Pick Your Layer-2: Polygon vs. Arbitrum

Way back in our very first Weiss Crypto Sunday Special, analyst and editor of Weiss Cryptocurrency Portfolio, Juan Villaverde explained Layer-2 protocols as solutions that “push transactions off the main blockchain” in order to reduce transaction times and fees.

In our most recent Sunday Special, Juan rejoins Chris Coney to explore the details of scaling decentralized finance (DeFi) and newer Layer-2 solutions, as well as the nuance between them in terms of technology and user experience.

Namely, they dive into the difference between their favorite L2, Polygon (MATIC), and the new hot shot on the blockchain, Arbitrum.

You can watch the interview here, or read on for the full transcript …

Chris Coney:

Hi there, guys and welcome to this week's edition of the Weiss Crypto Sunday Special with me, your host Chris Coney. Our guest analyst today is Juan Villaverde.

Juan, welcome back to the Sunday Special once again, Sir.

Juan Villaverde:

Good to be here, Chris.

Chris:

Excellent to have you, mate. So today, we're going to do a follow up on the very first episode of the Weiss Crypto Sunday Special. In the first episode, we discussed Layer-2 scaling of blockchains. In this episode, we're going to be revisiting, redefining and “nuancifying,” if that's even a word. Okay? Okay, great. So let's get down to it.

So you and I, we're pretty much in consensus about this: Pardon the pun, but our current favorite scaling solution is Polygon, right? Would you agree with that?

Juan:

I would agree with that, yes.

Chris:

Okay, good. And why do we love Polygon as investors and traders?

Juan:

As investors, it's quite easy to invest in this Layer-2.

Chris:

You can invest in it itself, can't you?

Juan:

You can buy it. I think I made that point last time. We made the same point that you can invest into this thing. So, you don't normally get to invest, it's like buying Lightning Network on Bitcoin (BTC, Tech/Adoption Grade “A-”) for example.

Chris:

Exactly. You just buy Bitcoin.

Cool.

Juan:

And since we made the first video, Arbitrum has launched. That's an Optimistic Rollup solution. I believe that Optimism is just around the corner, you can fact-check me on that. I don't know if it's fully launched yet.

Chris:

It's in beta.

Juan:

But it will come soon.

Chris:

Did you see the post in the group today that Uniswap (UNI) now allows you to switch to the Optimism version of it?

Juan:

I noticed and I'm basing my comment off that. It’s like “Okay, so I guess it's around, then.” I haven't heard a lot of buzz about it yet, so I'm guessing it hasn't fully launched. So we can compare the two and like you said, last debate was not … I don't think we were nuanced enough. After listening to it, I thought we gave too strong an impression that Polygon is simply superior on all levels, period, and there's nothing to these Optimistic Rollup solutions.

When I say Optimistic Rollup by the way, I want to distinguish between Optimistic Rollups and Optimism, the network. They use the same technology, but Arbitrum is another.

Chris:

They call it Optimistic Ethereum. That's what they've started referring to themselves as, Optimistic Ethereum.

Juan:

Really?

Chris:

Yeah.

Juan:

Well, that's funny. Anyway …

Chris:

It's like Ethereum (ETH, Tech/Adoption Grade “A-”) classic.

Juan:

Yeah.

Chris:

Let's not go there though.

Juan:

So you don’t get to invest in those. When Arbitrum went live, I actually have some Ethereum on Arbitrum. I tried it out, I tried out the fees, I tried out the speed of transactions. I just tried out some stuff. Pretty cool. It uses Ethereum. You don’t get to invest in it, there's no MATIC equivalent  — MATIC being the token.

Chris:

You buy Ethereum, right?

Juan:

You can buy Ethereum, for sure.

Chris:

But that means Arbitrum is adding value to the ETH token as well.

Juan:

It does, certainly. And that's a very good point: It does add value to the Ethereum token itself. You buy Ethereum, but it's on a pure play on Layer-2. You could argue Polygon is a pure play on Layer-2, so that's one advantage.

I guess the main distinction between the two is the trust required to operate in these two environments. When you're on Polygon, you're basically on a separate blockchain. The issue with being on a separate blockchain is you're implicitly trusting an entirely new set of validators. You're not trusting the Ethereum miners with your money or with your funds, you're trusting the Polygon validators.

Now, since Polygon is more than a side chain, it's what they call a commit chain. There are some advantages to operating on Polygon vs. something like an Ethereum copycat like Binance Smart Chain, which lives in its entirely own separate universe. The Polygon network is a bit different: The validator set lives on Ethereum. So these are registered on a smart contract on Ethereum. If you want to stake your MATIC, you have to be on Layer-1.

