Comfort is the death of innovation. It is complacency in disguise. - xh3b4sd

Sharing information is hard for humans, because I don't know what is happening inside of your brain, and vice versa. Now, I am certainly glad that my thoughts are my own. Nobody should ever know about all the insane brain waves I am getting all the time, because chances are, they would lock me up and throw away the keys. Sounds familiar? This aspect of life may simply be attributed to the human condition itself. And so, while it is a good thing that we cannot directly share the internal patterns of our brains, the bad thing is often that we can also not prove them.

What we are discussing here this week in the Powerlaw Memo is the process of information sharing, the attestation of facts, and the attribution of circumstances. Attestations matter, because attestation is trust. The game theoretical tragedy on the geopolitical stage is always rooted in the limitations of information sharing. Great powers distrust one another because neither side can verifiably prove the innocence of their benign motives. We can talk to one another, but we cannot prove to tell the truth, until it is too late.

To that end, trust assumptions rule everything around us. The government cannot trust its citizens. And citizens can certainly not trust their government either. For those reasons we are governed by systems that tell us how to live. We are governed by rules that are well intended, but often appear to stand in the way of progress or even freedom. To those ends, we are often left fighting the very systems that we grew to disagree with, despite the fact that we were the ones who created them in the first place. Sharing information, attesting to facts, and attributing circumstances are fundamental problems of society. And at some point in life, we have to ask ourselves when we should stop to settle for less.

As it stands today, the government knows basically everything about everyone. That is not what we wanted, but it is what we had to do in order to build our empires, up to this point. So fred you not, dear reader. The destruction of privacy may end up being a temporary footnote in the history books, similar to the centralization of media over the last 100 years. Brittle seeds of technological progress enabled monopolies for collecting and distributing information, effectively dictating opinions of generations. But as it naturally occurs with empires, they rise and fall by the hand of progress alike. Where electrical engineering brought us the centralizing forces of transistors and data centers, moon math brought us consensus mechanisms and zero knowledge proofs, to free us from the all seeing eyes of the nation state.

It is probably fair to say that we would never have made the progress on zero knowledge proofs that we already achieved today, without the relentless research and engineering driven by the blockchain industry. And if you are reading this today, dear reader, then you are in the top 0.001%, because most parts of the world do still not understand what we are even talking about here. That means, we are still early. We are in fact so early that there are still huge benefits to be had, based on the transition that this world will be going through over the coming decades. The question will eventually be this. Who can capitalize on this transition?

Attesting conflicts with privacy, which means, attestations that can preserve privacy are an absolute game changer. Zero knowledge proofs can change the way we think about the internet, the government, life itself, and any other complex system out there, because zero knowledge proofs can lead to more efficient business processes and higher levels of application security.

Proof of reserves is the assurance that an entity is in fact holding an asset. With this proof, a business is verifiably saying "our treasury holds 3000 ETH". Without such a proof, we are left wondering whether that number is real or rather aspirational. Customers and investors alike can be verifiably put to ease with this simple principle of operational integrity. Those kinds of claims can be proven without revealing any sensitive details about the underlying financial infrastructure and its composition. The automation aspects of those verifiable industry standards may lead to more economic activity onchain, that will effectively be better integrated, while being more reliable at the same time.

Proof of solvency is the assurance that a business can meet all of its obligations. With this proof, a business is verifiably saying "we have enough money to cover all liabilities". In today’s world, those words must be taken on the basis of opaque trust assumptions, which creates a lot of friction and room for third party intermediaries that are frankly nothing but a drain on the system. The onchain economy of the future will do away with this friction, and in turn enable every business conducted on Ethereum to leverage the cryptographically secure automation of verifiable solvency statements. ZK balance sheets will define a renaissance for economic efficiency without middlemen, because, code is law.

Proof of identity is the assurance that a user is in fact who they claim to be. Financial businesses will always be required to know their customers and conduct anti money laundering practices. Being able to privately prove that "I have a Coinbase account", or that "I am a US citizen" will enable users to onboard more easily onto financial services onchain. Easier onboarding is just better for business. And so, onchain businesses can onboard users faster, while providing better user experiences that are privacy preserving, which in turn may even lead to improved user retention overall.

Proof of income is the assurance that an individual received consistent cashflow from any activity. The real estate industry is typically conducting background checks around income to increase the likelihood of a home owner to fulfill their liabilities. Zero knowledge proofs would enable us to more easily verify that "I make at least 3000 USD of free cashflow every month". We will soon be living in a world in which it will be unnecessary to mail bank statements around or share personal tax reports only to make another person believe that my numbers are good numbers. In the not so distant future, Ethereum will allow us to prove the facts of our lives without compromising our individual information security.

Proof of profession is the assurance that an individual works, or has worked, at a certain company. Even further, we can imagine all aspects of our professional history to be proven, be it onchain or offchain. Businesses often have to do tedious background checks on job candidates, because it has been incredibly hard to verify that "I worked at Splits for 3 years". Those aspects of recruiting are so hard that an entire industry has grown around this problem domain of finding great people to work with. Our technological progress can do away with all sorts of opaque and inefficient business practices by simply automating talent networks using zero knowledge technology onchain.

Proof of loyalty is the assurance that a customer has been using a certain product or service for a certain amount of time. I could for instance prove that "I have an Athletic Greens subscription for over 10 years". Following that line of thinking we can imagine loyalty programs that provide discounts to partnership products and services, so that you may pay less for your health insurance if you can prove to be a healthy consumer. Living a better life and receiving better services go hand in hand on top the cryptographically enabled onchain economy.

Proof of credit is the assurance that an individual or business is in fact creditworthy. Credit scores are just numbers, but they mean something that is very relevant in today's day and age. Having a credit score may not be that much of an issue. But how those numbers come to be is often dictated by monopolies of sensitive data collection that we even have to pay for. Having to pay for the infringement on our human rights is not only an absolute disgrace, but also an information security nightmare. Zero knowledge proofs allow me to say that "I have a credit score above 750" without anyone making profit by knowing everything about my financial decisions.

Proof of quality is the assurance that a particular product or service is actually good or enjoyable as far as its users are concerned. Web2 gave us the five star rating system, which influenced consumer behaviour to a great extend. What we usually don't know though in Web2 is how real those ratings actually are. Anyone with an internet connection may provide more than one rating. The issue of Web2 primitives has always been that they are not sybil resistant, which means that a single person may operate multiple identities on the internet. Blockchains did not invent private keys, but they greatly furthered their adoption across the general population of the internet. Web3 can therefore leverage Ethereum's private key infrastructure, enabling businesses to implement onchain rating systems on the basis of zero knowledge proofs. Onchain rating systems can greatly increase the value of their expressed ratings, because customer identity can be proven anonymously across many onchain applications, which allows its associated ratings to be of higher quality on the basis of network effects. With all of that in mind, onchain businesses may one day say "our customers are generally very happy with our product", and they can prove it.

With a hard cut we go now over to our number for this week, which is a little over 340. Because this is the amount of onchain payments companies that we know of today. Every week more businesses find their way into the Ethereum ecosystem. And with an ever increasing network of onchain businesses, the opportunity set to establish novel customer success stories is up into the right. Buckle up buttercup. Ethereum is not waiting.

Layers of defence and layers of conviction. Find asymmetry and understand your target inside out. This is how you exploit systemic upside. - xh3b4sd

DeFi frontends provide access to the onchain economy. They are the Stargate into a new dimension. The entrance to the realm of decentralized finance. But at the end of the day, DeFi frontends are just websites that run on servers. They are inherently centralized and carry substantial trust assumptions with them. For that reason we have to assume that all frontends are compromised. And so all of the involved problem statements are fundamentally about operational security. Because exposing our private keys to attackers may upend our livelihood within a single transaction.

Here in the Powerlaw Memo we often talk about things that will always be true. And just like all frontends have to be considered compromised, it will always be true that nothing will ever be 100% secure. Security is about layers of defense. Security is about the arms race between establishing, maintaining and circumventing the defensive capabilities of a system. That challenge leaves mechanism designers with a vast playing field. And the most important thing for either player on that field is to leverage all the ways in which certain asymmetries can be exploited, whether they are meant to defend or attack.

All websites run code. This will probably always be true too. And the kind of code that is most relevant for us within the visible side of the internet, is Javascript. All Javascript code is written on some machine, and all websites are served over the internet, which means that there is an entire supply chain of complexity between the laptop of some developer and the browser of some user on the internet. It will then also always be true that there are uncountable attack vectors within that very supply chain.

In principle, all supply chain attacks are initiated where sensitive information is shared. Think about all the points of contact where you share your own information, or the information of someone else. Imagine all the situations in which you interface with the world. Theoretically, all those points of contact, all those interfaces, may provide an attacker with the opportunity to gain access to privileged data like production credentials or private keys. The way in which we share and move and transform information is therefore critical to our survival amidst the dark forest.

Let's look at some practical examples of information security. As software engineers we should not have privileged credentials on our machines. It bears far too much risk for sensitive data to be casually slung around on all kinds of developer laptops. Because downloading the wrong PDF may be all it takes to compromise some DeFi frontend. Even further, people come and go in an engineering organization. And every time somebody leaves the company, you have to rotate all production credentials, if those are exposed to third party machines on a regular basis. Rotating secrets is good, sharing them beyond the production environment itself, is not.

There is in fact no technical reason to store infrastructure passwords locally. Direct machine access should be rare and then temporary. Read access may be useful sometimes in order to debug an incident. It is 2025, and write access to production machines should maybe never be granted in the first place. If there would ever be a reason to manually manipulate a remote server, then a dedicated private key should be generated on demand under multi factor authentication. That process should then also involve some chain of command in military parlance. And once the machine access is not needed anymore, the privileged private key should be verifiably destroyed. We could even imagine to monitor the existence of such privileged private keys in order to record the history of such exceptions.

The way in which we share secret data matters. Sensitive data should not be shared using everyday text messengers, even if those applications claim to be end-to-end encrypted. Because even if they are, it takes one stolen phone, or one wrong message to the wrong contact, and an entire ecosystem gets compromised. Here we should pay attention to the details, because the details of protocols matter. All protocols work until they get tested. And the real test is usually carried out under pressure, at 03:00 in the morning, fighting two incidents at once, while getting angry customer feedback from the other side of the planet. There is no reason to do this to ourselves.

Information security is a house of cards. If you want to do it right, you have to build it brick by brick, with a solid foundation. Getting the big picture right is actually not too hard. What matters most for secret sharing is simply a reasonable password manager as the source of truth and point of contact for all sensitive information. And from there credentials should only be applied where they are required for some privileged software component to function properly. The rest of the system can then operate on the basis of authenticated interfaces. Those interfaces can then become our layers of defense to guard privileged internals. That way deployments may not be triggered by pushing arbitrary code directly to some production environment, but by enabling a version number that has been vetted and registered within the system itself through all those layers of defense. None of this has to be slow when executed either. Because everything can be automated, and in a perfect world, we just push on green.

