X reported that 474 00:30:11,240 --> 00:30:14,320 Speaker 1: they were blocking access from those wallets which had interacted 475 00:30:14,360 --> 00:30:18,160 Speaker 1: with tornado Cash, and even those that had received funds 476 00:30:18,240 --> 00:30:20,480 Speaker 1: from it. In the case of d y d X, 477 00:30:20,760 --> 00:30:24,480 Speaker 1: users who had immaterial amounts but who had associated with 478 00:30:24,600 --> 00:30:28,560 Speaker 1: Tornado Cash in the past were also blocked. Things were 479 00:30:28,600 --> 00:30:31,560 Speaker 1: further complicated by the fact that someone in the community 480 00:30:31,960 --> 00:30:35,880 Speaker 1: decided to start dusting a number of public ether addresses 481 00:30:36,120 --> 00:30:39,240 Speaker 1: of celebrities in the space. In other words, they sent 482 00:30:39,360 --> 00:30:43,120 Speaker 1: a number of small transactions to hundreds of known wallets 483 00:30:43,160 --> 00:30:46,840 Speaker 1: associated with E E N S addresses. The likes of 484 00:30:46,920 --> 00:30:51,240 Speaker 1: Brian Armstrong, Jimmy Fallon, and Steve Aoki were potentially committing 485 00:30:51,360 --> 00:30:55,040 Speaker 1: sanctions violations by appearing to be doing business with a 486 00:30:55,160 --> 00:30:58,720 Speaker 1: sanctioned protocol. What's even crazier than that is that some 487 00:30:58,960 --> 00:31:01,400 Speaker 1: of those users who were hit with the dust found 488 00:31:01,480 --> 00:31:03,680 Speaker 1: that they were not able to interact with our vey's 489 00:31:03,760 --> 00:31:07,280 Speaker 1: front end. These included the likes of Anthony Sassano and 490 00:31:07,600 --> 00:31:12,520 Speaker 1: Justin Son. But perhaps the most chilling development, at least 491 00:31:12,760 --> 00:31:15,959 Speaker 1: so far, was the arrest by Dutch police of one 492 00:31:16,000 --> 00:31:20,239 Speaker 1: of Tornado Cash's developers, Alexei Pertzev. Was picked up by 493 00:31:20,280 --> 00:31:24,120 Speaker 1: the Dutch Fiscal Information and Investigation Service f i o 494 00:31:24,240 --> 00:31:28,800 Speaker 1: D two days after Tornado Cash was sanctioned. Now, the 495 00:31:28,920 --> 00:31:31,920 Speaker 1: exact reasons for his arrest and what he is actually 496 00:31:31,960 --> 00:31:36,520 Speaker 1: being accused of remain unknown. But if it's just because 497 00:31:36,600 --> 00:31:39,960 Speaker 1: he wrote some code, then this is a dangerous precedent 498 00:31:40,160 --> 00:31:42,520 Speaker 1: for a number of reasons, which I'll explore a little 499 00:31:42,600 --> 00:31:45,800 Speaker 1: later on. The first thing that we need to be 500 00:31:45,880 --> 00:31:49,440 Speaker 1: asking ourselves, however, is whether these actions by the Treasury 501 00:31:49,720 --> 00:31:54,240 Speaker 1: were legal. Allow me to explain. This is the first 502 00:31:54,360 --> 00:31:58,720 Speaker 1: time that the Treasury has effectively sanctioned a tool, a 503 00:31:58,840 --> 00:32:02,400 Speaker 1: piece of open source code that exists on the Ethereum 504 00:32:02,400 --> 00:32:06,520 Speaker 1: blockchain and which can be used by anyone for any purpose, 505 00:32:06,600 --> 00:32:10,600 Speaker 1: be it good or bad. Given that it is open source, 506 00:32:10,920 --> 00:32:13,000 Speaker 1: that means it is akin to the likes of a 507 00:32:13,160 --> 00:32:16,920 Speaker 1: public good. So that could be analogous to a road 508 00:32:17,240 --> 00:32:19,760 Speaker 1: or a