Chris:

So Ethereum knows about these validators, right?

Juan:

Yeah. The Ethereum mainnet is where these validators are "registered." So there's that. There's also the fact that once every hour or so, these validators will write a summary of whatever has been happening on Polygon. A summary of the Polygon blockchain is written into Ethereum. That's why it's called a commit chain, I believe, because they're committing. These people are saying, "Hey, this is what's happened on our network, we're committing to this, we're all signing onto this. We're signing off on this, we're saying this is what happened. So you don't have to fully trust us guys because you can always call us out if we cheat in some way."

It is possible for someone to look at the Ethereum blockchain and say, "Hey, these validators are lying, they're not telling the truth." Now, does that prevent the validators from lying? No, not really. They can still cheat. This validator set …

Chris:

Because once you commit, you're committing and that's it, right?

Juan:

You're committing and that's it. It doesn't mean you have to follow this. So there's more trust on the Polygon Ethereum model than there is on Optimism because Optimism is totally different.

Chris:

But on Polygon, right?

Juan:

Yeah.

Chris:

That means that you're only having to pay the mainnet Ethereum transaction fee once per hour instead of every single transaction if you were doing it on the base layer.

Juan:

Right.

Chris:

It's like you're leapfrogging all that traffic by taking a bypass on Polygon.

Juan:

Yeah. The advantage is you're batching transactions. So, every time on Polygon, these validators are writing a summary, a settlement. They settle on Ethereum, they're batching a whole bunch of transactions. It's the same thing on Arbitrum.

Chris:

It's not like we as individual users have to do that at all; not really once every hour, we don't have to do that.

Juan:

No, no.

Chris:

Right.

Juan:

It's the network itself, it's part of the normal operations.

Chris:

It's just taking care of it.

Juan:

Yes. And every time they commit, you also get to release your funds. If you want to go from Polygon to the mainnet, there's many ways to do it now. One of the ways to do it is using the validators themselves.

Chris:

Wait for that commit.

Juan:

Wait for that commit and then your funds get released.

Chris:

Okay.

Juan:

So that's pretty cool. Now I believe that the main selling point for Arbitrum, in my opinion, is that it's far more trustless. Not only do they commit far more often — I think it's every six minutes. Every six minutes, boom! They're committing to the Ethereum mainnet. This is the same commit that the Polygon validators are committing to. In other words, just because they're writing a commit, it doesn't mean they're not lying.

But on top of that, on Arbitrum kind of works like a blockchain — though it's not — because there's a trace of every transaction that has taken place on the Arbitrum network, on the Arbitrum layer. And even though it is not completely trustless because … I don't know if I should touch on ZK-Rollups now but basically there's two types of Rollups. There's one type where, every time they commit to the mainnet, you already know they're telling the truth. Optimism is not that. Just because they're committing, it doesn't mean they're not lying.

However, it is possible for anyone who's looking at the Arbitrum network to validate everything that's going on that has happened up until a certain point. It is possible for anybody, any individual, to verify the the whole Arbitrum chain and know whether or not there has been a conflict or someone has cheated. In other words, you're not really trusting a set of validators, you're not trusting anybody.

Chris:

Because you can validate it inside the Arbitrum network itself.

Juan:

Exactly.

Chris:

You don't have to wait for the …

Juan:

Right. So anyone looking at the Arbitrum network can say, "Okay, this is a correct path." We speak of paths in the Arbitrum network because there can be several forks. In other words, the different versions of what's happened. But only one is true, And it's possible for anybody to come in and verify the chain and know which one is the correct path. In other words …

Chris:

It's like citizen policing.

Juan:

Yeah, exactly. And the advantage of having any individual be able to verify the whole chain is that you're not actually trusting anybody, and this is the point that the Arbitrum developers made. This is trustless, because any individual can come in and verify the whole chain. If there are several conflicting versions of this chain, it is possible for anybody to know which one is correct. Once they know, they can act as a bridge, for example.

Why would they act as a bridge? The reason they would act as a bridge is because [otherwise] if you want to release your funds from Arbitrum to the mainnet, you have to wait seven days. On paper, that sounds horrible. Yeah, that's horrible, you have to wait seven days. That's why I'm personally not really using Arbitrum right now because I move funds back and forth all the time and I'm not going to wait seven days. Even waiting an hour is sometimes a long time for me. So seven days is just a no-go, it's a deal breaker. I'm not going to use Arbitrum until this issue is solved. But it can be solved.

Chris:

Why is it a deal breaker for you?

Juan:

Because I do a lot of arbitrage.

Chris:

Arbitrage.

