Vitalik Buterin is the founder and chief scientist at Ethereum. He discusses the nascent field of Cryptoeconomics, the best analogy for understanding the Blockchain, why belief in progress is our most useful delusion.

Vitalik Buterin

<ul><li>A Blockchain, as a whole, functions like a computer. It has a hard drive and stores on it what all the accounts are.</li><li>It stores the code of all the smart contracts, and what the memory of all the smart contracts are. It accepts incoming instructions that are signed transactions sent by many different users and process them based on a set of rules.</li><li>On a Blockchain, you can build anything you can build on a computer. But it also provides additional trust guarantees that the computer will run in the way you expect it to run. </li></ul>

On blockchain as a ‘world computer’

There are different circles in the Ethereum community, some overlapping, some not.  You could be a full-time employee of the Ethereum Foundation or its outpost in Singapore. You could be a groupie, someone who has intellectual ideas and hangs out with us. You could be part of Ethereum while being part of a structured team. You could be part of it as a single person working at home, or you could be part of it as a member of a traditional, large corporation.

On Ethereum community

Scalability can increase the capacity of Ethereum blockchain and become substantially cheaper and more ready for mainstream use.  User experience could be another breakthrough in terms of using the blockchain, not being as clunky and security.

On future breakthroughs

The Ethereum creator talks with Tyler Cowen about crypto, the blockchain, social science fiction, why belief in progress is our most useful myth, learning new languages, and more.

Discover the world of business and economics.

economics

Economics

At the intersection of programming, economics, cryptography, distributed systems, information theory, and math, you will find

, who has managed to synthesize insights across those fields into successful, real-world applications like Ethereum, which aims to decentralize the Internet.

Tyler sat down with Vitalik to discuss the many things he’s thinking about and working on, including the nascent field of cryptoeconomics, the best analogy for understanding the blockchain, his desire for more social science fiction, why belief in progress is our most useful delusion, best places to visit in time and space, how he picks up languages, why centralization’s not all bad, the best ways to value crypto assets, whether P = NP, and much more.

Do you have a world-changing idea like Vitalik? The Mercatus Center is launching a new fellowship and grant program called Emergent Ventures to support transformational thinkers and doers. Listen to Tyler talk about the new project on the latest <a href="https://www.mercatus.org/bridge/podcasts/07172018/tyler-cowen-announces-emergent-ventures?utm_source=marketing&utm_medium=email&utm_campaign=cwtrelease">Mercatus Policy Download </a>, and <a href="https://www.mercatus.org/emergentventures?utm_source=marketing&utm_medium=email&utm_campaign=cwtrelease">click here to learn more </a>.

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TYLER COWEN: Hello. I’m here today with <a href="https://blockonomi.com/vitalik-buterin-profile/">Vitalik Buterin </a>, who is founder and chief scientist at <a href="https://ethereum.org/">Ethereum </a>. I’d like to start with what I call the Vitalik Buterin production function — that is, how you get things done.

I went back and I reread all of the papers on your <a href="https://vitalik.ca/">home page </a>. I found it quite striking that there were two very important economics results, one based on <a href="http://policonomics.com/mankiw-menu-cost/">menu costs </a>associated with the name of <a href="https://scholar.harvard.edu/mankiw/biocv">Greg Mankiw </a>. Another is a <a href="https://economics.barnard.edu/sites/default/files/inline/understanding_fischer_black.pdf">paper on the indeterminacy of monetary equilibrium </a>associated with <a href="https://www.nytimes.com/1995/08/31/obituaries/fischer-black-57-wall-street-theorist-dies.html">Fischer Black </a>.

These are famous papers. On your own, you appear to rediscover these results without knowing about the papers at all. So how would you describe how you teach yourself economics?

VITALIK BUTERIN: I guess it involves a combination of things. Some of it is reading what various economists on the internet say. Some of it is reading papers. Sometimes, if I want to dig into some topic more deeply, I end up reading books, like I read one on urban transportation economics a while back.

I also go to conferences. I was just at the <a href="http://www.sigecom.org/ec18/schedule_conference.html">Economics and Computation conference </a>with <a href="http://glenweyl.com/">Glen Weyl </a>and other people in Ithaca last week, which I thought was very interesting.

It’s always kind of an indispensable opportunity to physically go to places and actually talk to people, because that way you learn things about both what people are thinking about and how people are thinking in the space that you can’t easily find from the internet.