park. So it would be as if o 509 00:32:19,920 --> 00:32:22,640 Speaker 1: FAC were to sanction the use of an interstate highway 510 00:32:22,920 --> 00:32:26,120 Speaker 1: because drug dealers drive on it, Or if you wanted 511 00:32:26,200 --> 00:32:29,200 Speaker 1: a more relevant example, it would be like the Treasury 512 00:32:29,280 --> 00:32:32,600 Speaker 1: sanctioning the t c P I P protocol because hackers 513 00:32:32,720 --> 00:32:37,920 Speaker 1: use the Internet for hacking, it's impractical. Moreover, just because 514 00:32:38,120 --> 00:32:41,200 Speaker 1: a tool is sanctioned does not mean that the criminals 515 00:32:41,440 --> 00:32:44,800 Speaker 1: are not going to use it. That's because criminals, by 516 00:32:44,960 --> 00:32:49,280 Speaker 1: definition have zero consideration for the law. They're likely to 517 00:32:49,400 --> 00:32:53,360 Speaker 1: continue using the smart contract as they see fit. Then 518 00:32:53,720 --> 00:32:57,240 Speaker 1: there is the very important question of whether sanctioning a 519 00:32:57,320 --> 00:33:00,720 Speaker 1: piece of code violates the First and men mint allow 520 00:33:00,800 --> 00:33:05,320 Speaker 1: me to explain. You see, thanks to a case Bernstein 521 00:33:05,520 --> 00:33:08,840 Speaker 1: versus the d o J, it's been established that code 522 00:33:09,000 --> 00:33:12,560 Speaker 1: should be considered speech, and if it is indeed speech, 523 00:33:12,760 --> 00:33:16,000 Speaker 1: then it should be protected by the First Amendment. By 524 00:33:16,120 --> 00:33:19,440 Speaker 1: sanctioning this tool, the Treasury is effectively saying that the 525 00:33:19,560 --> 00:33:23,200 Speaker 1: speech itself is illegal. Now there is a very real 526 00:33:23,320 --> 00:33:27,200 Speaker 1: possibility that should someone want to challenge these sanctions, they 527 00:33:27,280 --> 00:33:30,440 Speaker 1: could have a strong case in court. The Coin Center 528 00:33:30,520 --> 00:33:34,239 Speaker 1: lobbying group has stated that it plans to Moreover, if 529 00:33:34,320 --> 00:33:37,520 Speaker 1: indeed the only thing the developer did was right code, 530 00:33:37,800 --> 00:33:40,200 Speaker 1: then that could also be seen as a violation of 531 00:33:40,360 --> 00:33:44,160 Speaker 1: free speech. Now, I'm sure that more astute legal minds 532 00:33:44,200 --> 00:33:46,480 Speaker 1: than mine are going to have a field day with 533 00:33:46,560 --> 00:33:50,040 Speaker 1: this case. But if there are any legal challenges mounted, 534 00:33:50,120 --> 00:33:52,640 Speaker 1: it will take a long time for them to be settled. 535 00:33:53,040 --> 00:33:56,040 Speaker 1: Until that time, the sanctions will have to be enforced, 536 00:33:56,080 --> 00:33:59,200 Speaker 1: and that means that all those defied projects and protocols 537 00:33:59,400 --> 00:34:03,400 Speaker 1: will hinue blacklisting the smart contract less the teams behind 538 00:34:03,480 --> 00:34:06,840 Speaker 1: them fancy a date with a prison cell. Apart from 539 00:34:07,040 --> 00:34:10,680 Speaker 1: the legal aspect, there is the practical consideration for how 540 00:34:10,760 --> 00:34:14,640 Speaker 1: this will be enforced. To remember, criminals are criminals, and 541 00:34:14,719 --> 00:34:17,920 Speaker 1: they will continue to use it. The code is open 542 00:34:18,000 --> 00:34:21,880 Speaker 1: source and free to fork. Should that happen, the Treasury 543 00:34:22,000 --> 00:34:24,080 