Juan:

Crypto markets move fast. When I need funds moved, I can wait an hour two, but ideally, I would have the funds move in about ten minutes, 5 minutes, Instantly, if possible.

Chris:

Well, specifically because arbitrage is a temporary price discrepancy.

Juan:

That is correct.

Chris:

Which could vanish any minute, so you can't sit about.

Juan:

Yeah. You can have funds on both places where you're doing the arbitrage, but sometimes funds must be moved because you have to collateralize positions. Sometimes, you have an under-collateralized position here and an over-collateralized position there. So you want to move funds, let's say, from the Layer-2 dYdX to whatever, some exchange or Polygon. Let's just say Polygon is now under-collateralized. And that doesn't take too long.

But on Arbitrum right now, it takes seven days. That's a deal breaker. It can be a deal breaker for many other reasons. I don't think the developers emphasize it enough because I suppose for most use cases, you wouldn't really care. But I would still hold that waiting seven days to have your funds released is a problem.

Now, there's a solution. Because it’s possible for any individual to verify the entire chain, it’s possible for them to act as a bridge. If I have funds on Arbitrum and I have funds on the Ethereum mainnet, then I can take the seven-day risk that it takes to actually settle transactions. I can take that risk off you. If you want to have your funds on the mainnet, you send your funds to me, I release funds to you on the mainnet and we're done. It takes five minutes. So, we're back to “It takes almost no time at all.”

Now why is this possible? Again, it is possible because if I'm doing this bridging, I can verify the whole Arbitrum chain. I can know what the true path is, I can know what the truth is and I know it's not possible for anyone to cheat and for anyone to lie. That is not true on Polygon. I know that this is nuanced, but in Polygon, it is technically possible for these validators here on this separate blockchain to lie completely and it's extremely hard to challenge them. Actually, there is no way to challenge them as far as I'm aware.

Chris:

Unless you are a validator yourself.

Juan:

Exactly. The community could come in. There's what I call the meta of crypto where, if suddenly Polygon went rogue, everybody would know about it.

Chris:

They lose trust.

Juan:

Then the blockchain will be forked, trust will be lost, these validators will be kicked out.

Chris:

The token would tank in value.

Juan:

Yes.

Chris:

Destroy their own existence.

Juan:

Exactly. And at the end of the day, it would just fork to the last known true state, and that's done. But there's no mechanism to challenge cheaters on Polygon. They have their own mechanisms, obviously. The entire chain would have to go rogue. This is not “Some people on Polygon are trying to cheat,” this is “The whole thing becomes corrupt.” Again, not a lot of risk there, but Arbitrum is arguably better.

I'm using Arbitrum as an example, but Optimism is the same. It's arguably better; there's a challenge period. So if I know what the truth is, I know that through the challenge period within seven days, the truth will be found. And if I know that within seven days, the truth will absolutely be found, then I can just sit here as a bridge and say, I'll charge you a fee to wait for those seven days. I'll release the funds to you immediately. So this is a …

Chris:

So that's a service someone in the free market can create and say, “I'll sell you the convenience.”

Juan:

And they will. They will do this, it's already in the works which is why I believe, I think if it's on Arbitrum, there's a disclaimer that says, "Hey, these are early days. You have to wait seven days to withdraw your funds." The reason they say, “Hey, these are early days” is because no one has stepped forward yet to provide the service. But they will.

So from a user perspective, it will be probably easier to unlock funds from Arbitrum into the mainnet. The reason is it’s far more trustless to use Arbitrum — to use a Rollup solution — than a sidechain. There's a lot less trust involved. You are really inheriting the security of the mainnet, and that's a huge advantage, in my opinion, that Rollups have over the likes of Polygon.

Chris:

Sure. It's the distance you go — and I made this point earlier on —it's the distance you go away from the base layer. In my mind anyway. This is cyber space;, there's no distance, it's just a logical model.

So, a base layer and then you go a certain distance away from that with a Layer-2, [where the] closeness or the trust of the base layer is slightly surrendered. Then, when you go further to Polygon, it's more surrendered by a smart chain, a universe unto itself, as it were: Its own ecosystem that doesn't really share data or commit to the Ethereum chain in any way.

Juan:

Yeah.. Little side note there: I do believe the likes of Binance Smart Chain will eventually be confronted with the reality that, unless they commit to a secure blockchain, there's no room for them to exist. So I do believe there's hope for these semi-centralized Ethereum alternatives ... if they commit to Ethereum.