COWEN: If you think about economics — what you’ve taught yourself — what do you think of as the central ideas relevant for <a href="https://www.youtube.com/watch?v=pKqdjaH1dRo">cryptoeconomics </a>, which is a term I think you coined?

BUTERIN: I would say that cryptoeconomics, first of all, is economics. It’s not like we’re inventing some completely different parallel society with a different parallel economy and different rules, but it is economics specialized to a particular set of circumstances. Then you have to ask yourself, “Well, what describes those circumstances?” There are a few major parts to that answer.

First of all, whatever mechanisms you have in cryptoeconomics land have to be fully specified exactly — not exactly to the standards of a court judge, but exactly to the standards of a computer programmer. What that means is that there’s a lot of things that you can’t do.

For example, you can’t say in cryptoeconomics, “It’s illegal to bribe people,” because there’s really no simple way to define what a bribe is. If someone really wants to bribe someone else, he can just go and do that outside of the protocol, and the protocol would have no way to tell.

Whatever your rules are for rewarding, penalizing inside of the mechanism, they have to be specified as a piece of <a href="http://solidity.readthedocs.io/en/v0.4.24/">Solidity </a>code, Viper code, whatever programming language you’re using in that set. That’s a much tighter constraint than policymakers writing laws have.

Another one is, of course, that all of the actors are anonymous, and what that means in practice is that you cannot drag people’s utility down below zero. If I have 70 <a href="https://www.ethereum.org/ether">ether </a>, and I put that 70 ether into a mechanism, the worst thing you can do to me is you can take away that 70 ether.

You cannot throw me in jail. You cannot socially ostracize me so I can’t earn any money again because I can always just switch identities. But to the extent that I’m willing to lock that ether up and make it vulnerable to a mechanism, then you have the ability to motivate me to that extent.

Cryptoeconomics is basically taking economics with those particular constraints and then adding together insights from fields that are fairly close by to the cryptocurrency space — particularly cryptography, information theory, math, and distributed systems, including all of the research around consensus algorithms, hash functions, signatures, zero-knowledge proofs, and what we know about all of those primitives.

Basically we’re trying to figure out, given these constraints and given these building blocks, what kind of systems and what kind of mechanisms can we design to achieve the properties that we want? And under what kinds of assumptions do those properties hold?

COWEN: What’s the contribution or understanding you wish economics could give you that it hasn’t given you yet? What problem do you want it to solve for you?

BUTERIN: I think that once you start getting into the weeds, and you try to move beyond very simple things like proof of work, the simplest versions of <a href="https://medium.com/@VitalikButerin/a-proof-of-stake-design-philosophy-506585978d51">proof of stake </a>, and the tricks that we’ve known about since 2009 or 2013, then you get into this situation where you realize the kinds of problems that you run into when you try to incentivize behavior.

Particularly when you run into things like what I call <a href="https://vitalik.ca/general/2017/07/16/triangle_of_harm.html">speaker/listener fault equivalence </a>, which is basically this idea that if the protocol requires Alice to send a message to Bob, and the protocol detects that Bob never showed a message from Alice, then the protocol knows that either it’s because Alice forgot to speak or it’s because Bob pretended not to listen.

Then, under those kinds of conditions, trying to figure out what is the right way to motivate Alice and motivate Bob while preserving all sorts of different properties. These are questions that are very close to questions that game theorists, mechanism designers, people in the economics community have already had a lot of things to say about. There definitely are results from the existing fields of economics and game theory that have helped significantly in that regard.

Another whole aspect is also the broader and social question of how will blockchain-based systems actually end up affecting society?

What is a blockchain’s unique competitive advantage? What are things that you can do with blockchains that you can do only with more difficulty without them? Trying to go from there and zero in and try to figure out exactly what industries and what kind of applications in those industries should be going after.

Do the things at the application layer that we’re trying to build even make sense? Should we modify them in some way to have them make more sense? I do think that people from the economics community have a lot to say about that.

Alex Tabarrok, for example, had that very nice <a href="https://marginalrevolution.com/marginalrevolution/2018/06/blockchains-opportunity-commons.html">post on Marginal Revolution </a>a couple of weeks back, where he talked about blockchains in terms of being an alternative to platform monopolies, and I thought that was a very good insight.

I thought that the general idea that a blockchain is one of the few tools that allows you to credibly commit to not turning into a monopolistic jerk is actually a really interesting insight and one that I have arrived at myself, but it definitely helps to have it be crystallized in that way.