Speaker 1: will end up playing whack a mole with a bunch 544 00:34:24,200 --> 00:34:28,080 Speaker 1: of newly deployed smart contracts. Not only that, but those 545 00:34:28,200 --> 00:34:30,880 Speaker 1: other crypto projects and protocols are also going to have 546 00:34:30,960 --> 00:34:33,160 Speaker 1: to monitor not only the funds that are coming from 547 00:34:33,200 --> 00:34:36,440 Speaker 1: the original Tornado Cash smart contract, but also from all 548 00:34:36,520 --> 00:34:41,000 Speaker 1: the forked ones. This could quickly become a logistical impossibility, 549 00:34:41,080 --> 00:34:44,040 Speaker 1: and projects will always have to worry whether any ether 550 00:34:44,080 --> 00:34:47,040 Speaker 1: they handle has gone through a forked version of the 551 00:34:47,120 --> 00:34:50,880 Speaker 1: original Tornado Cash. And speaking of which, there's also the 552 00:34:50,960 --> 00:34:54,160 Speaker 1: broader question around who, as a result of these sanctions 553 00:34:54,440 --> 00:34:58,520 Speaker 1: could technically find themselves in violation of oh fact rules. 554 00:34:59,239 --> 00:35:02,560 Speaker 1: If someone say from the Tornado contract to you, does 555 00:35:02,640 --> 00:35:05,560 Speaker 1: that mean you are in violation? I mean it's not 556 00:35:05,680 --> 00:35:08,560 Speaker 1: like you can refuse to receive it. As we saw 557 00:35:08,719 --> 00:35:12,640 Speaker 1: with those dusting attacks. Protocols themselves have started blocking some 558 00:35:12,880 --> 00:35:16,359 Speaker 1: of these dusted addresses. Could the Feds start going after 559 00:35:16,480 --> 00:35:19,279 Speaker 1: any of those wallets that have received tornado tainted eath? 560 00:35:19,480 --> 00:35:22,240 Speaker 1: Could we soon see Jimmy Fallon dragged away in cuffs? 561 00:35:22,880 --> 00:35:26,080 Speaker 1: It's not even about addresses that have received funds. What 562 00:35:26,239 --> 00:35:29,440 Speaker 1: about liquidity providers on the decks? What happens if they 563 00:35:29,640 --> 00:35:33,120 Speaker 1: unknowingly convert eth that has been through Tornado Cash into 564 00:35:33,200 --> 00:35:37,400 Speaker 1: some other cryptocurrency? Are they thus engaging with sanctioned entities? 565 00:35:38,000 --> 00:35:41,680 Speaker 1: What about ethereum miners? What liability do they have if 566 00:35:41,760 --> 00:35:44,560 Speaker 1: they were to propagate a block that included a Tornado 567 00:35:44,640 --> 00:35:47,680 Speaker 1: cash transaction? Does that mean that they could also be 568 00:35:47,800 --> 00:35:51,759 Speaker 1: flirting with illegality? Or how about that eth that's sent 569 00:35:51,960 --> 00:35:54,839 Speaker 1: to the eath to steaking contract? What would that mean 570 00:35:54,960 --> 00:35:58,520 Speaker 1: for proof of steak ethereum? What happens once the transition 571 00:35:58,640 --> 00:36:01,719 Speaker 1: to proof of steak is completed? Will validators have to 572 00:36:01,800 --> 00:36:06,240 Speaker 1: decide to censor certain transactions that their jurisdiction deems as illegal? 