If they say, "Hey, we're not going to do it the way Polygon did it. We're just going to commit to Ethereum," that will add a layer of trust because at least you know these people do not intend on cheating, which is not something you know today with these alternative smaller market cap or more obscure, opaque "blockchains." I don't like those at all. I think for me personally, the reason I wanted to get back to the subject is because trust is very important in crypto. Trust and “trustlessness” are the bedrocks of crypto, what make it possible. Bitcoin is possible because it's trustless, no trust required.

If trust had been required to bootstrap something like Bitcoin or Ethereum, they never would have taken off. So, you always need this robust, secure, trustless settlement layer, and then you can build all these solutions on top that require a bit more trust. But as long as you can settle and as long as you have some guarantee that this trustless layer still acts as a guarantor for all these things that are [happening] on these alternate networks, then you're fine. That's a good compromise to make. You're getting more speed, you're getting cheaper transactions and you're not giving up this trustless property.

Chris:

So what we're asking is for the networks to anchor themselves in something objective.

Juan:

Yes.

Chris:

If Ethereum is the ultimate arbitrer of truth because this is the base layer and especially since at least by now, it's based on proof of work. It anchors it in the physical, objective world and then you're saying you can build any number of subjective worlds on top of that like at the minute. This is the problem with Binance Smart Chain is this realm which isn't actually anchored to reality. Saying “just trust us, it's fine … kind of relative reality” … is going to be like “Mm-hmm … that's not good enough given the certainty that Bitcoin and Ethereum can offer.”

Juan:

Totally. You're really trusting them, but do you really trust them? Do you know how it works? Again, these may seem like theoretical issues ... until they're not. Because if someone — some rogue agent, some government, something — came along and decided to attack some of these networks, the minute trust is required from a single counterparty, that's a single point of failure. You can attack that and bring the whole thing crashing down. And so, the reason you want to have a secure, robust, trustless layer is because you want that guarantee that's not going to happen.

Slight detour, but anyone who figures how to use Bitcoin as a settlement layer really has a head start here because it’s most secure of all blockchain decentralized open networks. It's Bitcoin, not Ethereum, right?

Chris:

That's actually easy, though, because in Bitcoin transactions, you have that up or down field where you can include an arbitrary string in there which could be a hash from anywhere.

Juan:

There you go.

Chris:

You could hash Ethereum; you could commit Ethereum to Bitcoin every hour if you wanted to.

Juan:

I'd love that.

Chris:

But we might have to do that when we go proof of stake though, because it's going to be same problem.

Juan:

Maybe.

Chris:

Right?

Juan:

Yes.

Chris:

I would prefer that, personally.

Juan:

I would prefer that, too.

Chris :

Because then Bitcoin is the only remaining objective chain, if you like, that's anchored in something real.

Juan:

Yes, yes. And it can get philosophical there, but I think you and I agree that anchoring it in something real  — in other words, having a cost in the real world, having to expend real resources to produce a block — is genius of Bitcoin in many ways, and proof of stake does away with that.

Now, it doesn't mean proof of stake doesn't work; I'm not saying that. I love proof of stake. I think it’s the future of smart-contract platforms. I don't think they can run on proof of work very well. Look at Ethereum; they're too expensive. But what if you can figure out a way to have your cake and eat it, too? What if you can have this robust, secure settlement layer and then build all these proof-of-stake systems on top, and then the Layer-2s? Which are not even blockchains. We referred to Arbitrum, for example going back to that, it's not really a blockchain. It kind of is, but it's not because you don't need a validator set.

There are a bunch of transactions that a bunch of nodes share; they're all shared with one another. There's one true path that commits to Ethereum, no consensus is required. You can have a 100 people looking at this Arbitrum chain and 99% could be lying. Only one of them could be telling the truth and still, the one that's telling the truth will prevail.

This is not a blockchain, you don't need two-thirds of validators to say “Yes, this is what happened and that's the truth,” because that's what can corrupt the system. If two-thirds of the Polygon validator set become corrupt, they can start lying and it will be extremely difficult to call them out. On Arbitrum, again, if 99% of validators begin lying, the 1% that's telling the truth will eventually prevail and that's because they have this challenge mechanism.

Chris:

You're talking about the person that gets the math right.

Juan:

Yeah. The one that's verifying. Basically, when we say people are not telling the truth in a blockchain, we're saying there's a fork. There are two or more versions of what happened, and in a classic blockchain, when you have two or more versions ...

I shouldn't say in a classic blockchain. When this happens, all these decentralized networks, these blockchains, they all have a mechanism to find out what the truth is. They all do.

Chris:

To get back into consensus.

Juan:

Yeah. The longest chain rule and proof of work, for example. Whoever has the longest chain, that's the real one. In proof of stake, it usually comes down to what you can add.