COWEN: If you had to explain blockchain to a very smart person from 40 years ago, who knew computers but had no idea of crypto, what would be the best short explanation you could give them, basically, for what you do?

BUTERIN: Sure. One of the analogies I keep going back to is this idea of a “world computer.” The idea, basically, is that a blockchain, as a whole, functions like a computer. It has a hard drive, and on that hard drive, it stores what all the accounts are.

It stores what the code of all the <a href="https://blog.zeppelin.solutions/the-hitchhikers-guide-to-smart-contracts-in-ethereum-848f08001f05">smart contracts </a>is, what the memory of all these smart contracts is. It accepts incoming instructions — and these incoming instructions are signed transactions sent by a bunch of different users — and processes them according to a set of rules.

On a blockchain, you can ultimately build anything that you can build on top of a computer. From a computer science theoretical point of view, in terms of what it provides, you can think about it as being a computer.

But what it provides on top of that is these extra trust guarantees: the guarantee that the computer will run in the way that you expect it to run, and that a few people can’t make that guarantee fail by going out of business, getting hacked, dying, having their company go bankrupt, deciding to be evil one day, deciding they have some monopolistic interest to start acting differently one day, and all of those different issues.

COWEN: A reader wrote to me this question: “A crypto token is in some ways a Schelling point achieved through charisma. Is that secretly what he’s best at?”

BUTERIN: I did <a href="https://ethresear.ch/t/a-signaling-theory-model-of-cryptocurrency-issuance-and-value/1081">write that blog post </a>a couple of months back, and I think this might be one of those things that you referred to, where I talk about this, and of signaling theory, equilibrium of cryptocurrency.

It’s where I basically try to answer the question, “If there isn’t just going to be one cryptocurrency, then what prevents the entire cryptocurrency space from hyperinflating, as people can just costlessly issue more and more?”

The answer that I came up with is that issuing a cryptocurrency by itself is costless, but issuing a cryptocurrency that people care about is not costless. The equilibrium is that there exists this club of cryptocurrencies that people recognize as having value.

It is possible to join the club, but joining the club requires that you undertake some kind of costly signaling expenditure — in some ways burn capital, burn resources, or consume something unique — which is just difficult enough that it prevents people from doing it willy-nilly to the point where all the cryptocurrency hyperinflates.

COWEN: Don’t people trust ether and Ethereum in part because they trust you? In a sense, there’s this Russian tradition of holy men who come along — Dostoyevsky’s <a href="https://en.wikipedia.org/wiki/Alyosha_Karamazov">Alyosha </a>, <a href="https://en.wikipedia.org/wiki/Prince_Myshkin">Prince Myshkin </a>— like a non-evil Rasputin.

The person is innocent and has some very wise message, and people flock to that person. Are you, in a sense, the contemporary version of those figures?

BUTERIN: I know people have different theories about the kind of influence that I myself have. I think part of it is that, at least I feel like, the innovation in the crypto space isn’t just technological innovation or political innovation.

It’s also to a large degree cultural innovation, and even I, with my own behavior, I end up talking to people at different conferences, just reply to random people’s Reddit messages.

I try to make myself maximally accessible in a bunch of ways, try to bring different people in different communities together, perform a kind of social coordination function, which is probably, from an economist’s point of view, similar to some aspects of management, but without the aspects of management that evoke images of centralized control in all those different things.

And that’s not just myself. That’s the Ethereum community. It’s other crypto communities. I do feel like there definitely is a real sense in which the crypto community is also at the epicenter of all of these different cultural ideas of how projects should organize, what it means to be a leader, what it means to be a developer, what it means to be part of a project, what it means to be part of a team.

There’s social dimensions to that. There is ideological dimensions to that. There’s dimensions of how different ideas get spread and become more popular. I definitely do agree that that aspect of things is one that’s very important and probably not talked about enough.

COWEN: If we think of <a href="https://mindyourdecisions.com/blog/2008/04/01/focal-points-or-schelling-points-how-we-naturally-organize-in-games-of-coordination/">Thomas Schelling’s notion of a focal point </a>, something that people coordinate upon and come to accept as somehow centrally important, doesn’t that mean centralization always reemerges?

You look at something like Twitter. <a href="https://twitter.com/VitalikButerin">We’re both on Twitter </a>. I don’t think Twitter is dominant in its sphere because its AI is so good. It’s just people know the name, and people are used to going to Twitter.

Will the crypto space end up as centralized as Twitter, Google, and Facebook?

