Before we begin I’d like to make four points.
I invest in, appreciate and use Ethereum. I want the blockchain to succeed. I am not the latest person to emerge from the backwater of the internet to criticize crypto and call it a ponzi.
If you strongly disagree with me that’s excellent. Constructive, thoughtful criticism is grand. Calling me an ass clown is less helpful.
The nullification time frame for what I’m about to propose is 2 to 5 years. I don’t think this will happen next week, or even in 2023. If I was gambling man, I’d take a guess that this might be more likely to go down in 2024 or 2025.
I don’t actually want any of this happen, however, I think it would be unwise to ignore the possibility that it could happen.
Terrific. Let’s dive into this five part essay
1 - What they want
The United States Government (USG), and many governments around the world, are discussing the possibility of creating a Central Bank Digital Currency (CBDC). Indeed, just in the last week we’ve seen the USG bring up the possibility of a digital dollar. See here and here.
As we’re all aware, a CBDC would give the government all sorts of lovely tools like comprehensive financial surveillance and total control over your bank account. They could cancel anyone’s life in a keystroke, truly a technocrat’s wet dream.
Would it be a long term good for society? Undoubtedly not, but why let a minor detail like that stop us? By jove, if an unelected woke bureaucrat at the central office for wrongthink (COW) wants to decimate a business owner because they called someone a woman instead of a birthing person, the COW officer should have the right to do that! We’re trying to create a better society here people, please get onboard.
2 - The problem
The problem for the lovely, hardworking people at the government is two-fold.
Most people who have a modicum of sense (maybe 50% of the population) can recognize that a CBDC is a bad idea. Getting people to use this new Orwellian currency could be difficult.
The USG is technologically illiterate since all of the best people work in the private sector. Do we really believe that the our geriatric government can create a fully functioning CBDC and roll it out within the next 24 to 36 months? I’d be willing to wager that aint happening.
3 - The solution
Instead of referring to Ethereum as a cryptocurrency, a label that carries so much baggage, I might suggest that we rebrand it as “payment rails.” You could think of Ethereum as a highway system for money. It’s an Autobahn compared to the rutted, dirt roads we drive our mules down today. We sent a rover to mars but it still takes two days for my paycheck to clear, seriously?
So Ethereum the payment rails has a large and growing user base of younger people. It has an excellent network effect and a preexisting dollar payment system that’s proven to work. Hate on Tether and USDC all you want, but as a proof of concept they’ve been working for years.
USDC, whether it’s backed by reserves or unicorn dust, is battle-tested technology. Why would the government spend years creating their own CBDC and another year or two testing it (indeed if they’re even technologically capable of creating such a thing) when they could just nationalize what’s already there?
For the last eighteen months I’ve held the belief that the United States Government would just nationalize USDC. A fast and easy way to launch “their own” CBDC. However, while I still believe that this and this alone is a possibility, I’ve expanded the scope of my thinking. Why nationalize just USDC if you can just take over the whole Ethereum network and call it a day?
4 - The Proof of Stake opportunity
Ethereum’s transition to Proof of Stake (POS) was a great technological accomplishment. Unfortunately, switching from POW to POS has handed the keys of the castle over to a few institutions that are extremely vulnerable to coercion.
If you’ll recall, a few months ago Treasury sanctioned Tornado cash. Post-sanctioning, any individual who used the application could face jail time. I’m not sure exactly what the punishment for institutions would be, but presumably it’s quite bad.
My god! Like watching an art museum burn down it was the most beautiful immolation you could imagine. The Ethereum community broke the speed of light in how fast they disavowed Tornado Cash.
GitHub dumped the source code
The front end shut down
Exchanges froze wallets that had transacted with the protocol
Even so called “decentralized exchanges” blocked Tornado cash transactions
When the Treasury came a-knocking, the Ethereum community grabbed their ankles and prayed the government wouldn’t go in dry. But I’m supposed to be telling you about how Proof of Stake has fucked Ethereum, I guess I got off track.
Let’s take a quick look at all of the largest Proof of Stake validators. Here’s a pretty graph from Dune analytics.
I’m shite at math, but I know how to use a calculator and basic reasoning. By my estimation the following staking services are susceptible to government coercion.
Lido
Binance
Bitstamp
Coinbase
Kraken
Staked.us
Together these staking providers control approximately 63% of all deposits. That’s a major oof. If you consider the other smaller entities that can also be coerced, you’re looking at a super-majority of staking providers that the regulators can manipulate.