The perfect world described above is still not any guarantee for success. Supply chain attacks penetrate all components and dependencies across the entire stack. Dependency management is a particularly hairy problem domain because most websites depend on many many third party libraries, most of which are unaudited and ever changing. Nobody knows, and nobody verifies all the things that third party code is doing. One of the many best practices employed by software engineers is to test behaviour of an app in an automated way. The big problem though is that threats do not arise from the functionality that we test, but rather from the ones that we do not and cannot test at all. This is simply due to the fact that the action space of turing complete environments is near infinite, while we can only test so much. All of this is a long winded way of saying that the best dependency is no dependency, which is another of those things that will always be true.

Backend applications have the big advantage that they are executed within a centralized and controlled environment. Once setup and automated, one day we can maybe even reliably verify that the right code is being executed correctly without any interference. Frontend applications are not that fortunate, because they are delivered and executed in many variations of decentralized and uncontrolled ways. Some of the contributing factors here are many different devices like laptops and phones, many different software stacks like operating systems and browser versions, and many different delivery systems like ISPs and cloud platforms. On top of all of this complexity we have to work with Javascript, which is interpreted on every new website visit and user interaction. That means code is unverifiably executed at runtime over and over again without any indication of what else may be happening in a browser window. Our websites today are frankly an unmitigated disaster from a security point of view. And the nature of the Javascript ecosystem does unfortunately not really promote any kind of high standards either, when it comes to operational security. At this point we have to ask ourselves: how on earth are the lights still on?

We have actually come a long way ever since the first days of the internet. And history suggests that we are just getting better over time. That is essentially a bet on all of mankind. The one thing that we have going for us is the deep understanding that this here is indeed the dark forest. Mechanism designers understand the nature of complex systems, including many of their relevant forms of MEV. Think of mechanism designers as the Navy Seals of information security. To be a mechanism designer in their own right is simply the choice of wanting to be better tomorrow. It is simply the act of being honest, and the attempt to protect what is most important to us.

There are many different ways in which we can design systems that are resilient and self-healing, if not even antifragile. There are many different ways in which we can create layers of defense for ourselves and for the systems we operate. And there are actually just a few guiding principles that we have to lean on in order to be better off eventually.

Decentralization is one of those principles, and it enables many useful mechanisms, if designed right. At its heart, the open source movement is decentralized. All kinds of people create and maintain all kinds of software in a way that allows the broader ecosystem to harden and flourish. Secret sharing has become a discipline of information theory, which all of the internet is based upon. Multi factor authentication is an out of band verification mechanism that is extremely effective at preventing single points of failure across all kinds of domains. Decentralized command is a leadership principle that enables military cells to accomplish the most challenging missions under the most atrocious circumstances. And finally, blockchain networks allow all of mankind to rethink and restructure the art of governance and the way in which we are allowed to live, not just as citizens, but most importantly, as human beings.

If we want to leave this planet better than we found it, then leaning more into decentralization is what we all ought to do, regardless our skin colour and religious belief. And with that we make a hard cut for the number of the week.

Originally I wanted to share here that blob space became the burn leader on Ethereum mainnet over the past 30 days. That in itself is quite the achievement for a blockchain that has been pronounced dead uncountable times in the past. Though I cannot but declare "1" to be our number of the week, because Base dethroned Arbitrum for the first time ever as largest L2 rollup by TVL, with almost 12 billion USD onchain. And what's crazy to me is that 30% of that TVL is actually denominated in ETH according to L2Beat. Given all of that competition, and given all of that ETH exported to rollups, L2s don't look that parasitic to me after all.

You don't want money in the bank. You want money in the system. - xh3b4sd

There is often the argument that ETH is not used for anything meaningful. And I always find it somewhat irritating to hear such statements. First, meaning is subjective. What you and I find meaningful, given our very own world view, may be very different. And second, the statement that ETH isn't used in quite meaningful ways is simply not true. This week we are going to look at all the different ways in which ETH is used across the onchain economy. And doing that, we are going to look at all the different ways in which ETH accrues value by increasing its own utility function. Today ETH has a market cap of roughly 200 billion USD. This in itself is a respectable size for any system to command. And not only are 200 billion USD very respectable, but also is ETH criminally undervalued, considering that the world economy will become ever more onchain.

The native unit of account within the Ethereum ecosystem is ETH the asset. The gas price for block and blob space alike is denominated in ETH. That means transaction settlement and data availability are two main drivers of ETH's value accrual. About 75% of DEX liquidity is denominated in ETH or ETH derivatives. So the deepest liquidity pools do naturally evolve around ETH as the base trading pair. Ethereum derives its economic security from staked ETH, which is subject to slashing upon dishonest behaviour. And with that, all of Ethereum's crypto economic security guarantees are denominated in ETH too. Those security guarantees are further being exported via restaking, which expands Ethereum's real estate even more by enabling versions of economic activity that are not fully expressed onchain.

The native medium of exchange within the Ethereum ecosystem is then also ETH the asset. All ETH denominated products and services as described above require ETH to change hands. In a world of account abstraction, user operations may be executed by paying for gas with any token, or maybe even without the user knowing about any transaction cost whatsoever. But none of that changes the fact that Ethereum validators receive ETH for transaction inclusion and that economic security is denominated in ETH after all. It is often interpreted as a negative, that user's don't need to hold or know about ETH in the first place when using the onchain economy. But account abstraction is a superpower in this regard, because it allows ETH to permeate through all layers of society without anyone having to really worry about it. Contrary to popular belief, rollups and stablecoins are not parasitic. They are Ethereum's trojan horses, because they allow for the expansion of Ethereum's real estate, far and wide. Imagine we would force everyone to hold ETH in order to use the chain. That kind of pipe dream would be dead on arrival. Account abstraction or not. ETH transfers are so significant, they do typically show up in the top 3 of the burn leaderboard.

ETH is the store of value for Ethereans, people who believe in the future of the onchain economy. Any store of value must retain the value provided for long periods of time. Admittedly, ETH was not able to maintain purchasing power so far over several significant time frames. And that turned ETH into a speculative asset that most people do not believe in. The numbers we know today don't lie. But it is my belief that the numbers of tomorrow, the numbers of the coming years and decades, will prove ETH to be an economically relevant store of value with significant upside potential, exactly because major aspects of the world economy will become ever more tokenized.

An often overlooked aspect of Ethereum's modularity is that companies like Coinbase participate in the network in order to process their own business specific transactions efficiently. The economic activity in the Coinbase case is that trades of digital assets have to be settled on Ethereum. That specific business activity generates so much value for Coinbase that they are running thousands of validators in order to guarantee inclusion of the transaction flow that they generate. The value driver for ETH in this case is then the extension of Ethereum's real estate through real world business use cases. The integration between the offchain and the onchain world is a real positive sum aspect in a future that becomes ever more onchain. Coinbase doesn't participate in network validation for the staking rewards. I would argue that Coinbase would run the same amount of Ethereum validators even if they would yield zero additional capital, simply because network participation enables Coinbase's core business of operating a digital assets exchange.

Staking pools and distributed validator platforms do arguably provide their services for the yield, which is the amount of staking rewards issued by the Ethereum network. We often hear comparisons about the centralization of Bitcoin and Ethereum through the coordination of pooled resources. The truth of the matter though is that Bitcoin operates a far more centralized network than Ethereum does, for two critical reasons. One, three or four mining pools control the vast majority of hash power. And two, a mining pool is the colocation of GPUs, which are all stored and operated inside the same building. The decentralized protocols enabling staking pools on Ethereum are on the other hand used by a myriad of different staking operators, all having different preferences for geographies and software stacks. Staking might appear to represent a centralizing force, but the actually implemented mechanism design of staking providers like Lido and Rocket Pool are true facilitators of decentralized staking primitives, all of which bind enormous amounts of ETH for the long term. Think of it this way: staking pools are Ethereum's permafrost.

Rollups are the native scaling solution for Ethereum. We are building networks of networks. And in all of crypto, we did it first. Every rollup is running a dedicated onchain economy secured by Ethereum. Rollups are another superpower of Ethereum, because they allow for credibly neutral settlement of cryptoeconomic activity, based on the operational preferences that any given business use case may require. The validator set of your rollup can be permissioned or permissionless. The scalability properties of your rollup can be adjusted to your specific needs. Rollups are free to chose their preferred virtual machine and gas token. And rollups are free to chose their regulatory and privacy policies for the transactions that they themselves want to facilitate. Ethereans do certainly prefer ETH to be used as gas token on rollups. That is one aspect of what we call Ethereum alignment. But we should argue that a thousand flowers rather bloom, instead of prescribing top down purity tests. Ethereum needs to lean into the competitive market and favour 100 smaller rollups over 2 big ones. In any event, rollups expand Ethereum's real estate and export ETH as money. Whether you agree with it or not. This is facts.

ETH is the most pristine collateral all across DeFi. And with that we should also mention that DeFi originated on Ethereum, and that 95% of DeFi happens on top of Ethereum. No memecoin washtrading on Solana can change that. The reason for this dominance is because ETH is credibly neutral onchain money. If it's your keys, then it's your ETH. In Aave alone there are about 25 billion USD supplied in collateral, of which almost half is denominated in ETH and ETH derivatives. ETH the asset is part of the DeFi money lego complex. Its usage and utility will only increase from here, while both of these aspects perpetuate one another all across the cryptographically enabled world economic.

Smart contract blockchains enable new primitives for internet native applications. And all of those expand Ethereum's real estate. Today we can already see several social media platforms and gaming ecosystems, all building more accessible and equitable consumer apps on top of the credibly neutral substrate that is powered by ETH. Onchain native businesses like Farcaster and Zora increase the amount of ETH in user wallets and the provenance of ETH in every additional block space secured. Tokenization is the latest darling of traditional finance. BlackRock has over 2 billion USD of short term treasury notes tokenized on Ethereum. The majority of the stablecoin complex is settled on Ethereum too. All of those use cases expand ETH's economic real estate, which means that all of those use cases add to ETH's value accrual.

We can already see several state and business treasuries that treat ETH as a viable capital asset. Those institutions have realized how the future will most likely look like. DAOs and pension funds alike, they all carry the spirit of the strategic ETH reserve. And none of those entities cares about the toxic noise on crypto twitter. Because Ethereum is built by those with skin in the game. Not those who only complain about the efforts of others.

Onchain has become more than just money. Onchain can be about finance and speculation, but more so it can be about community, content, tickets, branding, collecting and every other possible permutation of production and consumption in an interconnected world that becomes ever more digital. Real world businesses have only recently started to integrate with Ethereum on more serious terms. In the past, business were simply not allowed to operate onchain for bogus regulatory reasons. But US corporations got the green light now to integrate with public blockchains. And many of them want to do it because Ethereum allows them to create more value for their business. Merging traditional businesses with the onchain economy will expand Ethereum's footprint by orders of magnitude. All of those expansions open up many different supply sinks for ETH to be utilized at the end of the day. And the emerging properties of this very onchain economy will be so much larger than the sum of its parts.

27.6 trillion USD in stablecoin volume was processed globally in all of 2024. And 95% of that volume was settled on Ethereum. It goes without saying, but, there is no second best.