BUTERIN: I wrote this <a href="https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274">blog post </a>a couple of years ago where I talk about different kinds of decentralization. One I talk about is architectural decentralization, which is basically the difference between a system being based on one computer and, say, a system being based on lots of computers and being fault tolerant.

Lots of things are architecturally decentralized already, like large parts of <a href="https://aws.amazon.com/what-is-aws/">Amazon AWS </a>, and lots of military hardware, traditional airplanes. Lots of things have aspects of architectural decentralization.

Another one is political decentralization, which is the thing . . . And blockchains are trying to achieve the architectural side of decentralization — it’s not run on one piece of hardware. In political decentralization, it’s not run by one single person or small cabal of people at the same time.

The third kind of decentralization I talk about, though, is logical centralization versus decentralization. One example I gave in my post is the English language.

The English language is architecturally decentralized because there’s no one single dictionary. It’s politically decentralized: there’s no one who really has the ability to practically regulate new words into and out of existence.

But it is logically centralized in the sense of there is one thing, which is the English language, and if you start deviating from that one thing, then you’re going to have a harder time.

The conclusion of my post, or at least part of it, is that I do think that blockchains are logically centralized, basically because there is one blockchain. It is a shared ledger. It is a canonical history. You’re either part of it or you’re not.

I argue that this logical centralization is actually good.

COWEN: If you’re looking to hire someone — either for Ethereum or to collaborate with — what quality or qualities do you look for that maybe other people underrate? Because you’ve also built a successful company, right? You’re not just chief scientist.

BUTERIN: No. Company is not necessarily the right emphasis, once again. It goes back to my point about cultural innovation. Ultimately, there are different circles in the Ethereum community, some overlapping, some not, and there’s different ideas of what it means to be Ethereum.

For example, you could be a full-time employee of the organization based in Switzerland called the <a href="https://www.ethereum.org/foundation">Ethereum Foundation </a>, or its outpost in Singapore called Ethereum Asia Pacific Limited.

You could be someone who has received a grant from the Ethereum Foundation. You could also be a groupie, someone who has intellectual ideas, likes hanging out with us, and just happens to fly around everywhere to the same cities that we’re in.

You could be someone working on some Ethereum project. There’s definitely people who work outside of the Ethereum Foundation as a formal organization that have made much bigger contributions than even some people inside of the foundation. I think that’s part of where a lot of the successful innovation has come from.

One of the things that this gives you is, it basically means that there are many different ways to be in Ethereum. You can either follow along and have the same kind of lifestyle that I do, or you can work for some traditional company and have some Ethereum Foundation grants be one of your projects.

You could work on some Ethereum application and be adjacent. You could just be a lone wolf working at home. You could pick any linear combination of these that you want.

If there’s tradeoffs, you can be part of Ethereum while being part of a structured team. You can be part of it being a lone wolf. You can be part of it as part of some traditional, large corporation. You can be part of a startup.

I do feel like this is part of what makes cryptocurrencies interesting, in that they are not just a decentralized censorship resistance, whatever system, as a product.

But they are also this cultural evolution that itself incorporates many aspects of decentralization in terms of how they’re produced and in terms of a way of living and collaborating and building things.

COWEN: While building Ethereum, you’ve also taught yourself French, German, and Chinese without having lived in those countries. On YouTube, I’ve even seen you <a href="https://www.youtube.com/watch?v=to7zJZSbxtc">answering questions in Chinese </a>about the blockchain to a Chinese audience. How did you teach yourself such good Chinese?

BUTERIN: First of all, as I said on Reddit, I definitely did not learn Chinese, and especially not Cantonese, in three months on a mobile app. That’s stuff that people come up with about me.

I don’t like it because it makes me look more like <a href="http://dotheword.org/2014/05/26/do-north-koreans-worship-kim-il-sung-as-god/">Kim Il-sung </a>, and it doesn’t make me look like a real person. [laughs] I’m not saying Kim Il-sung is not a real person, but Kim Il-sung the demigod definitely isn’t.

What actually happened was that around 2013, I decided, “Hey, cool, the Bitcoin community in China looks like it’s really big and really interesting, and there’s this big world that I haven’t been connected to, and maybe I should try.”

So I started going through podcasts initially, and once I went through those, then I went through some other Learn Chinese podcasts. And parallel to that, I also started going through flash-card apps that taught me the most popular — maybe 500–1,000 — characters and words.