573 00:36:06,600 --> 00:36:10,160 Speaker 1: Could they get slashed? So you can see how quickly 574 00:36:10,320 --> 00:36:13,480 Speaker 1: this grows out of control. The crypto space has just 575 00:36:13,680 --> 00:36:17,160 Speaker 1: seen a massive can of worms opened up right in 576 00:36:17,280 --> 00:36:20,040 Speaker 1: front of it. Now. Of course, there will be some 577 00:36:20,280 --> 00:36:23,920 Speaker 1: who claim that these actions are justified. Swiped funds from 578 00:36:23,960 --> 00:36:26,520 Speaker 1: some of the most high profile crypto hacks of the 579 00:36:26,560 --> 00:36:29,919 Speaker 1: past two years have gone through Tornado. This was seen 580 00:36:29,960 --> 00:36:32,600 Speaker 1: in the wake of the one million dollar Harmony hack 581 00:36:32,840 --> 00:36:35,960 Speaker 1: that took place a few weeks ago. There are plenty 582 00:36:36,040 --> 00:36:38,720 Speaker 1: of people who have been asking whether there are really 583 00:36:38,880 --> 00:36:42,880 Speaker 1: any legitimate use cases for Tornado cash, a tool designed 584 00:36:43,000 --> 00:36:47,640 Speaker 1: specifically for privacy. Essentially, this all comes down to the 585 00:36:47,719 --> 00:36:51,040 Speaker 1: broader question of why someone would want to have financial 586 00:36:51,120 --> 00:36:54,120 Speaker 1: privacy in the first place. As the old saying goes, 587 00:36:54,280 --> 00:36:57,359 Speaker 1: if you have nothing to hide, why do you worry? Well, 588 00:36:57,640 --> 00:37:01,799 Speaker 1: for plenty of reasons as it happens. Firstly, because blockchains 589 00:37:01,880 --> 00:37:05,960 Speaker 1: are public and transparent, everyone can see exactly what your 590 00:37:06,000 --> 00:37:08,840 Speaker 1: wallets are doing and what you could be buying or 591 00:37:08,960 --> 00:37:12,880 Speaker 1: investing in. This is not the case with trad fi, 592 00:37:13,040 --> 00:37:16,280 Speaker 1: where your bank account balances and spending habits aren't public. 593 00:37:16,920 --> 00:37:19,800 Speaker 1: The moment they are public and someone can attach it 594 00:37:19,880 --> 00:37:22,480 Speaker 1: to your I r L identity, it opens you up 595 00:37:22,560 --> 00:37:26,120 Speaker 1: to potential physical harm if criminals ever wanted to get 596 00:37:26,160 --> 00:37:29,880 Speaker 1: access to your crypto, or perhaps you wanted to donate 597 00:37:29,960 --> 00:37:32,520 Speaker 1: crypto to a cause, which may get you into some 598 00:37:32,719 --> 00:37:36,359 Speaker 1: serious trouble in your country. For example, what happens if 599 00:37:36,400 --> 00:37:39,880 Speaker 1: you were a citizen of Iran or Venezuela who wanted 600 00:37:39,920 --> 00:37:42,880 Speaker 1: to donate to a journalist or newspaper that the government 601 00:37:42,960 --> 00:37:47,080 Speaker 1: didn't like. Blockchain is immutable, you'd live in constant fear 602 00:37:47,160 --> 00:37:49,840 Speaker 1: of being placed on a list of some kind. Or 603 00:37:50,080 --> 00:37:52,360 Speaker 1: how about if you were a Russian who wanted to 604 00:37:52,480 --> 00:37:55,759 Speaker 1: donate to Ukraine, not something that you would like the 605 00:37:55,960 --> 00:37:59,080 Speaker 1: FSB to know about. On the flip side, you could 606 00:37:59,120 --> 00:38:02,160 Speaker 1: be a Ukrainian refugee wanting to hide where you were 607 00:38:02,160 --> 00:38:05,640 Speaker 1: getting your donations from. This is something that Fatalik himself 608 00:38:05,920 --> 00:38:09,280 Speaker 1: highlighted earlier this year when he donated to the country. 609 00:38:10,040 --> 00:38:13,759 Speaker 1: Beyond such high stakes implications, it could also just be 610 00:38:13,840 --> 00:38:17,040 Speaker 1: a situation in which you don't want people you interact 611 00:38:17,080 --> 00:38:19,879 Speaker 1: with on chain to know what you do with your money. 