Money exists on a quality distribution, and it therefore applies that not every money is created equal. - xh3b4sd

All systems prefer hardness, because hardness allows any system to survive. The lifeblood of any economic system is simply money. And that very money is defined by properties of hardness too. The factors for any money to develop a specific hardness may be internally or externally defined along the dimensions of supply and demand. Who is then to say how much anything should be worth anyway? How hard is the money of networks and nations? And what has the gold standard to do with all of that?

The notion that anything might be of value is as old as time. Barter existed ever since there have been humans on the scene. Gold was used as store of value for about 5,000 years. Formal money was developed roughly 3,000 years ago. Humans virtualize enterprise ownership for over 400 years by now. And as impactful as the information age has been so far, the tokenization of everything has literally just begun.

What we want to further focus on here is the way in which nation states and blockchain networks define their monetary policies. In particular we want to look at the gravitational centers of those types of economies, because their Gravitropic Forces do effectively define the economic behaviour of any given system.

Let's start with the nation state and the establishment of the gold standard act in the year 1900. The mechanism designers of the day wanted to create a money that is stable, and that can be trusted. And the best anchor for said money was the one thing that everybody wanted, but not many could have. That anchor, was gold. The one quality that was valued most during those uncertain days was stability. And up until 1971, gold provided that very stability for the US Dollar. In this picture, gold was the external factor that determined the value of the nation's money.

It turns out that even stability comes at a cost, because what is yet so stable may not adapt very well to periods of crises. Subsequently the gold standard was abandoned, because the backing of gold restricted monetary policy too much. So much so that the government was not able anymore to respond to sea changes like wars, depressions and the changing world order. In technical terms we would say that the system wasn't very flexible or elastic, so it couldn't adapt to change very well.

On top of the above, the gold standard had one mechanistic flaw that nobody ever talks about. The global gold supply was effectively determined by externalities outside of the control of any government whatsoever. And that means the valuation and stability of the world's monetary policies dependend heavily on the desire and ability of anyone to dig up gold from the ground, wherever it may be found. An analog to this very dynamic might be explained by today's control that petroleum exporting countries have over the global oil supply. And if adversaries can increase your gas prices or decrease your gold value, then there is not much left of a nation's sovereignty. The power struggles playing out here are of extraordinary geopolitical consequence, none of which help a nation to establish hardness.

The search for an optimal monetary policy eventually created systems of money printers and zero interest rates. And the further monetary policy strayed away from hardness, the more was there left to be desired. That very desire lead to the irony of our story, because it lead to the creation of a technology that was built to compete with all of those problems of hardness. Irresponsibility lead to competition, and competition brought us blockchain networks.

Blockchain networks define their own monetary policy using tokens that are algorithmically issued one way or another. The boundary conditions of the network itself define how much supply may be created and under which circumstances that supply may come to exist. Those supply mechanisms serve a very special purpose. And that purpose is inherently desirable for the network, because it is the network itself that defines its own boundary conditions trustlessly, which cannot be easily exploited. Those types of hard wired and self sustaining economies produces a hardness that the nation state can simply not compete with. Blockchain networks were the first hyperstructures that codified monetary policy in their own programmatic constitution.

The relationship between the nation state and its own money supply is at times artificially inverted by creating more money in order to fight more crises. More money now may help to solve a problem today, but that very solution comes at a cost that must be paid in the future. The flexibility in monetary policy as described in this example may appear to be elastic, but the question we have to ask is which part of the system is actually expressing those properties of elasticity. Because elasticity, similar to hardness, unsurprisingly, comes at a cost too.

A nation's money supply is artificially held elastic in order to provide overall system stability. What we then have to realize is that the elasticity in money supply is actually a detractor for a system's hardness. The way in which hardness is minimized here, is the fact that the artificially manipulated money supply simply borrows from the future. And the fact that this type of borrowing is even possible creates a systemic downward spiral of necessary discipline, which detereorates the system until the borrowing either reverses or the system collapsed. The more money a nation prints, the better it is doing in the short term. And the tragedy of an artificially inflated nation is that it remains stuck in this vicious cycle of producing ever more liquidity. In the moment it looks like everything is just fine, but security budgets do eventually matter. And the only way out of this vicious cycle is a very painful portion of prolonged austerity.

A network's money supply is programmatically held elastic in order to minimize trust assumptions. That is only possible because the monetary policy of blockchain networks cannot be compromised by the first crisis showing up on the horizon. The network's builtin boundary conditions ensure a systemic accountability which humans are otherwise tempted to circumvent. The correlation between a network's money supply and that network itself is uninverted when compared to the nation state. The more supply there is created, the less healthy the network becomes. But if the network grows, the more supply it can generate in order to increase its utility function. This uninverted correlation between supply and network is the desired default behaviour.

And so, market based reductions in money supply are inherently healthy for networks, but excruciatingly painful for nations, because nations can typically not just stop spending. The reason why the respective supply correlations are flipped across nations and networks is because the nation choses to keep their inputs elastic, while the network choses to keep its outputs elastic. That asymmetry allows a nation to fake system health temporarily, while it allows a network to guarantee hardness over long periods of time. The United States Government is essentially forced to debase its own currency over time in order to address structural issues like generational demographics. Ethereum is aiming for the infamous burn in the long run, which increases the value proposition of its own money, the more it is being used. Ethereum expresses hardness when it becomes ultra sound in the most relevant way.

Nations and networks both seek to establish hardness, but nations prefer economic stability while networks prefer economic elasticity. Treating the inputs and outputs of a system properly has the effect of redefining that system's utility function. This conclusion is not to dunk on the stability that governments try to provide, but rather to outline credible paths towards hardness for programmatic economies.

And with that we make a hard break for the number that we picked for this week. 400 user operations per second are performed across the entire Ethereum ecosystem over the course of a day. We refer to user operations here because they capture the intended actions of a user instead of submitted transactions. Another way of saying this would be that there may be many different user operations executed within a single transaction. A user operation may refer to an ETH transfer, a token swap, or any contract write onchain. The user operation terminology originates from the concept of account abstraction, which is another mechanism to utilize a network's economic elasticity. Integrating Ethereum ever deeper into the real world economy will eventually allow us to turn elasticity into hardness, synchronously composable for all of the United Chains of Ethereum.

Only you can carry the fire. Only you can stop the rain. - xh3b4sd

In this Powerlaw Memo we are going to take a look at utility functions and pricing models with respect to Ethereum's scaling roadmap. And this time we are going to frame our problem statements through the lens of Gravitropic Topologies. People are still losing their minds about ETH's value accrual, and as long as this is the case, we are going to cover the topic like a ballerina in the wind. Just with our mechanism designer glasses on, of course.

Let us rehash some basics first. Ethereum's scaling roadmap is based on networks of networks. Like the internet, many networks of computers interact with one another in complex ways, as if the entire thing was a single organism. In that sense, Ethereum mainnet is a network, which we call the base layer, or L1. And all the L2 rollups are also networks, all settling to Ethereum mainnet. This is the mechanism by which L2s can optimize their own networks based on their own preferences of tradeoffs, while enjoying the best kind of economic security.

All of that economic security is provided at a relatively small cost, which all L2s happily pay for today, because they are getting a pretty good deal. The unit economics involved here make up a pretty big chunk of the motivations for any blockchain network to join the party. We could argue that the utility to cost ratio is extremely high. And we could further argue that any well designed system would operate exactly like that.

But now ETH didn't pump to infinity and a lot of people who thought they could get rich quick based on the efforts of others are writing angry tweets on the platform that used to be known as twitter dot com. And as we can imagine, everyone has an opinion about possible solutions for our ETH value accrual problem. This is not to disparage the marketplace of ideas. We need to have many ideas in order to find the right path forward. This is especially true because most ideas aren't really that good if you make the effort to think them through. In any event, our differences are not what divides us, but what makes us better as a community. This is what we must thrive for, for the base layer and for the social layer alike: antifragility.

Those are the days of US tariffs, because the US government tries to balance its own household deficit. One of the lesser useful ideas thrown around now is to impose something like tariffs on L2 rollups, so that they pay their fair share for the sake of value accrual back to ETH the asset. On the surface we see an imbalance, and the first emotional reaction is to cut off the arm that is already bleeding anyway. Who doesn't fondly remember the good old days during which doctors, the beacons of society, commonly practiced bloodletting in order to rid us of all the evil spirits tormenting our bodies. Tinkering with price controls like a real communist is exactly the same kind of energy in my book. This is not how anything works.

Countries are not blockchains. And so geopolitical tensions may require different approaches than ordinary business decisions. That is especially true for the technological industry which caused mechanism design to become a real thing in the first place. At this point we are entering the realm of gravitropic topologies, which allows us to view any complex system based on a simple question. Where are all the gravitational centers?

What we are looking for are local pockets of energetically dense behaviour. In other words, we are looking for some kind of inflection points within tensions or dichotomies. Thinking about our problem statement, we can then quite quickly see that there are at least five correlated dimensions of interest. Those dimensions describe our centers of gravity in terms of gravitropic phenomena. The mentally challenged may already bamboozled. But fred you not kunpan. We are going to splain. Our five dimensions to consider right now are price, demand, utility, cost and loyalty.

Price is easy. That is the thing we care about, because price is the dimension telling us how much worth ETH is at market rate. We want number to go up. Demand is easy too. That dimension is the only thing apart from supply that is directly mechanistically linked to price. We want demand to go up too, because the positive correlation between price and demand tells us that more demand increases price. Then we have utility. This dimension describes how useful something is, which is linked to demand with another positive correlation. That means something is in higher demand the more useful that thing is. Cost is our fourth dimension, which is the property that the L2 tariffs crowd is talking about so passionately. An ugly but pretty important detail here is that cost is negatively correlated with demand. That is to say that people want less of something if that thing becomes too expensive relative to the perceived utility. And the fifth of our gravitropic dimensions is loyalty. The degree to which an L2 is aligned with Ethereum and ETH describes whether there is ultimately demand at all. So loyalty is the end boss here. Loyalty is not only very sticky, but it also shapes utility functions and pricing models, until its gone. If we push loyalty over a certain threshold, then all demand will be lost forever.

Now that we established the relevant centers of gravity, their connections and correlations, we can go over the implications of pricing models and get an idea about the efficacy of L2 tariffs. People want to increase costs now. Increasing costs reduces the gravity of demand and loyalty. In the case of L2s we can see a very special relationship between demand and loyalty, because loyalty forces demand to be sticky too. The problem here is two fold. Loyalty can only inhibit the gravitational effects on demand for so long, because increased costs deteriorate loyalty itself. And loyalty is a force that doesn't come easy. Once it is broken it is incredibly hard to heal.

At this point we should also have noticed something else. Increasing costs hasn't increased price at all. If anything, all we have achieved with price controls was to reduce the hardness of the system by way of reducing loyalty and increasing trust assumptions. Once the door opens for the incompetent to play god within a system that they don't understand, it's downhill from there. We are being told that L2s must pay their fair share. We are being told that making Ethereum more expensive will be good for ETH. But that is frankly not how anything works. Because I am old enough to remember that we set out to scale Ethereum exactly because it was too expensive to use.

Utility functions and pricing models are negatively correlated. Price controls are the worst kind of interventions because they attack the integrity of any given system. So instead of taking something away from somebody else, instead of tinkering with forces beyond our control, we need a better approach for ETH to make number go up. The optimal solution for our problem can of course also be explained by gravitropics, and for some readers the answer we are looking for may be shockingly obvious.

