What's Next for EOS, ETH, and BTC?

In light of my recent resignation from block.one, I would like to address those with questions about my relationship to EOS and the broader cryptocurrency industry. It breaks my heart to watch as a cloud of censorship and regulation descend over a technology that many of us hoped would free us from the international banking cartels. We all cheer as the price of Bitcoin reaches new all time highs, but I cry as the vision of what Bitcoin promised to be fades away.

In the early days of Bitcoin we would use it to buy and sell. It facilitated bounties and international transactions with strangers. The transaction fees were low and no one worried about tracking cost basis and reporting to the IRS. Bitcoin was a functional medium of exchange free from any intermediaries.

Bitcoin, like gold before it, has been captured by the regulatory apparatus. Privacy is rapidly disappearing and attempts are being made to frustrate those who want to use Bitcoin without a regulated custodian. This turns Bitcoin into “just another financial asset” with the sole remaining innovations being provably limited supply and political neutrality.

Bitcoin may very well replace gold in the future and reach inconceivable highs. It may very well save your portfolio from the coming hyperinflation. But it will no longer save you from financial oppression.

EOSIO is a toolkit that enables both public and private blockchains. Discussions on the relative decentralization of EOS vs Bitcoin vs Ethereum are moot in a world where all three blockchains are falling victim to the same regulatory frameworks.

Decentralized finance is a dream that I introduced with BitShares a full 5 years before it became a buzzword. I fear that this dream is also losing the war of regulation. As efforts grow to block “self custody” of your own tokens, all smart contracts that are not approved and managed by a regulated custodian will also become a victim.

Major privacy coins are being delisted from exchanges because of anti-money laundering regulations, OFAC, and other regulations. Decentralized exchanges will depend upon the ability to self-custody BTC, EOS, and ETH. The proceeds from selling privacy coins on decentralized exchanges will be heavily scrutinized if not blocked entirely when they are deposited to the major exchanges.

Granted, everything I have said so far assumes a United States centric perspective; however, the only way to stay out of “US” jurisdiction is to perform KYC on everyone who uses your service. This is a heavy burden on decentralized applications and a burden that is not easily outsourced.

Lastly, anyone building anything that results in economic profit and loss imposes tax consequences on their users. Tokens like Voice or Hive create tax events every time they change hands. This is why I decline rewards when I post on Hive, they are not worth the tax accounting. With the growing sophistication of the tax authorities and the loss of privacy, none of these token-based ecosystems / platforms stand a chance unless they automatically do all of the tax calculations and boil it down to a 1099. The only way to automate such calculations is to have full knowledge of every purchase price and sale price. Such things are not possible if users are trading on multiple exchanges in a decentralized manner.

With that context what can we do to make EOS “successful”? There is no single answer to that question because we all have different definitions of “success” and the paths to “success” can head in opposite directions. The most common definition of “success” that I see is a high token price. EOS is “successful” if everyone who buys it makes money. What if EOS achieved this “success” by becoming a completely regulated, centralized, walled garden of KYC’d users?

What would the role of the EOS token be in such an environment? What if the EOS network achieved mass adoption, but the EOS price fell to be valued like a company earning transaction fees? The EOS token is used to buy scarce resources on the network, such as RAM and CPU time. Alternatively the EOS network can be viewed as DAC selling transactions. Anyone with any economic sense knows that the cryptocurrency market is utilizing some other valuation method completely divorced from technological and business fundamentals. Making EOS “successful” in terms of price appreciation requires a completely different mindset. It requires marketing EOS to “currency speculators”. The price can only increase if people believe more people will buy it tomorrow.

So let's talk about getting more people to use the EOS network. I asked myself a hard question: “Why do people use Ethereum when the fees are so high and its scale so limited?”. Clearly there must be some cost to using EOS that is not fully accounted for by the transaction fees. I believe that cost is in the infrastructure requirements to operate a full node. Transaction fees may be “cheap” to the end users, but the real cost are externalized on to full node operators which are not paid by inflation.

If I was the “CEO” of a company in the business of facilitating smart contracts, then I would offer infrastructure as a service and ensure that anyone could deploy applications and that all costs associated with operating these applications were covered by transaction fees. The closest thing EOS has to a “CEO” is the elected block producers. These are the guys who are paid to make EOS a desirable platform. Note, that this is not purely a technology issue. This is about the infrastructure as a service and hosting nodes and economic sustainability.

If the EOS block producers were to operate API nodes that can handle all the read queries app developers can throw at them then costs would not be externalized. If the EOS block producers could host IPFS nodes to pin files needed by apps, then the applications could be fully decentralized. The block producers would then cover their costs via inflation or fees.

So the question becomes, how does a community of token holders “force” their hired block producers to provide the services required to attract more developers? In theory, token holders are supposed to vote in producers that provide the most value to the network. In practice, token holders vote in people who pay them kickbacks. It would be like Apple shareholder’s electing a board that issued new shares and distributed them as kickbacks to a subset of the shareholders.

How then is the EOS network suppose to advance in a sustainable manner? What can any single individual do? What technological code could be developed?

People have proposed a system to “vote to fund proposals”. In principle, this is no different than voting to fund block producers. What rules and incentives will change the game theory to produce a different outcome?

If you bring democracy to a country full of socialists you will get vastly different results than bringing the same democracy to a country full of libertarians. These results can last until the economic incentives of democracy slowly turn the libertarians into socialists.

“Success” of mass adoption and token appreciation requires not just improved technological solutions, but the cooperation and wisdom of the vote-casting token holders. I have put forth proposals designed to align power with long-term commitment to token price and to simplify the economic model of purchasing CPU time on the network. I have put forth proposals to increase the representation of token holders among the block producers. I have put forth proposals to encourage cooperation of producers by punishing everyone if anyone misses a block. While at block.one I led a team that implemented all of these proposals in a matter of months.

Now it is a matter of getting voters to approve them.

In light of the recent regulatory environment, the EOS community has a choice between moving toward more decentralization or toward more compliance with regulation. Moving toward more decentralization would mean intentionally limiting EOS throughput and therefore raising transaction costs. This would be done to reduce the cost of operating a full node which will minimize externalized costs.

If EOS is to grow in scale, then application developers will require large scale infrastructure which is costly to operate. A business able to support this infrastructure would have to comply with regulations. By the time all the regulations are complied with, such a business is usually better off operating their own private EOSIO chain.

So there you have it, BTC, EOS and ETH are all being valued as currencies disconnected from technological fundamentals. All three are on a path to be captured by regulators with a complete loss of privacy. The best hope a token can have for capital gains is to maximize its utility as money and its compliance with regulations and work to get institutions adopt it. I believe that the staking pool model will make EOS a better currency and that KYC’d accounts with regulator approved smart contracts trading regulator approved assets may be the only way forward if massive capital gains are the goal.

Block.one is in the ideal position to take EOS in this direction if the community chooses to go that route. I, on the other hand, am not interested in having my innovation limited by the whims of government regulators. Those of us interested in creating tools that return power to the people will need to look elsewhere. Our “profit” is not measured in dollars, but in “freedom”.