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digital
daily

digital daily: Philosophy

Philosophy. September 13 – the release date for Vitalik Buterin’s “Proof of Stake.” This will be more on philosophy than the narrow confines of blockchain engineering, a philosophy that Ethereum’s transition to proof of stake aims to unlock, from organization design to democracy. The ambition is to recalibrate the use of the internet away from centralized pools to decentralize engagement that brings control and freedoms to its users. The ambition is admirable. And the Ethereum Foundation aims to complete the merge to proof-of-stake shortly after the book's release. The high-level fanfare is understandable for a digital asset market looking for a narrative pivot. But the details will determine the pathway to the philosophy. A good example is the emergence of “liquid staking” into the merge. Staking ether to the Beacon Chain was the ultimate long-run investor vote of confidence in the protocol. Staking ether was a one-way street – you can only get access to the ether after the merge. If the merge never happened, the staked ether is a stranded asset. Liquid staking “solutions” emerged out of frustration on the timing of the merge. Lido created a “liquid” staking derivative – stETH – that is reserved by a combination of ETH on the Mainnet and staked ETH on the Beacon Chain. Investors were able to earn some yield on ether with better liquidity characteristics. And it has been popular, with Lido accounting for 31% of total staked ether. Its popularity is at odds with the philosophy. The risk is centralization. Governance for Ethereum can be dominated by the Lido DAO if Lido is the preferred staking mechanism. Several proponents of Ethereum have expressed concerns. A proposal was sent to self-limit the amount of Lido that could be staked in June. 99.81% of participants voted against it. Realizing the potential of decentralization will take time and patience. Users are only just starting in digital arenas, and they take comfort in centralized support. It will take time, patience, and a lot of education from the Ethereum Foundation for users to embrace the independence the protocols afford them. It’s early. Really early.

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