Once you get to an intermediate level, you’re high enough that you can participate in <a href="http://www.whatiswechat.com/">WeChat </a>conversations, go to China, and participate in conversations in person.

I was never a long-term resident of China, but realistically, I did spend more than half a year there in total in my life.

Once you get to that intermediate level, as long as you put yourself in environments where you continue keeping it up, eventually it continues getting better and better, and eventually you get to the point where you can improve it further by watching movies on airplanes.

COWEN: My colleague <a href="https://medium.com/conversations-with-tyler/robin-hanson-tyler-cowen-signaling-the-elephant-in-the-brain-e1444b69baa7">Robin Hanson </a>has promoted the idea of prediction markets, or betting on ideas. Why are there, right now, so few prediction markets? You can bet on the outcome of an election. There’s plenty of sports betting, but they seem quite thin when it comes to actual economic events.

BUTERIN: I know that on the centralized side, the traditional prediction market side, there’s a lot of regulatory issues that make it more difficult to set one up.

Also, on top of that, I think part of what makes cryptocurrency so attractive is that traditional financial systems have a lot of inefficiencies and annoyingness that go beyond the strictly regulatory.

Even something like, “Oh, I have money. How do I move it into some particular application?” Very often it involves bank wires. It involves all of these various systems which each individual person may or may not have. You have to figure it out, and there’s a lot of friction involved.

I see cryptocurrency in part as this grand experiment of, what happens if you create a financial system that really is fully frictionless, where moving bitcoin or ether from your wallet into an application, into a smart contract or whatever, really is as simple as logging into a website or clicking an email.

I do think that, even already, the cryptocurrency ecosystem has, first of all, managed to get people to accept micropayments — specifically paying for transaction fees — when a lot of people thought that that’s impossible.

I do have hopes that the higher levels of liquidity and efficiency in the cryptocurrency space could make cryptocurrency prediction markets succeed more. That’s one aspect.

Another aspect is that, even if the cryptocurrency base solutions actually manage to be censorship resistant, and if they manage to be more convenient, then there is the possibility that this kind of gambling, betting, or whatever is a kind of betting that people aren’t as interested in.

Basically, the amateurs don’t find it interesting enough, and there’s not enough people playing for it to be worth for the professionals to really participate.

That is possible, though I don’t really think it’s fair to say that prediction markets as a category can be really called a failed experiment yet, given that there have only been a few years of trying to make them work and only a couple of different approaches.

But if <a href="https://www.augur.net/">Augur </a>and <a href="https://gnosis.pm/">Gnosis </a>and all of these other Ethereum and blockchain-based prediction markets end up launching, and it continues to be the case that lots of people don’t end up using them, then it’s probably more reasonable to consider that idea as, at least, a failure in its dream of growing beyond the niche, but I don’t think we’re quite there yet.

COWEN: As for frictionless trading, let’s take what’s called the <a href="https://blog.ethereum.org/2014/07/22/ethereum-and-oracles/">Oracle problem </a>. As you well know, you can have smart contracts on Ethereum, but those are closest to frictionless when everything is within the system.

But if you have an external event — a property title — and you need someone in the physical, real world to rule how an actual piece of property is assigned to someone and how that information is then translated into cyberspace, does the Oracle problem mean that the frictionless trading of, say, Ethereum, is never actually that scalable, or is there some way around it that we don’t yet see?

BUTERIN: It depends what specific thing you’re trying to do frictionlessly. For example, moving ether from one account to another is absolutely frictionless. Converting ether into fiat currency is absolutely not frictionless.

It is very possible that it’s not going to significantly get more frictionless in the near- and medium-term future because of all of the banking issues, where cryptocurrency exchanges have a hard time getting and maintaining bank accounts.

If you’re talking about participating in some kind of pure financial derivative system, then I think it will be frictionless.

COWEN: But determining how or why someone should be paid, someone has to rule that, right?

BUTERIN: Here’s one example. There’s a system called <a href="https://makerdao.com/">MakerDAO </a>, which is basically a decentralized currency that has a more active monetary policy that attempts to keep its price as close as possible to one dollar.

This clearly requires a price feed, and the MakerDAO definitely includes a decentralized price feed mechanism. It definitely is the case that there is some overhead in maintaining that Oracle inside of the MakerDAO system, but at the same time, just using MakerDAO is completely frictionless.

Vitalik Buterin on Cryptoeconomics and Markets in Everything (Ep. 45)

Vitalik Buterin

On blockchain as a ‘world computer’

On Ethereum community

On future breakthroughs

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