I think Cardano (ADA, Tech/Adoption Grade “B-”) for example, has done this. They added a concept of blockchain density. In other words, they do have the longer chain rule. They have analogs for when a proof of work is a pretty simple rule, but typically, it comes down to this: In proof of stake, whatever two-thirds of validators say is the truth. If you corrupt one-third [of validators], the blockchain cannot [come to consensus] because you need two-thirds to confirm.

Chris:

It's a stalemate, right?

Juan:

It's a stalemate. You cannot tell what the truth is. Now, if two-thirds align and decide to start lying, [there’s] no way to call them out.

That is not how Optimistic Rollup solutions work. You need one person telling the truth and that's it; that's all you need. So, they're not really blockchains and you do not need this new consensus layer on top of the consensus layer of the mainnet, right? There is no consensus layer. One person telling the truth and there's a mechanism to find that out and everybody can follow that one person. So it's quite interesting. And again, I don't think we emphasized this on our first iteration; we didn't make this point.

Chris:

That is the key point that with Polygon, you've got a new consensus layer side chain on top of Ethereum. This is getting complex, whereas you're saying with Arbitrum and Optimism, because they're not separate sidechains with their own blockchain and their own consensus, they're using Ethereum consensus, which is the same. The network effects are it's cleaner, it's less complex, easier to verify, all these kinds of stuff.

Juan:

Yeah. I think, technologically speaking, it's far more complex to have something like Optimism running than a sidechain. But once you have it up and running, thinking about it in terms of security and trust, it’s a lot easier. This uses the security of a mainnet, that's it. There is no other security. Yeah, this can be stalled. You can have attacks on this Layer-2, you can have conflicts where we don't know what happened. Except anybody can verify it and you can know what happened.

Chris :

It's usually simpler to resolve.

Juan:

The idea that all that's needed is one honest actor is super powerful because one of the main weak points of any blockchain is you need a large set of people to be telling the truth. Because the truth is defined by what this large number of people say. What if they all want to lie?

Chris:

That goes back to what I was saying. That's relative truth rather than absolute truth.

Juan:

Correct.

Chris :

Math is an absolute truth because there is an objective set of rules by which math obeys. That's why we like proof of work — because it's physics. But anyway, let's not go there but it's probably like that.

So, we're singing the praises of these Layer-2s right now. But like you say, there are always trade-offs. So why do we still love Polygon?

Juan:

It's cheaper and faster.

Chris:

Right. Because of these negatives, it allows certain things to happen, like two-second transactions that cost the fraction of a penny. That’s why, from a user experience point of view, that's amazing.

Juan:

The ecosystem is more mature at the time of this recording, as well. For me personally, I might consider switching somewhat to Arbitrum if the ecosystem matures. Just the seven-day wait period is a no-go for me. I'm going to wait for these people to start providing these [bridging] services. Of course, you need to trust them, obviously. But someone is always going to be telling the truth in these Layer-2s, in these Optimistic Rollup solutions. Someone is going to be telling the truth.

Chris:

I've got a name for them: accelerated bridges.

Juan:

Right. Accelerated bridges, there you go. It’s someone taking that risk off your hands.

Chris:

I was going to say if you use them, you don't have any risk because, if the challenge period happens, they're the ones who are going to lose because they're taking on the risk for you.

Juan:

Exactly. Which gives them an incentive to verify the chain and not you. And that's beautiful; that's where the model works because they're the ones verifying. You're the one who could cheat, not them. When they act as a bridge, you could cheat them. So if they're willing to release the funds to your mainnet, that's it, they did their work. And unless you're a shadowy super hacker, to use that term ...

Chris:

Super coder.

Juan:

Shadowy super coder. Unless you're one of those, you're not going to lie to these people.

Chris:

[crosstalk 00:25:23] due diligence.

Juan:

Correct. You have to verify the chain. That's the beauty of this model. There is an incentive for people to verify the chain and charge a fee for that service.

Chris:

Well, that's free money if you do it properly because there's no risk.

Juan:

If you do it properly, it's free money. There's no risk. Exactly.

Chris:

That's very interesting.

Juan:

That's the beauty of it because you have a guarantee that within seven days, the true path will be chosen. That's how these things work. Not going to get into how because it's math, but this is your guarantee, and that's very powerful in these Layer-2s. Now, they're more expensive than Polygon. Polygon is fractions of a penny.

Chris:

I was going to say when you said you're considering switching that Arbitrum is orders of magnitude more expensive per transaction. It's still a lot cheaper than Ethereum, but it's nowhere near the fractions of a penny you get on Polygon.