The conclusion, the optimal solution, is the approach of maximizing the utility function of our system. Utility is the dimension that market participants are willing to pay for voluntarily. And utility is the thing that increases demand universally based on pure market dynamics. Utility is the thing that caused L2s to become aligned with Ethereum in the first place. And make no mistake. What can be corrupted, will be corrupted. That is a tale as old as time. Utility is positively correlated with demand and loyalty. If we make something more useful then it will simply be more sought after. That is the attack vector we should all be focusing on. Make that damn thing more useful. Nothing else matters.

Once again most people seem to have the right insight but draw the wrong conclusions. And it is so irritating to me how common it is for people to invert their shallow conceptions of the world by simply confusing inputs with outputs. We need our systems to become ever more competitive, because that is the gravitropic dimension that is most energetically dense after all. In other words, the same kind of competitive dimensions are inversely correlated against one another, because one gravitational center of competence forces another to higher the bar, or perish within the free market.

Even further, the colloquial gravity of the matter is that the world around us is changing. It always does, whether we are here or not. And entropy is changing only in one direction within the competitive dimension, which is upwards. And it doesn't matter whether you like that or not, or whether you want to remove yourself from those forces all together. Sure, you can sit back and let others carry the fire. But it goes without saying. If you don't come to war, then war will come to you. I hope that this will never happen to anyone, ever. In any event, it is better to be a warrior in the garden, than to be a gardener in war.

90% is our number of the week. This is the share of tokenized treasuries that BlackRock's BUIDL fund has issued on top of Ethereum mainnet. That is 1.8 billion USD in nominal terms. It looks like the big boys find Ethereum pretty useful after all. And maybe that has something to do with utility too. I mean, just maybe, you know. Don't forget that our plans are measured in centuries. The world needs the most credibly neutral base layer for global coordination. NASDAQ onchain is an app. Ethereum is the world computer.

The opposite of wrong in a multi dimensional system is not necessarily right. - xh3b4sd

Ethereum is the world computer, providing anyone with very compelling properties of hardness. For that reason, Ethereum is home to most stablecoins, which are just one form of tokenized assets, or RWAs, if we would call it real world assets. Everyone is now excited about RWAs, because the institutions are finally coming. Ever since Donald Trump's election last November, the regulatory shift favouring innovation opened the door for crypto as an industry. We are open for business.

With everyone's excitement, new narratives are spun up left, right and centre. What is the next play? How can this make me money? Who is most to benefit from the regulation induced sea change unfolding over the next couple of years? We are referencing many interesting data points here in the Powerlaw Memo every week, showing how dominant Ethereum is persistently across various onchain categories. In most relevant ways, Ethereum leads the way in basically all TVL related metrics all over DeFi.

Now that RWAs are the new trend, everyone's expectation is that most of the upcoming tokenization will simply continue to unfold on top of Ethereum, first and foremost. In that sense, liquidity begets liquidity. The question though remains in what ways ETH as an asset may benefit from all this institutional adoption in terms of increased utility and eventually price appreciation.

However we want to look at the problem statement, what has to be optimized from any perspective is some kind of utility function. From the perspective of Ethereum as a public blockchain network, the utility function is defined by something in the order of liveness, verifiability and censorship resistance. Those are round about the dimensions that vast amounts of Ethereum researchers and builders care about. From the perspective of ETH as a financial asset, the utility function is defined by something like unit of account, medium of exchange and store of value. Those are roughly the dimensions in which ETH may realizes its value accrual over long periods of time. And from the perspective of RWA issuers as profit maximizing businesses, the utility function evolves simply around doing better business so that shareholders remain happy.

The above describes a complex system nobody can reliably predict. In all what we do here though, we can get pretty far if we only get the direction right. One directionally relevant point that has been made about ETH's value accrual is the idea that ETH will be further used as base trading pair for any tokenized asset. The logic of the argument would then be that more tokenization binds more ETH in liquidity pools, effectively acting as supply sinks, which makes number go up.

At face value, nothing is used as base trading pair just because. Not even ETH. The decision to chose a trading pair is made by liquidity providers who may be motivated in different ways. Some may just want to keep their tokens productive, which is by no means a free for all when the token at hand is a free floating asset subject to price volatility, because impermanent loss is not your friend. Onchain studies have shown time and again that most liquidity providers lose money due to fees, MEV, DEX-CEX arbitrage and volatility induced impermanent loss.

Granted, almost all tokenization today is being done for US Dollar backed stablecoins. So let's ignore all the issue above for the sake of this argument. The mission remains the same, token issuers want to find more and better opportunities to propel their businesses forward, so that they can earn more money. And that opportunity is publicly available in our beloved DeFi money legos. This industry provides rehypothecation primitives that make all TradFi panties wet. We provide instantaneous access to a global customer base allowing national institutions to increase their reach dramatically all around the globe. There are availability, efficiency, transparency and counterparty benefits that DeFi provides almost for free. But none of the above makes ETH more valuable, if ETH is not bound to any of the resulting business practices.

Today we are living through the return of fundamentals, and there must be a compelling reason for ETH to become a major player in the battle of base trading pairs, which overall is a cutthroat business itself. I was curious now and looked at the 24 hour volumes of the top 10 liquidity pools in Uniswap, Curve and Balancer. Note that the 24 hour volume metric was most comparable. What I found onchain was that ETH as part of any pool in the top 10 realized a trading volume of 0.742 billion USD within 24 hours, whereas other pools not involving ETH produced about 1.033 billion USD respectively. That means ETH is already a base trading pair with a market share of 74% in onchain trading volumes.

What matters most in our analysis is the fact that ETH as the native asset within Ethereum mainnet does already enjoy huge network effects, which we can expect to persists. And with that comes a big fat BUT. Once again, the insight here is correct, but the conclusion is wrong. If we were to extrapolate linearly based on a single data point in time, then we could get all kinds of lofty valuations for ETH's future price appreciation. But more tokenization on top of Ethereum does not magically imply similar increases in ETH related trading pair activity or price appreciation for that matter. Those relationships do not scale linearly. We could likely add 1 trillion USD of tokenized assets on Ethereum and the effect on 24 hour trading volume involving ETH may only double from 1 to 2 billion USD. That would be a 5:1 ratio in TVL/Volume terms where those two dimensions are already highly asymmetric based on their nominal values. And I think that ratio itself is A) quite generous and B) doesn't scale linearly either due to diminishing returns.

The TVL/Volume relationship and adjacent debates about what is more important is as old as blockchains themselves. And it seems only few do understand that TVL and Volume do not follow much of any predictable relationship of first order. BTC for instance has a TVL dominance across all of crypto below 60% while running a negative security budget, which is to say BTC does not generate any more value onchain despite being valued the most nominally per coin. That in itself makes no sense whatsoever. Solana flips this picture on its head because there is only about 10% of Ethereum's TVL on Solana while that network in its heyday generated sometimes multiples of Ethereum's volume on a daily and weekly basis. We have seen many Solana shitcoins with a market cap of 100k USD generating 300 million USD in daily trading volume. And whether we call this wash trading or capital efficiency doesn't change the fact that SOL can't keep a market cap above 100 million USD for 3 days straight. I mean, with inflation, that might be doable one day, and I am sure they are on their merry way.

Value and price are not the same, just like TVL and Volume are independent phenomena. Neither can provide us with a reliable idea of future value accrual in isolation. And so what we are left with is simply good old mechanism design in order to figure out how anything works. What we can always rely on are second order effects within complex systems. And whether we look at TVL, Volume or merely price, all of those dimensions benefit from network effects once a certain threshold is crossed. And whether it is Ethereum, Solana or Bitcoin, each will continue to benefit from their very own second order effects in their own right. For this very reason, any attempt to compare one with the other will likely fail to produce any compelling evidence for determining the better or worse, because this is all just apples and oranges. You buy them for very different reasons.

Our number for the week is 56%, which is World Chain's monthly market share of smart wallet activity across the entire Ethereum ecosystem. This type of activity is the very kind of second order effects we were discussing above, because network effects beget network effects. ETH's value accrual matrix is multi dimensional, which is a negative if you try to do the elevator pitch, but which is a big fat positive if your price pool is the cryptographically enabled world economy. Trading pairs saturate quickly because there is really only this much liquidity that you need, which is exactly why the returns that we get diminish very quickly, if we expect trading pairs to be a means of supply sinks for ETH. Just more TVL may not have any reasonable effect anymore on certain types of trading volume. The case we can make though in any event is that Ethereum is the infinite garden, and within that garden ETH is the real estate. Ever more buyers will find ever more sellers in an asymmetric world that keeps increasing its utility function across multiple dimensions simultaneously. Focus on tending the garden, and let a thousand flowers bloom.

Putting energy into a system and getting value out of it are two totally different things. - xh3b4sd

Energy has driven civilization ever since like no other force. The degree to which humans can produce and harness energy has created global superpowers like never seen before. The ability to make any process more energy efficient is the driving factor behind our technological progress as a species. The Kardashev scale classifies civilizations based on their ability to utilize the energy within their surrounding environments. Type one civilizations can utilize all available energy of their own planet. Type two civilizations can utilize all available energy of their own star. And type three civilizations can utilize all available energy of their own galaxy. For us today it is unthinkable how we could even utilize all available energy of our home planet. And that is not for a lack of trying.

In our day and age we are governed by systems that sometimes mandate the saving of energy, which is probably the right insight, but has lead to entirely wrong conclusions over and over again. Saving energy for energy savings sake does only have the consequence of using less energy. And all things equal, having less energy as an input results in less productivity as an output, which is predominantly what we have seen happening in Europe over the last two decades. The mandate of saving energy as it has been implemented so far, has therefore been detrimental to achieving any of society's actual intents and purposes. We are not better off today as a system, and even worse, we have become exploitable from within.

If we want to save energy, then we have to grow our way out of this problem by advancing technological progress, because only technological progress can enable us to do more with less. And if anyone is really interested in lifting up everyone in society, then technology is our only best friend.

Our ability to produce electricity has come a long way, but the mechanisms to do that are still very crude at times. The absolute level of our sophistication is basically to heat up water hot enough, so that steam can physically turn the crank of a generator. The vast majority of our electricity production works by means of electromagnetic induction. This mechanism is so primitive you literally just have to spin that thing. We have also figured out how to harness photoelectric conversion via solar panels. But all together, those two methods pretty much summarize the extend of our ability to produce usable electricity.

The systems used to produce energy go through state transitions that cause lag effects. We cannot just go from 0% to 100% and expect instant power production at just the right level. And so, energy production has to be scaled up and down incrementally. At the same time, we are particularly inefficient at storing energy, which brings us to the concept of using blockchains as a temporary store of energy. We are going to make the case that this absolutely fantastic idea is not at all as brilliant as it may sound in the first place, because it either doesn't work, or it won't last.

To set the stage, when we produce electricity, then we often produce more than can be put to good use at the time. The energy grid must always be oversaturated in available electricity, because the lack of supply may cause cascading grid failures that can lead to wide ranging blackouts. Producing more than we need is not efficient, and it surely does not allow us to save energy by any measure. We are then trying to divert excess energy towards any available alternative for energy storage or revenue generation.