5 - How they’ll do it
One sunny afternoon the United States Treasury will release a statement saying, “Ethereum and its stablecoin empire represent a systemic threat to the United States and the sovereignty of the dollar. Tether is facilitating payments to North Korea, USDC was used to purchase guns that led to XYZ attack and lending protocols like Compound and MakerDAO are too unstable. For your safety, dear citizens, we are taking over the network. Big brother loves you.”
Then comes the stick. “We’ve released a new update to Ethereum that will give the government control of the network. Every Ethereum staking service provider has one week to implement the update. Financial institutions that don’t install the update may be fined or have their licenses revoked. Individual stakers may be imprisoned and have their bank accounts frozen. All stablecoins apart from FEDCOIN are now illegal. Have a lovely day.”
After what happened with Tornado Cash, who can argue that the community won’t cave to the threats?
At this point in the article, those who are technologically familiar with Ethereum might raise their hand and say, you dumb ass! We’ll just fork the network and create a new version where the major staking services aren’t in control. To this I say: stablecoins. He who controls the spice controls… I mean, he who controls the stablecoins controls the network.
When Treasury hijacks Ethereum they’re not just taking over the staking providers, they’ll also bend the stablecoin issuers over their knee. They’ll get USDC, USDT, PAX USD, BUSD and all of the rest to only offer redemptions on Treasury Ethereum. Right now USDC has a market cap of $50 billion. Let’s just assume, for arguments sake, that it’s fully backed. On the day of nationalization Circle and Coinbase will be presented with two options.
Support Treasury Ethereum. Continue earning money from your staking service. You must shut down USDC since it will be replaced by our digital currency, however, you will not be fined or have your funds confiscated.
Get kicked out of the financial system. Lose all your licenses to do business in the western world. Jail time for executives. Full confiscation of the $50 billion in reserves backing USDC.
I assure you, the major stablecoin issuers will go along with Treasury Ethereum. I think that ultimately Treasury will make all stablecoins apart from FEDCOIN illegal, but maybe they don’t do it right away.
Individual users who want to use the forked network will lose all access to stablecoins. Your stablecoin balance is now zero. Even if you personally don’t use these tokens, what will happen to the ecosystem if they’re gone? What will happen to the value of Forked Ethereum, if the stablecoins aren’t there to facilitate transactions?
There and back again in 30 days
The crazy thing about my theory is that just imagine how fucking easy it would be for Treasury to pull this off! They hardly even have to lift a finger. All they need to do is develop a simple Ethereum patch to give them full control, and then put out a press release.
A good ol’ fashioned hijacken is so absurdly simple that even the brain dead plankton that inhabit our hallowed halls of government can figure it out. In terms of creating FEDCOIN, they can simply copy the source code and infrastructure of USDC, or just nationalize USDC and rebrand it as FEDCOIN. Infinitely simpler than attempting to build a new CBDC from the ground up.
They’ll combine this hijacking with a slick disinformation campaign that will say things like,
Inflation is crypto’s fault. All those filthy degenerates who’ve invested in Bitcoin, they’re the reason you’re paying more for eggs
Did we mention that only terrorists use crypto?
We want to protect you and keep you safe. The new version of Ethereum is government approved!
Does this sound ridiculous? Is it any more ridiculous than anything else we’ve seen recently? I don’t think so. I think it will take a few weeks from start to finish until Treasury has complete control over Ethereum and its ecosystem.
Again, I DON’T want this to happen, I hope it doesn’t happen, but I think that it’s something that could happen.
FAQ
What do you think the likelihood that this will happen is?
As of today I would say perhaps 50%. As events develop in the next 18 months I think we’ll have a clearer picture of whether it’s more or less likely.
What would make it less likely?
Ethereum could find a better way to decentralize its staking providers so that they’re less susceptible to coercion. Also, figure out the stablecoin problem.
Or, perhaps the government decides that rather than nationalize Ethereum, they’ll just work with a private company. Maybe they pay Meta $10 billion to create some kind of stablecoin, or they partner with Ripple. Who knows.
Would this be bad for the price of Ethereum?
Difficult to say, although I would probably lean towards no. In fact it could be quite good for the price of ETH. However, it will depend on how much the government tampers with the network.
If they by and large leave it alone, and just focus on the stablecoins, then it’s probably great for the price of ETH. If they completely change the network infrastructure, then maybe not so much. For example, if they mandated that all transaction fees must be paid in FEDCOIN instead of ETH. That would be a big hit to the price of Ethereum.