Pontem Weekly Livestream Recap October 7, 2022

Welcome back! This week our topic is decentralization, which is a very important topic. It’s one of those core pillars of crypto that we should strive to reach, so stick with us as we dive into this topic.

1. How do you plan to compete with decentralization?

Decentralization is very important, however, it’s a tradeoff. Centralization comes with more efficiency. You can move a lot faster. But it also comes with drawbacks, such as the ability to turn into a monopoly, where they can then price fix. , Tthere’s potentially decreased options as well. But with crypto technology, it is important for it to be decentralized and censorship- resistant in order for it to be robust enough to counter attacks. For example, on something like Solana or Binance Smart Chain, chain halts can be done by a small number of people. This could potentially be dangerous, especially if state actors might want to censor the entire blockchain or start locking people out of transactions.

There are various ways of achieving decentralization. One way is giving power to the community and token holders via governance proposals and governance on the protocols and parameters. Another way is making sure you are distributed broadly.  

These protocols are standards for sending messages. Specifically, for something like our decentralized exchange Liquidswap, it’s a standard for sending messages peer-to-peer that allows you to swap one coin for another. So we strive to use the best of this technology to make it decentralized, like immutable ships, meaning our protocol is live and cannot be upgraded directly by us. And making sure that the contracts are not upgradable, which can be a vulnerability due to centralization. I believe decentralization is a competitive advantage, but it does have its drawbacks by not allowing us to move as quickly.

2. What do you guys think about networks that are a little more centralized? For instance, Binance Chain was hacked and validators were able to halt the chain to stop the attack.

I would say it's a spectrum, and it has its pros and cons. The trilemma around security, scalability, and decentralization should definitely be taken very seriously, but decentralization will always be a spectrum itself. In the case of Binance Smart Chain, the ability to halt the chain, especially in this instance, people might see it as a positive. Originally, if I’m not mistaken, it was almost $500 or $600 million dollars at stake, so it’s an advantage they were able to stop that. However, this is an instance where something bad happened, so it was a good thing they could halt it. But it’s also a scary thought that they have the complete ability to do that. Imagine an authoritarian regime asks the chain to halt for some reason, censor the chain from certain groups or regions, or just simply asks for the funds. We have to just trust and hope that the chain can’t be coerced into doing so. The ability to halt transactions is good in times of hacks, but if that power is put into the wrong hands, it could potentially be dangerous or at least go against the ethos of blockchain. More centralized chains can be faster and more “secure” in the way that they can halt the chain to stop attacks, but there can be unintended consequences.  

If you think about it though, even Bitcoin isn’t that decentralized because the top 3 Bitcoin pools have access to more than 51% of the coins. So theoretically, if all three pools colluded, they could 51% attack. Similarly, most Ethereum nodes are run through Infura or one of these large RPC providers, which are mostly located in the US and Europe. So if a state actor wanted to make running nodes illegal, it could potentially take down the whole network. But this kind of happened with Bitcoin when mining was made illegal in China. All of the miners migrated to other countries like Kazakhstan. There was definitely a drop in the hashrate but then it found its way right back to normal.                    

3. What are your thoughts on miner extractable value?

I think miner extractable value is a really big issue, as well as a really big opportunity because there are a lot of inefficiencies in markets. There are pros and cons just like everything. At the end of the day, I do think it’s user choice, which is delegated through protocols. If people know the tradeoffs, they’ll opt into the protocols that give them the kind of choice they’re looking for. There will always be a market for malicious purposes, but people can minimize those by choosing the protocols that don’t allow them.  

4. How many types of decentralization are there?

It’s not so much that there are types, it’s a spectrum or a tradeoff. Vitalik Buterin introduced the trilemma of blockchain: there are trade-offs between security, decentralization, and scalability. A parameter to measure decentralization is censorship resistance. Security and scalability are important things for users, but there is a trade-off between security and decentralization. The more security there is, the more centralized an entity is and thus vulnerable to attack, malicious activity or corruption. As a user, you can choose how much security and decentralization you want.

Interestingly enough, Ethereum’s upgrade cycles are not very decentralized. And this is potentially a benefit on Aptos where we can be more decentralized than Ethereum, and that is protocol upgrades can happen on chain with token holders voting. This is not how it’s done on Ethereum. It’s a small group of people who decide on the roadmap for Ethereum that gets implemented. Ethereum users don’t really get to vote.  

5. How do we solve DeFi’s biggest challenge: trust? What are the tools to maintain the privacy and security of DeFi users and how do they work?

Trust is not only a big issue in crypto, but also the main benefit we get from using crypto. You have to trust the developers and the smart contracts. You want to make sure that the code you’re trusting your funds with is immutable, meaning it can’t be changed by developers who later pull the plug and steal everyone’s funds. You want to make sure it’s a peer-neutral protocol that nobody can stop, because if that power gets put in the wrong hands the funds are at risk. We do have an emergency stop button just in case something goes wrong, but we might get rid of that in the future if that becomes a possibility.  

With regards to tools, I think in the future we will see roll-ups and zero-knowledge individual app chains running on ZK-proof sidechains. We’re starting to see this on Ethereum. I think the ZK VM is coming out soon. Obviously privacy is a main concern, but what I’m interested in is how regulators will regulate privacy because they can just do a broad brush and make the whole thing sanctioned.    

6. Although decentralized exchanges offer greater reliability and security availability than centralized exchanges, some of their limits are that they’re slower and charge big fees. How do you intend to address these issues?

First, I’ll say that theoretically-speaking, a decentralized exchange should not be more expensive than a centralized exchange. Potentially in gas on Ethereum, but as we reach scalability, these issues should potentially get better. If you actually look at the base fees for most decentralized exchanges, they’re actually way lower than for centralized exchanges. If you are getting lower fees on a centralized exchange, I would really question how you’re getting that.  

In terms of speed, this is a good point. Currently, centralized exchanges can scale transaction throughput pretty quickly. But hopefully as we pioneer on Aptos, which has a throughput of hundreds of thousands of transactions per second, we can match the speed of some of these centralized exchanges. The big trade-off with speed is trust and transparency.          

7. The concept of decentralization is synonymous with proof-of-work because of Bitcoin. After Ethereum switches to proof-of-stake through the merge, it will have shifted to a centralized blockchain concept, which means that it’s indirectly controlled by certain authorities. Will you follow Ethereum or work on decentralization?

I’m not sure that I would agree that Ethereum is shifting to a fully centralized blockchain concept. But proof-of-stake could theoretically be more centralized given that less people have these coins, leaving more room for collusion. However, it does come with advantages like savings on electricity. I definitely agree that proof-of-stake might not be the most decentralized, but we’ll see how it plays out over time.  

Thank you all for listening, and we’ll see you again next week! Join us if you’d like to come up on Discord and ask a question.