Historically people tried to make the case for mining Bitcoin with surplus energy, and we still hear about similar initiatives once in a while, all aiming to better manage peak loads within electricity grids. Localized experiments have helped power grids to manage peak load better and safe billions of USD, but current estimations suggest that Bitcoin is used in less than 1% of such cases, making it virtually irrelevant at global scale.

The Proof of Work type of load management is also a rather inefficient approach, because you replace one inefficient aspect of energy production with another inefficient way of energy production. And then, in Bitcoin's case, managing peak loads by way of mining BTC does only work as long as the market value of the coin is higher than the cost to produce it. And Bitcoin is designed to become more inefficient as the years pass by, which by some people is somehow considered a feature. All of that is to say that there is a time window during which Bitcoin may be used to manage peak grid loads, but that window will close in a matter of years, simply because the network is bound to become too inefficient eventually, causing it to crumble under its own load.

Now, I wanted to know if there are any active efforts to store surplus energy temporarily in Ethereum blockspace, and the short answer is no, because that doesn't work for several reasons. But let's take a step back and describe what we would try to achieve here. The idea would be that there is a blockspace market, and that people could acquire blockspace rights while gas prices are low. And those blockspace rights could then be exercised when gas prices are high. With that we would effectively create a temporal blockspace swap. Sounds pretty cool, right?

One flaw in that idea is that energy must be converted into a digital form of value first. And only Proof of Work blockchains allow the direct conversion from physical energy into economic value. So the gap between excess energy and gas for blockspace would still have to be bridged in very inefficient ways. So, Proof of Stake blockchains like Ethereum cannot help with this particular energy conversion problem at all.

We could simply purchase ETH for gas when peak load is high, but that approach in itself is flawed for several reasons. When peak load is high, then the supply of electricity is higher than the available demand. That means power is already cheapest during peak loads, which is a negative in itself because we are already bound to be inefficient. Selling cheap power for ETH may result in further energy losses along the way, because the price of ETH may very well move against us temporarily. And then all we have achieved is to purchase a token with excess energy, while what we actually needed in order to conserve energy onchain was to acquire blockspace itself, not the means to buy it at market price like everyone else.

What would be necessary is a protocol native mechanism that allows for temporal blockspace swaps, so that cheaply acquired blockspace rights can actually be exercised in an expensive blockspace environment. And as fascinating as this idea may be, it would still not alleviate the world's struggles for intermittent energy storage. This is because blockspace is limited and rather inelastic. What we mean by that is the following. There is only a fixed number of blocks generated every so often, and no external mechanism can modify that schedule. The only thing that external forces can influence about blockspace is the level of its contention, which refers to the amount of transactions that want to be part of the same block at the same time. All of the technical challenges aside, even if we could store energy in blockspace, we could only store so much of it at a time, because Ethereum mainnet is not designed to scale elastically to the extend that peak loads may require.

We could now argue that L2 rollups may introduce temporal blockspace auctions, and that multiple networks may be able to swap blockspace rights between one another. That is also a fascinating idea, but it doesn't appear to be practical either. The fundamental problem behind temporal blockspace swaps is the fact that we try to add more stress to an already stressed system, while at the same time we are unwilling to pay for the bottlenecked resources. The point of it all is to execute for cheap when execution is expensive. But the reason that execution is expensive, is exactly to protect the system from overloading. And so temporal blockspace swaps combined with peak grid loads would actually mean that we move the peak load of one system into the peak load of another, which all together sounds more like an unmitigated disaster from a mechanism design point of view.

Blockchain networks may be good for humanity. They may lift up generations of people and redefine the ways in which civilization governs itself one day. Blockchains might be incredibly well suited for myriads of market based experiments, and one day they might even cure cancer. But for all we know today, temporal blockspace swaps are the wrong conclusion, given the genius of their insight.

3.5% is the number of the week this time around. And here is the story explaining what it represents. Bitcoin is digital gold. Ethereum is home to almost all stablecoins. Comparing gold with money in the United States we can see that the US gold reserves equate to roughly 750 billion USD, if we are generous. The M2 money supply, which includes money market funds and retail deposits under 100,000 Dollars, is estimated to be somewhere around 22 trillion USD. The price pool that Bitcoin is playing for does only account for about 3.5% of the money within the US economy. And that does not even account for economic activity induced by the velocity of money itself. We also have not included second order effects that these types of economic systems bring with them, which all together would imply another differentiating factor of 10, dear reader. In summary we can say this. Bitcoin was the idea. Ethereum is the execution. Even if temporal blockspace swaps don't work.

Information is not fair. Information is asymmetric. - xh3b4sd

Information as a concept is one fundamental part of our universe. It describes how some thing is configured or looks like. The way you appear in the mirror is described by the information content of your DNA and its subsequent biological expressions. The way you look is defined by information, encoded by many biological functions. The way we speak as humans is described by information too. The shape of the sounds and words and sentences that we produce are all configurations, specified by the information content encoded in our language.

Nothing can be described without information. And the signals allowing us to perceive any information do often only provide incomplete representations, because signals are lossy channels of information content. Signals are a way to consume information, more or less completely. Information content is a concept describing that parts of a signal are useful, and that information can be gained by consuming it. We are human, and we are naturally inclined to maximize some utility function. In the context of information theory, that means that we are usually trying to maximize the information content or information gain of a system.

Once we understand the concept of information gain, we can see it in many aspects of our lives. The foundation of any game is the information content that allows its players to either win or lose. Any information theorists out there may want to weigh in on the following take. Regardless, I would say that all games are games of imperfect information, exactly because future behaviour of other players or the environment are uncertain. There are many interesting dynamics to discover amidst various game designs, because games can be complete, incomplete, or imperfect in information. All the fascinating game designs aside, what we want to look at a little bit closer this week are real world applications of maximizing the information gain of a system.

Information theory has a concept of increasing the information gain by some clever mechanism. Several thought experiments exist in the form of logic puzzles. One of them is called the "12 ball problem", which poses the following question. Given 12 equal balls, of which only 1 has a slightly different weight, and given a balance scale, what is the minimum amount of weighings required in order to find the odd ball?

The least efficient way to go about this problem may also result in the highest possible resource consumption. We could simply weigh 11 of the 12 balls against any random ball and find the odd one of the lot eventually. This approach comes with a lot of variation in its performance profile. Sometimes it takes 7 weighings, rarely 1, and in worst case 11. The naive sequential approach does not provide any execution guarantees. So what do Senpai?

I wanted to discuss this problem because the solution to the problem requires the kind of thinking that is usually only found outside of the colloquial box. Our objective is to maximize the information gain, because that automatically implies to maximize the execution performance and subsequently minimize resource consumption. Weighing every ball separately results in the smallest possible information gain per weighing. The outside of the box thinking approach would then maybe be to weigh all the balls at once. And when we do that, then we effectively create batches of resource constrained processes, which reduces the amount of operations necessary in order to complete a task. And if we can do that, then we are also increasing the efficiency of the system.

The way in which we define our batches must be strategic to some extend. For instance, we would want to minimize the cases in which we are weighing the same ball multiple times. But that by itself does not tell us how large our batches should be. An indicator might be the amount of distinct information gains achieved per operation, because that amount can be the basis of our batching formula. A balance scale has two sides. We have to way one thing against another. The distinct amounts of gained information per operation is therefore 2, because we learn about the order of two items in comparison relative to one another. 2 is then already greater than 1, which is a pretty big deal if we were to execute some operation infinitely often for eternity.

What is so fascinating about the 12 ball problem is not only the information gained by the actions that we are doing, but also the information gained by the actions that we are not doing. Weighing one batch against another tells us how two batches compare. And the question for us is whether we should just weigh a random selection of 6 balls against the other 6, because it turns out that this approach would result in a slightly reduced information gain per operation compared to the optimal strategy.

Let's break down how 6 vs 6 would fare. With a total of 12 balls, the only possible outcome of the first 6/6 weighing is tilt in either direction, because the odd ball can now only be on either side of the scale. The second weighing would then split the tilted balls into a 3/3 weighing. The third weighing would then weigh two random balls of the tilted 3, where the possible results are two times tilt, plus one times balance, each of which refers to only a single ball. The information gain of the first weighing in this case is 50%, because we ruled out one half of the population. The second weighing rules out another 25%, leaving the third weighing to solve for the last quarter, where something remarkable may happen. If the third weighing produces a balance, then that process itself hasn't provided any direct information gain, because both balls are of equal weight after all. But the information inferred by the lack of information gain tells us that the last ball that we did not weigh on the third try must be the odd one, simply because we have ruled out the rest of the population at this point already. We utilized knowledge of an action that we have not done on the last try. And it is pretty cool that something like this is even possible.

The optimal solution though is slightly more efficient, because it utilizes knowledge of an action that we have not done on the first try, instead of the last one. The secret lies in the way in which we can craft our formula to derive the optimal batch size to start with. Remember, a balance scale gives us two clues at once, and if we can, then we should also choose to gain information without doing anything for it. That means 2 clues of an action we are doing, plus 1 clue of an action we are not doing, gives us an optimal 3 clues per weighing. Every clue is associated with a batch, and having 3 batches across a population of 12 provides us with a batch size of 4 if my math is strong today.

Let's break it down once more. With a total of 12 balls, the outcomes of the first 4/4 weighing is one of two tilts and one balance. The balance case gives away the clue of the action that we did not do. From here the second weighing is simply a 2/2 in any event, and the third weighing is a straight forward 1/1. The 4/4 approach allows us to rule out 66.66% of the population at first trial. Utilizing all characteristics of the environment provides us with over 16% more efficiency at the start despite having smaller batches to begin with, which in itself may save a lot of money on day.

Batching for efficient information gain is a widely adopted primitive across all walks of life. Medical diagnostics run tests against batches of samples in order to rule out large amounts of clients at once. Epidemiologically most samples are usually negative anyway, and so most batches are too. The few batches that result in a positive test can then be dissected with more effort individually, but only if there is a real reason to expend more resources on individual samples. Binary search algorithms split sorted lists in ever smaller halves for fast lookups that do not require the verification of every single item. And last, but not least, fraud proofs bundle blocks of many transactions so that only the minority of fraudulent transactions require in-depth verification.

Any form of hash tree allows any root hash to be verified efficiently within distributed systems. And as long as everyone computed the same root hash, no more work has to be done in order to provide certain verification guarantees of the underling system. Only a conflict in root hash verification triggers more workloads to be executed. In a similar fashion, zero knowledge proofs generate a single cryptographic proof that guarantees the correctness of an entire batch of computations mathematically. That way validating every single step of a large set of transactions is not necessary anymore. Verifiers can then easily check the relevant zero knowledge proof in constant time, regardless of the underlying batch size.

And this, ladies and gentlement, is then also exactly how we scale Ethereum. The largest, economically useful smart contract blockchain network, home to over 130 billion USD in stablecoin TVL. Every other day I am flubbergasted by the sheer amount of intellectual property constantly generated on top of Ethereum, most of which is economically relevant. These days the Eigenlayer ecosystem is firing on all cylinders, leaning heavingly into trust minimized autonomous agents. AI that is for you, dear reader. Narrative traders and proponents of overvalued infrastructure projects can go eat dirt, because agentic onchain banking is about to unfold on the public blockchain with the strongest security guarantees.