Juan:

It's nowhere near. But my understanding is there are some upgrades, there is some tweaking that can be done that will drive down costs. And there's also the fact that if there's more activity, there are these fixed costs. I don't know how significant they are, but the fact remains if there's more activity, these costs go down.

Chris:

Right. Because you're sharing the transaction cost in a batch, yeah.

Juan:

Yeah. I don't know off the top of my head, what the statistics are for Arbitrum right now, but I do know that they settle on Ethereum I believe every six minutes. It's a short period of time whenever they fill out their batches. So, if a batch is filled out, you can know that's a cheap — if you think about it — batch.

Chris:

It's the most optimal shared amongst the most number in the most [crosstalk 00:27:05].

Juan:

So, if it happens every minute or every 30 seconds, then okay, that's a pretty cheap batch that you have right there. But it's still expensive because there's a lot of data that needs to be pushed on the mainnet because, again, these changes need to be verified. And so you have to provide all of the data required to verify it. So these are too expensive compared to Polygon.

Polygon is cheap, easy. It's easier to build stuff on Polygon. Or maybe it's just a matter of time, I don't know. But the way it stands today, it is still better to use Polygon. You have bridges now between the two so if you don't want to wait that one hour, then fine. Just go to one of the many bridges to bridge your assets back to the mainnet. You can go directly to exchanges. This is not a problem anymore for Polygon.

The other thing is that [Polygon has] grown to such a size that I do trust these validators, too. Maybe at first when it was under $1 billion in market capitalization, that was a bit of a stretch. It's a commit chain, but how do I know they're not lying? I think that ship has sailed now. These people have already proven themselves.

Polygon is the scalability solution, it's the most used one. It's a blockchain in its own right. You can trust these people in their own right.

Chris:

It hasn't been around a very long time.

Juan:

Yeah.

Chris:

I remember when MATIC Network launched. It was in that category where lots of new stuff launches and there are all these little burgeoning grassroots or whatever you call them. Just these nascent projects that you're not quite sure which ones [will make it] because there are loads of them.

It was one of them, and I remember looking at the MATIC token and going, “that's just this little startup thingy, and that was years and years and years ago.” And yet to their credit, they've worked and worked and worked and stuck at it and stuck at it until they broke through. Many projects don't persist as long as they have.

Juan:

That's true, that's true. They stuck with it and they found ... I think their “light-bulb-going-off moment” was when they decided “Instead of competing with Ethereum, let's commit to it.” I think that's just a better model. It is the reason that a lot of people, myself included decided “Okay, I'll give this a shot. If I don't have to go to this entirely new separate universe, I can still be around Ethereum's orbit and I trust Ethereum, so I'll move some of my funds.” Then I eventually started moving more and more and more. I use it a lot now.

Chris:

Doesn't that bring us to the Hashgraph conversation we were having earlier on? Because we were talking about the Hashgraph superior consensus algorithm, and I said when I first learned about that, I was like, "Oh my goodness. This is so technically superior. Blockchain, technology-wise, has just been invented. It hasn't even been mainstream adopted, yet it’s already cooked."

Juan:

Yeah, I thought the same.

Chris:

And your retort to that was similar to what you just said, about the adoption, right? Was that basically your point about it? It's not so much about the technology, but more about the compatibility. This is the point you just made: “If I can use something that's still in Ethereum's orbit,” were the words you used. So you're not going too far away from what's familiar and you already trust.

Whereas again BSC,with Binance Smart Chain and Hashgraph, they’re right over here in their own universe, right? And it might be a nice universe, but it has come later to the party and we're all embedded and really cozy with Ethereum and it's perfectly fine. It works perfectly fine for most use cases.

Juan:

Not only that, I think there are some practical implications to Ethereum being the largest and more secure [than other] smart-contract platforms.

Chris:

The adoption thing.

Juan:

The adoption, network effects. All the apps are on Ethereum; all the stuff that's interesting is on Ethereum. I consider myself a very active user. I would say I use it at least once a day, at least.

Chris:

What's that? Which network you use at least once a day.

Juan:

Polygon or Ethereum; I use both a lot. And I can tell you that I don't use Hashgraph because there's nothing to do.

Chris:

There's nothing to do on there.

Juan:

There's just nothing to do on there. Yeah, maybe applications are cheaper on Hashgraph, but where are the applications? There's nothing cool, there's nothing interesting going on.

Chris:

Interesting. That's very interesting.

Juan:

One of the things I like most in terms of distributed applications is dYdX, I use it a lot. The Layer-2 that uses ZK-Rollups. Beautiful thing.