612 00:38:20,480 --> 00:38:23,400 Speaker 1: For example, let's assume that you get paid in crypto. 613 00:38:24,000 --> 00:38:26,640 Speaker 1: That means that your employer will be able to see 614 00:38:26,760 --> 00:38:30,440 Speaker 1: exactly what you do with that money and what you're buying. 615 00:38:31,239 --> 00:38:34,040 Speaker 1: Or perhaps you're buying something from an online merchant and 616 00:38:34,200 --> 00:38:35,960 Speaker 1: you don't want them to know what else you've been 617 00:38:36,000 --> 00:38:38,759 Speaker 1: spending the money on or how much you have Just 618 00:38:38,920 --> 00:38:43,160 Speaker 1: imagine the targeted advertising. Ironically, this would be a lot 619 00:38:43,239 --> 00:38:46,239 Speaker 1: easier to achieve when paying with a completely open and 620 00:38:46,320 --> 00:38:50,080 Speaker 1: permissionless form of money. Now, these are all reasons as 621 00:38:50,120 --> 00:38:54,359 Speaker 1: to why someone would want to anonymize their transaction history. Now, 622 00:38:54,840 --> 00:38:58,480 Speaker 1: some might say you could just use a centralized exchange. However, 623 00:38:58,760 --> 00:39:02,360 Speaker 1: the whole point of de centralized and censorship resistant currency 624 00:39:02,719 --> 00:39:07,160 Speaker 1: is that you don't have to rely on a centralized gatekeeper. Moreover, 625 00:39:07,560 --> 00:39:11,120 Speaker 1: some people are just not comfortable having others holding their 626 00:39:11,160 --> 00:39:15,160 Speaker 1: private keys, and can you blame them? It was also 627 00:39:15,440 --> 00:39:18,880 Speaker 1: pretty disingenuous for the Treasury to claim in its press 628 00:39:18,920 --> 00:39:23,040 Speaker 1: release that seven billion dollars was laundered through Tornado Cash. 629 00:39:23,800 --> 00:39:27,960 Speaker 1: That was the total volume of transactions, many of which 630 00:39:28,040 --> 00:39:31,120 Speaker 1: would have been for such perfectly legitimate reasons as I 631 00:39:31,239 --> 00:39:34,480 Speaker 1: have just talked about. In fact, according to stats from 632 00:39:34,520 --> 00:39:38,320 Speaker 1: the blockchain sleuths over at Chain Analysis, only about sevent 633 00:39:39,160 --> 00:39:42,000 Speaker 1: of the funds that flowed through the protocol were tied 634 00:39:42,120 --> 00:39:48,200 Speaker 1: to sanctioned activity. The vast majority was related to defy activities. 635 00:39:48,880 --> 00:39:52,280 Speaker 1: That means that these users were thrown into the laundering 636 00:39:52,320 --> 00:39:55,120 Speaker 1: bucket by the Treasury when all they were really doing 637 00:39:55,320 --> 00:39:59,719 Speaker 1: was trying to anonymize their funds. So this raises the 638 00:40:00,400 --> 00:40:03,719 Speaker 1: of what all this means for crypto privacy and heck, 639 00:40:04,080 --> 00:40:08,960 Speaker 1: privacy in general. Well, it's quite clear that privacy is 640 00:40:09,080 --> 00:40:12,880 Speaker 1: under attack. Yes, this move by the Treasury was prompted 641 00:40:12,920 --> 00:40:16,359 Speaker 1: by concerns around North Korean hacking, but the tool used 642 00:40:16,560 --> 00:40:18,960 Speaker 1: is so blunt for the effect it's trying to achieve 643 00:40:19,280 --> 00:40:21,279 Speaker 1: that you have to wonder whether the folks at oh 644 00:40:21,360 --> 00:40:25,520 Speaker 1: FAK gave any thought to collateral damage. Many have drawn 645 00:40:25,600 --> 00:40:29,759 Speaker 1: parallels