All of the above brings us finally around to the number of the week, because BlackRock's BUIDL fund is now sitting at over 1 billion USD in TVL, of which roughly 83% are managed on, you guessed it, Ethereum. There is no second best, Michael Saylor. Bring it on.

Most people live in yesterday. Only few live in tomorrow. - xh3b4sd

I was today's years old when I understood the ETH value accrual thesis that the Ethereum researchers are pursuing using blob space. And the way to explain it is to understand a statistical principle called the Law Of Large Numbers. A better way to put it would be "the law of many samples", because what the Law Of Large Numbers tells us something like the following. The average of ever more observations will reflect the true value of a system ever more precisely.

Here is a classic example for approximating the average result of dice rolls based on many observations. In plain mathematical terms we would describe the average result as (1 + 2 + 3 + 4 + 5 + 6) / 6 = 3.5. By approximation the average of the first couple observations will be far off that expected value. But with ever more dice rolls, the average result adjusts ever closer to the true value. More samples give us a better idea of the underlying intricacies of the system at hand.

We can think of many more examples in which the average of many samples gets closer to some underlying truth. A coin flip may be not so fair in a single toss, but heads will eventually come up just as often as tails does. Measuring the size of animals can provide sufficiently reliable estimations about a species. The insurance and gambling industries make heavy use of the Law Of Large Numbers, as well as everything involving signal processing, because approximation by many samples allows us to reasonably predict the output of a system due to ever decreasing error variations.

Understanding that increased scale of a system provides more predictable error rates can then help us to understand how a relatively small system today may perform as a big system tomorrow. And that brings us to the realization I just had a couple of days ago. Ethereum's focus on blob space turns out to be very much aligned with high levels of ETH's potential for value accrual.

When we talk about blob space in Ethereum land, then we talk about data availability, or short "DA". Data availability is a very technical way of saying that the data that blockchain networks are supposed to verify, is guaranteed to be there in the first place. Because, if data does not exist, it cannot be verified. And because all of this is about blockchain networks, what really matters is the quality of the underlying block space.

Not all DA is created equal, and so some forms of DA will become commoditized, but some forms of DA will not. The commoditized versions of DA will be relatively cheap and relatively weak in the sense that more or less trust assumptions will have to be made when using those cheaper versions. The superior form of DA will always be limited, because it will always be natively integrated in the underlying system. Ethereum's native way of providing data availability for rollups is now described as blob space, a separate fee market to store rollup data. Justin Drake mentions once in a while that DA will never be commoditized. And what he means by that, is that the most secure DA will never be commoditized, because Ethereum's ability to provide data availability is simply limited, even at larger scale.

Now that we have a lot of the fundamentals out of the way, let's get to the point where value is in fact accruing back to ETH the asset. The demand driver for DA is always in parts related to the underlying security context. And even though blobs provide a superior form of data availability, blob space is surprisingly free for the most part, up to a point. And that is just a very big head scratcher for a lot of people out there. How can you possibly make money by giving something away for free?

Well, Ethereum doesn't reinvent the wheel here. There are several common economical principles that we are leveraging in order to generate demand and capture value in the process. We can summarize most of those principles using the concepts of freemium margins and network effects. And the calculation is pretty simple once we understand one thing: all free blob space will always be used. That in itself creates network effects, which in turn causes block space contention, which is just a fancy way of saying that everyone wants to post data at the same time. Once everyone posts data at the same time, blobs get "full", and Ethereum experiences usage spikes that are then revenue generating. Those usage spikes appear to be meaningless today, because we only have 3 free blobs per block. So far I was also of the opinion that blobs will not generate meaningful revenue ever, because we barely ever go over that freemium range in blob usage. But I was missing an important detail in the equation: scale.

The usage patterns of blob space are in fact fascinating to visualize. When we check blob space usage on some Dune dashboard, then all we see is a more or less flat line around the free range of currently 3 blobs per block. And with that little fluctuation there is barely any meaningful revenue generated today. The trick about the blob space strategy is simply scale, which is the way in which Ethereum is going to leverage the Law Of Large Numbers in its favour. Because scale increases the absolute size of a relatively small value.

Here is a nice way to think about it. Blob usage causes contention spikes above the water line. The water line of a small pond is pretty flat. But the water line across the deep ocean can become rippled with pretty big waves. Orders of magnitude more economic activity may burn billions of USD in blob fees alone every year, even if most blobs are free, because deep waters make for big waves. By my estimation, Ethereum could eventually burn over half a million ETH tokens consistently every single year. All estimations aside, more economic activity sampled over longer periods of time will inform us ever more accurately about the potential output of the underlying system.

And just to hammer that point home, almost all economic activity on top of Ethereum L2s will always be almost free, all the while we have the potential to generate billions upon billions in revenue flowing back to ETH. The reason that this is likely to work is because all the ocean of freemium blobs below the waterline remain free. So the vast majority of consumers can be served using superior bock space, while paying almost nothing for it. But that will only work if we generate economies of scale so that the little contention we produce pays for everyone else's free lunch.

Additionally, the costs to use L2s will remain in their own equilibrium because of the amount of free blobs per block. And then, L2s too will scale even further by themselves. They will become more efficient over time, and in the process become better at serving more users. Just like Base is scaling 1 M/g per week.

It is only the contention above the free range that causes price discovery in the blob markets. And the larger the amount of used free blobs, the larger the contention in absolute terms above the waterline, while keeping the relative size of blob usage spikes relatively small.

Another way of visualizing those principles of scale would be something like this. Compare the skin of an apple with the crust of the earth. The apple is small, and so is its peel. Planet earth on the other hand is far larger and therefore its crust is also way thicker. The relative sizes of the apple skin and the earth's crust are very similar respectively. They are proportional. But the absolute size of the crust of the earth is many orders of magnitude larger.

Today we are burning blob fees to the extend of the apple skin. Tomorrow we may remove far more amounts of ETH tokens from circulation by way of burning blob fees, but only if the economic activity on top of Ethereum uses hundreds or even thousands of free blobs per block one day. This is why the security context of Ethereum's blob space is so incredibly important. Because this very security context is one of the most important drivers of block space demand in Ethereum. Most people out there do still not understand why decentralization and MEV matter so much. By my estimation, Ethereum gets it right already today. Time will tell how any of this will play out. Maybe the reason why we can see all of this here so clearly before everyone else, is because we are already living in the future. I mean, just maybe.

The number of the week is simply 1. And that is because of something that nobody is telling you about. What nobody is telling you, is that Ethereum, despite being "abandoned", is once again number 1 in daily and weekly onchain volumes. That is a reference to the stark activity decrease that Solana is now experiencing again as the latest hype chain falls out of favour again. Turns out, crime wasn't the answer after all.

People tend to come up with very different distributions of wrong. - xh3b4sd

Distributions show us that the world is not just black and white. Many people live in a world in which the glass is either half full or half empty. But that line of thinking is far too simplistic for a life worth living in a complex world. To clarify, we are not talking about the act of distributing physical goods here. When we talk about distributions as a concept, then we talk about the realm of statistics. Distributions describe for instance how often different things happen relative to one another, or how many things there are of a kind. We could for instance visualize the distribution of how late the bus arrives around the corner over the course of next week. On such a distribution we could for instance see that the bus is always a couple of seconds late. We could see that the bus is more than one minute late about 10% of the time. And we could see that the bus never came once, because the wheel fell of the wagon. Distributions can show us what is rather right and rather wrong. Distributions can show us how real the world really is. Because the data underlying distributions may highlight how relevant any given case turns out to be according to hard numbers.

If you believe that some aspect of your life is totally true and 100% real, then you are making an absolute statement. Cognitive science shows us that nothing is ever as bad or as good as we make it to believe. The mental traps that we create for ourselves can be found in the difference between the absolute and the relative. And while absolutes and relatives too unfold on some distribution, being too close to either side of any extreme would suggest to me that we may be out of balance once more. Not understanding how fundamental distributions are in this universe causes some of the largest displays of cognitive biases in our societies today. Anything even remotely related to blockchains and politics provides a basket of misunderstandings and cognitive shortcomings. All of which make life harder for everyone, for no apparent reason.

The political spectrum unfolds on a distribution, just like everything else in life. Most notably, our generations are marked by left and right ideologies, as either end of those extremes caused history to be rewritten many times within the last one hundred years. Extreme positions are rarely the answer. Especially if the extreme position itself is on the wrong end of the wisdom distribution. The Powerlaw Memo is all about understanding the world around us. Because every one of us is the architect of their own life. And every one of us impacts the very environment that we all share in extraordinary ways. So extraordinary that some of our actions cause ripple effects through space and time, leaving a world behind that will never be.

Last week we talked about having the right insight, but drawing the wrong conclusions. We covered the insight that everything in life is subject to power structures. What we did not do is to talk about the wrong conclusions that many draw from this life. The conclusions that I want to discuss here can be found on one of the extreme ends of the political spectrum. On one hand, those ideas speak very loudly about fairness and equality. But for some reason those ideas prefer to give everyone a fish to eat, instead of teaching everyone how to fish independently. Being for empowerment of individuals, but not sustainably empowering individuals with competence is dishonest at best. The resource that truly impacts the lives of most people over time is not money, but competence. Because competence scales a social system in a decentralized fashion so that everyone able may help to lift up everyone around them. But instead, some of the conclusions drawn amidst the extreme ends of ideologies prefer to provide the notion of a world god. The picture of a wonder healer. An entity that can be trusted as if ordinary folk better not worry about nothing no more. The tragedy in all of this is two fold. For one, the world god represents a single point of failure, which is a mechanism designer's way of saying that you better trust nobody in the first place if you want to survive. And two, offloading responsibility to somebody else achieves the opposite of well being, because a lack of responsibility breeds complacency, which is the perfect ground to nurture famine. There is a saying in society that goes something like this. You are the average of the 5 people around you. That statement in and of itself is not only true, but it also describes a distribution. So, where do you want to be on that distribution? Who do you want to be?

I do not want to spend any time thinking about partisan mind viruses, because once you are too far gone, the system itself takes over and runs with it. Once you are so far away from reasonability, it is almost impossible to communicate. So much so that inducing any kind of soft fork choice in behaviour gets out of reach entirely. What I want to highlight for those who are still able to comprehend, is the systems point of view of a self righteous society. A society whose citizens have many opinions to share, even though they never really achieved anything themselves. Masses of entitled individuals repeating marketing ideas that many before them have also just recycled from somebody else before them. The poster child of the trend that we are describing here is the European Union and their struggle with themselves. I believe for some time now that there is very little that may safe Europe in the decades to come. In fact, the situation is so bleak within the minds of the many, the only thing waiting at the end of the tunnel is once again, war. Not so much because of external aggressors, but rather because of the enemies within. Because of the wrong conclusions that elected and unelected officials alike draw time and time again.