Now, that one doesn't have any uses that Optimism [doesn’t]. Whenever they publish a batch, you know it's true. So that's the guarantee of ZK-Rollups. So that's a beautiful thing. That's on Ethereum. If you want to use dYdX Layer-2, if you want to trade on those markets — and I do — you're using Ethereum. So, what's better for me as a dYdX user, for example?

Chris:

As an end user, exactly.

Juan:

Is it better to be on Hashgraph? No, it's going to be on Ethereum. And what if Hashgraph forks dYdX Layer-2? Because they could use the Ethereum Virtual Machine (EVM) and they launch a similar version on their own mainnet. Well, here's a problem: You cannot fork a community.

Chris:

I was going to say. It's not enough, is it?

Juan:

Not enough. Right now, you have at least $1 billion in volume on dYdX, on this distributed exchange that lives on Ethereum. Hashgraph can fork that only once.

Chris:

No network effects, sure.

Juan:

They're not going to take $10 million in volume.

Chris:

No liquidity.

Juan:

No liquidity, I'm not going to use that thing. So, you can fork the tech all you want, you can improve on the consensus algorithm all you want. If everybody is playing in this pool, that's where you want to be. You don't want to be somewhere else. You can have all the philosophical arguments you want about “actually, this one's better; technically speaking, it's so much more robust.” But guess what? No one is there.

Chris:

All the yeses except …

Juan:

Exactly. So if you can't play because there's no one to play with, you're not going to use it and that's a very sticky problem, right?

Chris:

It is.

Juan:

Because you would need to migrate all users at once to make the switch, but [not] individually. All of us collectively could just pick Hashgraph and make it the mainstream smart contract platform, but individually, we cannot.

So, the way we'll look at it as individuals is, here's where everyone is, so this is where I'm going to be. Everybody else sees it the same way, so they're going to be on this one network. That's the thing about network effects, you do not fork those.

I don't think the Hashgraph people, when they launched, quite understood this. I remember this perfectly, they said, “We're going to patent” which is a big no-no. We're going to patent this consensus algorithm because of forks. Because if someone forks, how do you know what the real one is? It's pretty simple: where the community is. That's the real network: where all the community is.

Chris:

Well, that's where the Bitcoin vs. Bitcoin Cash (BCH, Tech/Adoption Grade “C+”) debate settled.

Juan:

Then they forked again, and it didn't work. Ethereum forked and it didn't work. So you cannot fork the network effect. You can fork the code, not the network itself. That cannot be forked.

Chris:

Because the network is the users.

Juan:

So this is a nonissue.

Chris:

The users, right?

Juan:

It's the users. You cannot replicate them ad infinitum, right? So it's just an overstated problem, this fork risk.

Chris:

That's very interesting.

Juan:

Totally overstated.

Chris:

That's very interesting, mate. I'm not saying anything disparaging about Swirlds which is the technology company that invented Hashgraph and patented it. But — and this is my understanding from when I was deep into the computer science side of things — when you have a technological worldview and you think the tech is enough, you can forgive them. Totally forgive them for thinking that breakthrough innovation was enough if you come from the Bill Gates school of thought, right? Oh, that's it.

But if you come from the human, the emotional world and look at the user end and how they make decisions, most people make decisions emotionally and justify them logically. That's the old tenet. That explains why Binance Smart Chain is so huge despite it being what it is. They've got community, they incentivize the Binance army, and everyone loves the Binance Smart Chain. The users absolutely love it. And you can say “technology …”, they'll be like, "Yeah, don't care. We actually love it; we love all the graphics and the cartoony pancakes." They've cracked that community thing, which is where it's at.

Juan:

Community is where it's at, and I do believe this is another observation that I've made. I do believe that this is part of what's changed since 2020. We used to think more in terms of superior technology. The Bitcoin Cash debate was about fast transactions and these huge blocks and look at all the cool things we can do. We used to think that was the thing, but since then, we've realized the network effects is the community. That's the finite resource that everybody is competing for. And once you have that resource, it’s very hard to lose it. So, our understanding of what gives value to a distributed network has changed and matured over time.

We now realize that you cannot fork a community and what makes Ethereum or Bitcoin so powerful are some technological aspects. Yes, the tech is interesting and yes, the fact that you can even do smart contracts is pretty cool. But at the end of the day, it's a gravitational pull of all these people involved in this one network. If you build on it, you're more likely to succeed than if you’re trying to compete with it. If you're trying to compete with it, you're starting from scratch, from nothing.

Chris:

Like I'm going to build an electronic store on the moon with a population of zero.

Juan:

Yeah. So I need to bring all these people now because who am I going to sell to?