with the early crypto wars. For example, for those unfamiliar, 646 00:40:30,080 --> 00:40:33,440 Speaker 1: this was when the US government arrested Phil Zimmerman, a 647 00:40:33,520 --> 00:40:38,840 Speaker 1: developer who distributed PGP cryptography online. They accused him of 648 00:40:39,000 --> 00:40:43,920 Speaker 1: quote munitions export without a license, Yes, that's right. They 649 00:40:44,000 --> 00:40:47,640 Speaker 1: contended that his p GP encryption system was a weapon 650 00:40:47,960 --> 00:40:51,480 Speaker 1: that could be used by adversaries. I mean, heck, while 651 00:40:51,520 --> 00:40:55,120 Speaker 1: on Earth would someone want privacy online, only criminals and 652 00:40:55,320 --> 00:40:59,560 Speaker 1: enemy governments would want to encrypt their communications. Well, it 653 00:40:59,680 --> 00:41:03,080 Speaker 1: turned out that there were many many practical uses for 654 00:41:03,200 --> 00:41:07,080 Speaker 1: encryption online and various encryption standards have helped power the 655 00:41:07,239 --> 00:41:11,040 Speaker 1: multibillion dollar e commerce revolution that we've experienced over the 656 00:41:11,120 --> 00:41:14,480 Speaker 1: last twenty years. What was initially considered a way to 657 00:41:14,600 --> 00:41:19,000 Speaker 1: hide state secrets has in fact allowed legal commerce to thrive. 658 00:41:19,800 --> 00:41:22,239 Speaker 1: I'll leave some resources in the description for you where 659 00:41:22,239 --> 00:41:24,560 Speaker 1: you can get some more information on the crypto wars. 660 00:41:24,680 --> 00:41:29,120 Speaker 1: It is a fascinating subject. Back to cryptocurrency though, and 661 00:41:29,480 --> 00:41:32,880 Speaker 1: many have also been wondering why Tornado Cash got hit 662 00:41:33,000 --> 00:41:37,480 Speaker 1: and not other well known crypto projects like Manero for example. Well, 663 00:41:37,960 --> 00:41:40,759 Speaker 1: my assumption is that mixers are viewed with a lot 664 00:41:40,880 --> 00:41:45,200 Speaker 1: more suspicion than privacy. By default, cryptocurrencies people could see 665 00:41:45,320 --> 00:41:48,880 Speaker 1: on chain how the Lazarus group was laundering its funds 666 00:41:49,000 --> 00:41:52,280 Speaker 1: through the tool. This isn't something that you can easily 667 00:41:52,320 --> 00:41:56,759 Speaker 1: observe with Manero. Moreover, the mere volume of funds that 668 00:41:56,840 --> 00:41:59,920 Speaker 1: were running through Tornado Cash made it a prime target. 669 00:42:00,760 --> 00:42:04,880 Speaker 1: But this doesn't mean that Manero isn't being studied and tracked. 670 00:42:05,200 --> 00:42:07,840 Speaker 1: I can only imagine that there is a strong state 671 00:42:07,960 --> 00:42:11,719 Speaker 1: backed effort to crack the ring signature technology it's famous for. 672 00:42:12,480 --> 00:42:14,880 Speaker 1: This is perhaps one of the reasons why the Manero 673 00:42:15,000 --> 00:42:18,040 Speaker 1: devs push some new upgrades to the protocol only a 674 00:42:18,120 --> 00:42:21,960 Speaker 1: few days ago. Now some are advancing another argument, and 675 00:42:22,120 --> 00:42:24,800 Speaker 1: that's that this could be a good thing for crypto 676 00:42:24,920 --> 00:42:28,200 Speaker 1: in the long term. These include the likes of Kevin O'Leary, 677 00:42:28,320 --> 00:42:31,560 Speaker 1: a k A. Mr Wonderful. He said in a recent 678 00:42:31,680 --> 00:42:35,560 Speaker 1: YouTube video that cracking down on quote crypto cowboy culture 679 00:42:35,960 --> 00:42:39,680 Speaker 1: was needed if we wanted to see widespread institutional adoption, 680 00:42:40,200 --> 00:42:43,439 Speaker 1: that we needed a quote rules based environment in order 681 00:42:43,480 --> 00:42:47,760 Speaker 1: to attract real institutional capital into the digital asset industry. 