The crux of it all maybe best described in what we think "good" really means. The wrong conclusions almost always entail an element of what it means to really help somebody. I am not sure how well a society is doing in which the government spends tax payer money on syringes so that heroin addicts can get a clean shot. But never mind, the situation is way worse. The single biggest mistake that society gets wrong is the opposition of either left and right simply because an idea is coming out of the wrong direction. The typical way of thinking nowadays goes something like this. Any policy on the right end of the spectrum is automatically understood as fascist and racist. And that is simply not how distributions work. If we want to separate the world into left and right, then each side unfolds on half of the entire spectrum. It is therefore impossible that all right policies are equally located at the worst end of the extreme. And so the gap between wanting low energy prices and another holocaust is rather large. The dishonesty to label the very much needed competence as socially opposable does all of society a huge disservice. We need the good parts of right wing policies just like every parent has to keep their children in check once in a while. The key to a successful life is balance, because this world is not just black and white. Distributions, rule everything around us.

Mechanism designers can choose to create rules that do one of two things. We can create rules that allow for a certain behaviour to emerge, and we can create rules that force a certain behaviour to vanish. I have no way of proving any of this, but I would claim that most systems work well if the rules for behaviour to emerge and the rules for behaviour to vanish are somewhat in balance. That is to say the "for" and "against" rules must be rather equally distributed within any given system. A system is not a system if it has only "for" rules, because then it is a free for all. And a system is not a system if it has only "against" rules, because then it is just a prison. Power is always taken, and the crumbling systems of our time prohibit far more for the many than they enable for the few. Policy makers of our day and age tend to understand their job description to be something that prohibits. I would argue that failing societies have those types of "against" policy makers in common. The result being that governments regulate their own citizens to death, simply because their mandate of protection was utterly misunderstood.

And so we make a hard cut for the number of the week, because crypto must rule everything around us. 88% is the amount of priority fees on Solana, which tells me that crime is alive and well over there. The priority fee is mostly paid by individuals who want to be first in order to extract more value than thy neighbour. Today, almost all of Solana's revenue is based on the emerging behaviour of extraction. A behaviour enabled by an ecosystem. We know this to be rather true because almost all volume on Solana originates from the memecoin industrial complex. Or how I like to call them in the wake of LIBRA, weapons of mass destruction. 90% of anything is not a distribution anymore. 90% of anything is basically the whole pie. Priority fees on Ethereum range between 15% and 40%, with a vastly more diverse economy of utilization. That is how I like my chains. Diverse and distributed.

Where there are humans there are power structures. - xh3b4sd

Across human history, everyone has the same correct insight, but many draw the wrong conclusions, often in the wildest possible ways. The correct insight is the following. Everything in life is a power struggle. That statement is about energy, and energy can only be conserved. Throughout its conservation, energy does always materialize in some way or another. The very state transitions of energy as it is being conserved, describe the very power struggles that we are referring to here. That is then also why there will always be MEV, whatever shape it takes. The role of mechanism designers is to define systems that prevent unhealthy capture and dominance. Because what can be captured, will be captured. And since everything in life unfolds on a distribution, there will always be some kind of capture and dominance, regardless how well it may be distributed. In a way, capture can be a tool. You may really want to have a set of super powerful actors that are putting their forces to good use within the confines of your system. Harnessing power for the greater good is just as desirable as harvesting the crops to feed the people. The challenge for people is then maybe to create an experience that is as smooth as possible for as many people as possible, so that no one actor may force their unreasonable will upon another. Where there is energy, there are power structures, and with power structures there come the struggles. This is all very natural, very simple and very logical. And there is nothing wrong with that. We have to take the world for what it is, regardless of what we want it to be. Even further, the state of the world does not automatically imply that we can't try to make it better. The world around us is a malleable place after all.

In order to understand the framing of complex systems in the spirit of mechanism design, we have to lay some ground rules. The common terminology used by us was in parts already described in past week's Powerlaw Memo, where we articulated the conceptual differences between action spaces and rule sets. As a reminder, an action space describes what is possible, whereas a rule set describes what is allowed. Rule violations may be possible if the underlying action space allows for them to happen. For instance, murder is a crime for most parts across all of civilization, but a heavy stone or a sharp knife may end a life real quick, crime or not. For the purpose of our discussion about power struggles, let us define the difference between a system and its actors. A system is defined by an action space, and free agents exercising behaviour within it. Any action space has been defined by a mechanism designer, which is not to excite the creationists amongst us too much. Actors other than the mechanism designer may try to force their own will upon other free agents. Configuring system constraints is a form of power, but modifying the available action space does not imply to give somebody power, nor to take it away. Changing the action space simply means to change the game. As an example, an apple tree's ability to grow more apples is not equal to giving you more apples. You still have to know where the apple tree grows, and you still have to be tall enough to reach for the fruit. And even further, you may not even like apples in the first place. The point here is that the idea of giving power is completely absurd, because whatever may be "given" may not be usable or may not be of any interest to the agent. So, what is there must be taken, and therefore power must be exercised. Unexercised action potential, the ability to do something, is not more than a hypothetical, until energy of your own making affects the world around you. Only what actually happens is the realization of power. Or in other words, it is not power if it is not realized.

Power is always taken. Taken by the able. And the question for mechanism designers is always how much should be up for grabs. When people say that power may be given, then what they are actually saying is that some actors may be allowed to do something within some predefined action space. But the definition of a rule does not automatically imply that anyone is actually able to behave entirely according to that rule. The history books are full of malicious kings and rulers who claimed to give power to the people, only to use the exercised rights of their citizens against them. The constitution of Stalin's Soviet Union, drafted in 1936, assured freedom of speech and all the wonderful rights that people ought to have. And we all know how that worked out for them. In that sense, a rule is not more than a glass to be filled. Filling the glass is on the actor. And if the actor has not enough water, or if the actor has a broken arm and can therefore not fill the glass, then all of the granted rights to fill it are of no use after all. In a similar fashion, when people say that power may be given, which it is absolutely not, then what they are actually saying is that some actor may be allowed to go through any of three magic doors. Said actor may even be allowed to go through all three magic doors simultaneously, because that action potential is defined by the mechanism designer. But can the actor go through all three doors at the same time? If the actor operates within our physical world, then that kind of power cannot be exercised by any of us. We can also look at it from the opposite angle. Let's make the argument that your government changed a law that now prohibits the possession of firearms. If the power to not own firearms would be literally given to you, then you could in fact never own a firearm anymore. But the world that we live in is constrained by the available action space, and not by artificial rules within some social construct. You can always own firearms if you find a way to create or receive one, law or not. And that very act of creation or purchase is then exactly that kind of realization that constitutes true power, because despite the limitations of artificial rules, it is on you to exercise your own ability within the available action space. Power is for the taking.

Linguistically, we are living in a world of distorted social reality. That concept is called linguistic relativity. Because what does it even mean to take power anyway? We are not taking power literally from the shelve in the supermarket. When we say to take power, we simply refer to the act of carrying out some behaviour. Ergo, power is doing. All of that is to say that the colloquial expressions of giving and taking power are socially influenced idioms, and they are not literal in meaning. That should also become apparent by the mere fact that power is an abstract concept, which is somehow proven by the circumstance that you cannot simply touch it. We can also look at the linguistic evolution of those two idioms. The phrase "taking power" originates from military and political conquests, in which actors seized control through force. Acting through force is exactly the definition of realizing action potential within the confines of the available action space. The phrase "giving power", originating from early legal systems, granting authority by divine right or royal delegation. Giving power is an oxymoron like the infamous deafening silence. It is rather an expression that contradicts itself. Taking power is rooted in the physical world, based on actions actually carried out. Giving power is a social construct. It is not more than a promise, like the value of a Dollar bill. And with that we tried to square the circle, to talk some blockchain once again.

For this week we picked the number 300, because according to Coingecko there are almost 300 L1 blockchains out there. How many can you name from the top of your head? Every quarter we hear from more blockchain networks being launched. I am always left wondering, how all of those L1s are going to bridge the gap between the user in the real world and their own siloed technology stack. How are all those L1 going to integrate in world full of networks of networks? So many blockchains out there command market caps of hundreds of millions of USD, but they are effectively ghost chains, because nothing is ever happening there other than providing venture capital with some lofty paper returns. The fundamental issue between L1 blockchains are their separated security contexts. If you want to move from one L1 to another L1, then you have to take third party trust assumptions for granted, which implies that your money may or may not be stolen eventually. That is why we are building L2 rollups in this space. Because the security context between an L1 and its L2s is fundamentally the same, given some solid mechanism design and proper software engineering. So every time I see another Layer 1 blockchain launch, my first question is this. Why is this not an Ethereum L2? And you know what? The answer is never good. I guess power must be for the taking after all.

We did not evolve to see reality, we evolved to survive. - xh3b4sd

Repeating the same characteristics across different scales is a very common phenomenon that can be observed everywhere in nature. When you are not taking good care of your own body, then you are probably not taking good care of your home either. If you have a dirty kitchen counter all the time, then you will probably have quite a messy life in one way or another too. A very distinct property, and be it yet so small, may cause ripple effects from the micro into the macro structures of our lives, our world, and our universe. The Math Wizards amongst us may already realize that we are talking about fractals here. Fractal patterns become visible by ever repeating geometric shapes, visualized by the notorious Mandelbrot Set. Fractals literally rule everything around us. We can see them in the shape of broccoli heads, ice crystals, lightning bolts, neural networks and even in the arrangement of galaxies across the observable universe. Fractals enable the world, from small to big. In a similar fashion, paying attention to detail helps us to get the big things right. Based on studies in psychology and behavioural economics, we know that people commonly neglect details due to several cognitive biases and environmental factors. Humans often prefer to focus on rather broader patterns instead of specific details, because they perceive those details to only have minimal impact on overall outcomes. I understand how people arrive at those conclusions, because an increasingly complex world causes decision fatigue simply based on ever higher cognitive loads. Humans need to utilize shortcuts in order to navigate the world. But the decision as to what constitutes a valid and rather sustainably useful shortcut, separates those who tend to succeed in life, from those who tend to fail. I am not here to proclaim what is right or wrong. I am here to point out that the best roof is no use without a solid foundation. I am here to point out that parenting advice from people who have no children is rather useless. I am here to point out that, unsurprisingly, there is a causal relationship between cause and effect. One comes before the other. Big builds upon small. If anyone out there is still thinking that MEV counts as revenue, then we shouldn't be surprised to wake up one day, finding ourselves surrounded by short term games within an extractive player versus player environment. Call it Crime Chain. Blockchains evolve from, and into fractals too. L1s for instance are like single cells, or single servers. They are integrated and optimized for performance within their own range of control. But they can only get so big or so useful on their own. Eventually, they will crumble under their own weight. The universe consists of fractals of fractals. And so it should not come as a surprise that the digital realm consists of networks of networks. Which is then also why the rollup centric roadmap, as pursued by Ethereum, will eventually prove to be the right approach for the cryptographically enabled world economy.