Chris:

Exactly.

Juan:

So that creates its own sets of problems. And it's a problem that I think they're all having. I think since our understanding has changed and since we and these networks and these teams now know that network effects are important and community is important, they're all investing in trying to build their own communities.

Notably, Cardano. I know because I follow that project pretty closely. They spend a ton of resources trying to build community to their credit. They understand that if they don't get community, their tech doesn't really matter at the end of the day. But the likes of Solana (SOL) or Binance Smart Chain, they realize this too. They know you need community. Without those, you're toast. Tech alone is not going to cut it.

Chris:

This is in real time, awkwardly proving the subjective theory of value, because it's only what the people value that ends up being valuable, right?

Juan:

Right.

Chris:

I also wrote a note about the consensus algorithms and Hashgraph and all that sort of stuff we just said. That's the commodification. Technology becomes commodified, but you can't commodify people because we are the human beings who ultimately decide what value is. That's the Austrian School of Economics, right?

That's why people can't get their head around why Bitcoin has value, because the value is purely defined by the community. There is no objective value, it's all in the mind of a human.

Juan:

That is true, and I even heard on a podcast recently. They were being asked about gold and he said, “very good point.” He said people like to say, even I've said before, it has intrinsic value. And then he made a point that no, there's no such thing as intrinsic value, nothing has intrinsic value. Value is a property that we attribute to a thing, and that can be a digital, virtual thing. It doesn't have to be an actual thing that you can touch.

We can attribute value to anything, to an idea. Ideas are pretty powerful, they're hard to kill. They have value but are abstract concepts. The idea that we have created a value system or a monetary system that is completely abstract, well, we're actually just attaching the physical components from something that was always virtual to begin with. Money and value have always been virtual. It's always been a concept.

Chris:

Virtual … I'm going to say is subjective for the people as well. Even when someone says, “Gold has intrinsic value.” Why? They go, “Because it's shiny.” Yeah, but that's still a value judgment from a human being. So when you say it's got intrinsic value, you're basically saying, “I think it's got value” and you're a human being, so there we go.

Juan:

To their credit, the reason I think people say intrinsic value is because I've used this term, too, and what I mean by that specifically is that if I have gold in my hand, I have value. It doesn't depend on something else. If I have a bond, for example, it has value only if this company meets its obligations. If you have stock, it only has value if this company is doing well. If I have money at the bank, it only has value if the bank is solvent.

Chris:

Well, that's not quite true though because you're talking about middlemen. You said the stock only has value if they perform well, that's not true. The stock only has value if someone else will buy it off you and sees it as valuable. Why would they see it as valuable? Well, if the company is performing well but at the end of it, there are two human beings on either end of that transaction defining the value.

Juan:

Okay, okay. That's true.

Chris:

That is an objective truth, you can't escape it.

Juan:

That is true.

Chris:

If there were no conscious human beings on the planet, there would be no such thing as an economy or value. Animals would just carry on walking around doing their thing, eating leaves and each other and whatever, right?

Juan:

I guess I stand corrected, Sir; I guess I stand corrected. If you have a gold coin, it only has value because people say it does.

Chris:

You said [you have] equal value in your hand, [but] you haven't. You've got a gold bar in your hand. The value is when I want to buy it off you, right? Because I value it and that's subjective to some human beings. So can't escape it, no escape.

Juan:

Totally true, totally true. And I think the other point this person made which was pretty interesting was if you're in a deserted island, that gold bar is pretty useless. You're not going to do anything with it.

Chris:

Exactly. That is exactly the point.

Juan:

If you're on a deserted island and this guy has all the coconuts on that deserted island, guess what? Those coconuts are worth far more than your gold. In fact, your gold is totally worthless because you can't do anything with it.

Chris:

Exactly. In a world with no internet, blockchain and Bitcoin are useless.

Juan:

Totally useless.

Chris:

Valueless, as well.

Juan:

Valueless. Yeah, it doesn't even exist actually. You can have a paper record of the Bitcoin blockchain; you can print it out, I suppose.

Chris:

That would be a lot of paper. Yeah.

Juan:

A lot of paper and it's totally useless. Yeah, it's interesting. All value is subjective.

Chris:

It is, it is.

Juan:

You're right.

Chris:

Cool. I think we've done this one, so we'll close it there. Are we good?

Juan:

Yeah, we’re good.

Chris:

All right, Juan. Thanks for being on the Sunday Special once again.

Juan:

Thanks for having me, Sir.

Chris:

Yeah. That's going to do it for this week's edition of the Weiss Crypto Sunday Special with me, Chris Coney. See you. Until the next one, it's bye for now.

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