682 00:42:48,360 --> 00:42:51,920 Speaker 1: These seem to be fair points. Institutions do want a 683 00:42:51,960 --> 00:42:55,080 Speaker 1: more transparent and well regulated crypto space before they all 684 00:42:55,120 --> 00:42:58,839 Speaker 1: feel comfortable throwing large sums of money into it. For them, 685 00:42:59,080 --> 00:43:04,520 Speaker 1: privacy isn't a major concern money is. Financial freedom isn't. 686 00:43:04,600 --> 00:43:08,200 Speaker 1: Why so many so called decentralized Web three projects are 687 00:43:08,239 --> 00:43:11,840 Speaker 1: getting multiple billions in VC funding. If the name of 688 00:43:11,880 --> 00:43:14,960 Speaker 1: the game is mass adoption through the paths of least resistance, 689 00:43:15,120 --> 00:43:20,040 Speaker 1: then a more centralized and controllable defy is the way. However, 690 00:43:20,480 --> 00:43:23,400 Speaker 1: is that the defy we want? Do we want to 691 00:43:23,480 --> 00:43:26,279 Speaker 1: trad fi lapping is defied to achieve our goals of 692 00:43:26,440 --> 00:43:30,759 Speaker 1: mass adoption? Not me personally, but you may have a 693 00:43:30,880 --> 00:43:39,560 Speaker 1: different perspective. Okay, Time for some of my closing thoughts 694 00:43:39,600 --> 00:43:42,040 Speaker 1: on the matter. Now. Firstly, I think we can all 695 00:43:42,080 --> 00:43:45,319 Speaker 1: agree that those who engage in criminality should be brought down. 696 00:43:45,640 --> 00:43:47,960 Speaker 1: The laundering of ill gotten gains, be it through a 697 00:43:48,040 --> 00:43:51,560 Speaker 1: bank account or a defied protocol, should be prosecuted to 698 00:43:51,680 --> 00:43:55,440 Speaker 1: the full extent of the law. Those wallets identified as 699 00:43:55,480 --> 00:43:59,400 Speaker 1: being linked to criminal activity should also be sanctioned and flagged. 700 00:44:00,120 --> 00:44:03,640 Speaker 1: This is exactly what the Treasury had been doing prior 701 00:44:03,800 --> 00:44:07,560 Speaker 1: to the Tornado Cash sanctions being imposed, and it's not 702 00:44:07,800 --> 00:44:12,040 Speaker 1: as though this approach wasn't enjoying some success. Thanks to 703 00:44:12,120 --> 00:44:16,040 Speaker 1: some pretty advanced tools and tracking services, law enforcement is 704 00:44:16,160 --> 00:44:19,919 Speaker 1: able to catch such miscreants more effectively than they could 705 00:44:20,000 --> 00:44:23,520 Speaker 1: in the past. They also have the power of subpoenas 706 00:44:23,600 --> 00:44:27,399 Speaker 1: and search warrants. Quite simply, they didn't need to take 707 00:44:27,480 --> 00:44:30,800 Speaker 1: this action against Tornado Cash. As I've pointed out, the 708 00:44:30,960 --> 00:44:34,000 Speaker 1: net result is a loss of privacy for some and 709 00:44:34,280 --> 00:44:37,320 Speaker 1: a massive mess up for all in the DeFi space. 710 00:44:38,160 --> 00:44:40,719 Speaker 1: As for those North Korean hackers, they'll just switch to 711 00:44:40,800 --> 00:44:43,280 Speaker 1: one of the other one hundred or so laundering techniques 712 00:44:43,320 --> 00:44:47,320 Speaker 1: that they were using long before Tornado came about. Moreover, 713 00:44:47,560 --> 00:44:50,279 Speaker 1: given that Tornado cash is nothing but code, it will 714 00:44:50,320 --> 00:44:53,160 Speaker 1: be hard to permanently outlaw. It will be a game 715 00:44:53,239 --> 00:44:55,760 Speaker 1: of whack a mole, It won't have the desired effect, 716 00:44:55,840 --> 00:44:59,880 Speaker 1: and the collateral damage is already permeating through the crypto industry. 717 00:45:00,560 --> 00:45:04,320 Speaker 1: There are also all the legal questions raised by these actions. 718 00:45:04,760 --> 00:45:07,000 Speaker 1: Is this a breach of the First Amendment? And what 719 00:45:07,160 --> 00:45:09,440 Speaker 1: happens to any of those citizens who have used it 720 00:45:09,520 --> 00:45:12,960 Speaker 1: in the past or anyone that interacts with it. It's 721 00:45:13,000 --> 00:45:16,440 Speaker 1: a legal quagmire, no doubt about it. There may be 722 00:45:16,760 --> 00:45:20,040 Speaker 1: legal challenges, and perhaps this could turn into a new 723 00:45:20,200 --> 00:45:23,720 Speaker 1: crypto war, one with a net positive long term impact 724 00:45:23,960 --> 00:45:27,160 Speaker 1: as we saw with the first crypto war. Or perhaps 725 00:45:27,360 --> 00:45:31,239 Speaker 1: the large centralized institutions will conform and will have a 726 00:45:31,360 --> 00:45:35,640 Speaker 1: more amenable, but less free crypto space. One thing this 727 00:45:36,040 --> 00:45:39,560 Speaker 1: does show us, however, is how centralized the crypto space 728 00:45:39,640 --> 00:45:43,440 Speaker 1: has become and how dependent we are on certain services 729 00:45:43,480 --> 00:45:47,440 Speaker 1: and depths. It also demonstrates how willing certain developers are 730 00:45:47,640 --> 00:45:51,960 Speaker 1: to really embrace decentralization. I mean, when you have the 731 00:45:52,040 --> 00:45:55,600 Speaker 1: threat of sanctions violation over your head, it changes your 732 00:45:55,680 --> 00:45:59,319 Speaker 1: risk calculus. I don't know how many dept developers would 733 00:45:59,360 --> 00:46:02,439 Speaker 1: be ideally stick enough to want to risk thirty years 734 00:46:02,480 --> 00:46:06,359 Speaker 1: in prison. One thing is for certain, those Tornado Cash 735 00:46:06,440 --> 00:46:11,080 Speaker 1: sanctions could have significant implications for the crypto industry, some 736 00:46:11,239 --> 00:46:14,200 Speaker 1: of which will only become apparent further down the line. 737 00:46:14,719 --> 00:46:17,400 Speaker 1: Whatever happens, though, it's a story we will be keeping 738 00:46:17,520 --> 00:46:20,239 Speaker 1: a very close eye on and will be updating you 739 00:46:20,360 --> 00:46:24,719 Speaker 1: folks every step of the way. Thank you so much 740 00:46:24,760 --> 00:46:27,560 Speaker 1: for listening to the coin Bureau podcast. If you'd like 741 00:46:27,640 --> 00:46:30,960 Speaker 1: to learn more about cryptocurrency, you can visit our YouTube 742 00:46:31,040 --> 00:46:34,360 Speaker 1: channel at YouTube dot com forward slash coin Bureau. You 743 00:46:34,440 --> 00:46:36,920 Speaker 1: can also go to coin bureau dot com for loads 744 00:46:36,960 --> 00:46:39,680 Speaker 1: more information about all things crypto. You can follow me 745 00:46:39,760 --> 00:46:42,640 Speaker 1: on Twitter at at coin bureau or one word, and 746 00:46:42,880 --> 00:46:45,719 Speaker 1: I'm also active on TikTok and Instagram too,