Every so often we talk about the concept of an action space within the context of mechanism design. Let us explore what an action space is and why it is important in order to understand complex systems. An action space simply defines one or many actions that are possible to execute within any given environment. The physical reality that humans live in is constraint by the action space of physics. Colloquially we are then referring to the laws of physics. We can only do what we are physically able to execute. Therefore we cannot move faster than the speed of light, and our bodies are subject to gravity, wherever we go. Above we mentioned the laws of physics, which is a bit of a misnomer, because laws and rules typically have the purpose of artificially constraining the available action space within society. And in the case of physics, those laws are in meaning exactly equal to the action space defined by our physical reality. To our knowledge, the laws of physics are not artificially constraining the physical action space. In this case, the laws of physics rather accurately describe what is possible and what isn't. Note that we are only referring to the proven facts of what we know to be true when we talk about physics. For the sake of this argument, let us ignore all the wild theories of unproven multidimensional universes, whether they have strings attached or not. The point I would like to make here is the differences between rule sets and action spaces as they play out everywhere around us all the time. The difference that interests us here is the delta between what is allowed and what is possible. Those two notions are not the same. And mechanism designers usually learn this the hard way by getting their DeFi protocols exploited for millions upon millions of United States Dollars. As a side note, and as reported by DeFi Llama, in all of 2024 alone, we registered about 1.25 billion USD in losses due onchain related hacks and incidents. Most of these losses are typically incurred due to insufficient protocol logic and infrastructure related failures. So it turns out that we can put a number on the difference between the allowed rule set and the possible action space. And that number for all of 2024 is in fact one and a quarter billion US Dollars. The rules of a smart contract and its underlying blockchain network try to enforce how you as a user are supposed to behave. If the associated mechanism design is strong, then this rule set encoded in smart contracts will be very good at forcing some desired user behaviour. But if the associated mechanism design is flawed, then the encoded rule set allows for a gap that bleeds into the onchain action space, effectively allowing for unintended behaviour to be exercised, which then may result in financial losses for the underlying protocol and its users. It is like the difference between combat sports and human conflict. One supersedes the other in entropy. Training how to behave during a knife fight may have not much to do with the reality of a real knife fight. Because what most combat sports are actually teaching you is not so much how to win a fight, but rather how not to behave. The later almost always implies that not to fight is the real win. Taking it even further, knowing how to prevent a likely fight from happening in the first place, and knowing how to not get caught up in situations that may culminate in a real fight eventually, those kinds of strategic foresight are what separates adults from children. Related here is then also the importance of mechanism design. Because understanding complex systems is usually not to create or become the apex of its kind, but simply how to survive and prevent disaster and certain death. All fancy ideas at the speed of light and all preparedness for knife fighting situations typically go out the window at first contact with reality, once somebody comes along with a bigger stick. Mechanism design rules everything around us, because all that matters in this world, is what you can and cannot do.

28 billion USD is the number of the week, because this is the amount of onchain trading volume generated on Solana over the past 7 days. Why bother? I wanted to highlight the amount of trading volume here this week, because the typical comparison of trading volume is usually made between two distinct chains. It is always Solana vs Base, Ethereum vs Solana, Base vs Arbitrum etc. But what we have not yet realized as an industry is the fact that chain specific metrics may not be too relevant anymore in a world in which we build networks of networks. Solana generated 28 billion USD in onchain trading volume over a 7 day period as a monolithic system. But what also generated the exact same amount of trading volume, and that is the funny part about it, is the entire Ethereum ecosystem measured by L1 and all of its L2s. The takeaway here is that the onchain trading volume between the Solana and the Ethereum ecosystem is actually equal, which most dashboards and hot takes on Crypto Twitter do not acknowledge just yet. I believe that there will come a time when blockchain infrastructure and onchain apps have matured to the point where normal everyday users cannot tell the difference anymore between using one chain over the other, because then everything will just work. In that brave new world, it won't matter which configuration of AWS instances served a user transaction. What will rather matter in this brave new world will be the onchain equivalent metrics of hours watched online versus cable. Maybe try to pay a bit more attention to detail, as to getting the big things right one day.

I am a storm. I show you who you are. - xh3b4sd

The rollup centric roadmap as implemented by the Ethereum ecosystem entails a promise. That promise goes as follows. Every L2 rollup will try out different business models and varying technology stacks, so that we are collectively experimenting with different approaches across the entire Ethereum ecosystem. The promise is then that some of those successful experiments originated on L2 rollups, may find their way back one day to benefit Ethereum mainnet. Someone said recently that all of the L2 experimentation has not yet brought innovation back to the L1. And I am not sure if that is a fair assessment of the situation we are in today. From an engineering point of view, I can already see several angles on which research and development is shaped by a combination of dynamics unfolding on L1 and L2 alike. There is already some kind of cross-pollination happening when mechanism designers think about interoperability between different chains. The need of a single coherent user experience arises from the existence of fragmented L2 rollups. That by consequence shapes the future of Ethereum mainnet so that many different chains may be connected seamlessly one day, inheriting L1 security guarantees. We can see a similar picture looking at everything that has anything to do with zero knowledge cryptography. Various proof systems have been designed and built in order to make L2 rollups work today. Among others, Starknet, ZKSync, Taiko operate proof systems to ensure their own rollup integrity on top of Ethereum. All of those proof systems have vastly increased the ZK capabilities that we have to our disposal today. All of which was developed because of the rollup centric roadmap. One day all of this research and development will likely culminate in an L1 ZK native EVM, bringing all of the crazy moon math back home again. Another example of technology originating from a cross chain environment and then finding its way back home to Ethereum mainnet are so called intent based architectures. Somebody may fact check me on this, but I believe that intents as a technical concept originated from the problem of cross chain bridging, where solver markets have been leveraged in order to fulfil an economic desire between different chains. Those intent based architectures and solver marketplaces have already found their way to the L1 in the form of something like CoW Swap. What is basically happening inside of this product is the following. A user defines conditions for a token swap that they want to make. This is then the so called intent, a user defined outcome. CoW Swap does then create an onchain competition for any interested participant to solve for the proposed intent. At the end of competition stands a solver that has won the right to fulfil the user's intent based on its cryptographically guaranteed parameters. The result of this onchain competition is the guaranteed execution to the best possible price, free of toxic MEV. Many very large orders are conducted regularly via such intent based architectures on Ethereum mainnet already today. What we now can say in summary is that the L1 does already benefit from all kinds of experimentations happening all across the L2 landscape. Chain interoperability, zero knowledge proofs, and intent based architectures are just a few examples that have already crossed the chasm. The cycle times that we are subject to here are longer for core infrastructure developments. But the benefits of networks of networks will permeate through the entire ecosystem eventually. ZK EVMs will enable a mainnet native ZK EVM one day. The entire UX debate across Ethereum land lead L2s to improve account abstraction standards as a unit. And thus the unified Ethereum vision is effectively driven by L2 fragmentation. One day it will all come together. Patience, Brother Bing.

Somebody asked the other day why Reddit has become so dominated by left-wing ideologies. I thought about it, and tried to come up with an explanation for myself. The following is a ramble of mine, which I am not quite sure what to do with. I am not sure how right or how wrong any of this is. In any event, here is how I tried to organize my thoughts. A system that allows anyone to occupy a position of power outside of the realm of society, attracts the lowest quality of character. The system we are talking about here is Reddit as a social media platform. Life is hard in general, and it takes a particular person to become completely removed from reality. And once you drop out of the real world, you go looking for meaning in darker places elsewhere. In other words, people without a real life and purpose got enabled to become the master of their own echo chamber, potentially leading people towards ever more incompetence. Because, if they had not been intrinsically incompetent in the first place, then they would not have taken on those self-reinforcing roles of doom. The people we refer to above are certain types of Subreddit moderators, and their abuse of power is reflected in their ability to dictate the application of rules and norms as they interpret them without any form of recourse or appeal. Subreddits can often be described as impenetrable dictatorships. And with that I am starting to think more and more that left ideologies require a certain distance from real life to begin with. Hubris can only thrive if the reconciliation with reality is absent. When you look around, most working class people, those who have to get up early and get something done in order to make a living, those people are predominantly on the right side of the political spectrum. Most plumbers are rather right. Most teachers are rather left. Almost all soldiers are rather right. And almost all academics are rather left. Your proximity to the brutal force of nature, the act of surviving itself may be what actually holds us in the balance. And so, we better not lose that. What I want to say is this. Autonomy and comfort are incompatible in a highly relevant way. The more you choose comfort in your life, the less autonomous you will become over time, because all comfort comes at the cost of giving up control to some higher force that you may not like very much eventually. Because once that higher force got a real tight grip around your neck, you will only be left to do its own bitter bidding.

If you are heavily exposed to social media, then this cycle appears to be dominated by people who try to extract as much value for themselves as possible. Looking at most charts, this story is easily believable. What I would rather like to focus on are the builders instead. Those people who have skin in the game. Those people who have a vision for the future. So this is to everyone who holds up some ideals. This is to everyone who keeps working on ideas that one day may change somebody else's life. In that was I have always thought of tokens as some kind of real estate. An ownership claim to something useful within the cryptographically enabled world economy. This is to the builders and mechanism designers. Lord knows the world needs you.

Our number for this week is 10, because the ETH dominance is down to almost 10%, while Solana throughout the most recent memecoin drama became now home to more than 10 billion USD in stablecoin TVL. Acquiring 10 billion USD in stablecoins is no small feat, not for any ecosystem. What is interesting here is the fact that despite TVL going up in Solana land, trading volume has been rather flat or going down on average. This is particularly funny when we consider that all of the historic wash trading and fake volume generated was touted as capital efficiency. And now that real people appear to move real money onto the chain, one of Solana's most important metric doesn't move. It is almost as if trading volume is not the only metric that really matters for a blockchain network. In a similar sad picture, the ETH dominance at almost 10% wouldn't be anything to worry about if overall crypto-economic activity would inspire more confidence in the future growth of this industry. I think we will certainly get there one day. And so for now we are maybe just left with one of those days during which it feels like nothing much is going quite in the right direction. We know for a fact this sentiment is not true. And so our feelings may rather reflect the quiet before the storm. Until next time, dear reader.

The universe is dark by default. Making light is on you. - xh3b4sd

"Dictum meum pactum" is the latin form of "my word is my bond". And with that promise comes an invisible social contract that must be honoured. Humans are inherently social creatures, which means that several trust assumptions are built right into every one of us. Social contracts work because of their implied reputational value. The word of a drunkard may be quickly dismissed in the face of a magistrate, because the reputation of either proceeds them. The proverbial skin in the game here does then describe the basic concept of Proof of Stake in its purest form. Proof of Stake is essentially all about having something to lose. And that very concept of an economical threat upon misconduct and dishonesty is called slashing. If you lie to me, then your reputation gets slashed by virtue of the underlying social contract between us. Once you lied to me, I have a harder time believing in your future trustworthiness. The socioeconomic principles that allowed human societies to thrive across the millennia turn out to be so fundamental and universal that some clever mechanism designers translated Proof of Stake into the digital realm in order to secure blockchain networks. Proof of Stake blockchains come in a variety of flavours. Some versions define different staking requirements, so that different amounts of economic value have to be staked or even locked for long periods of time. Some variations of PoS define their own centralization vectors explicitly by allowing the delegation to specific operators or validator sets. Others implement various mechanisms to do leader election, or define different roles of network participants all together like Ethereum's proposer-builder separation. Following into the footsteps of the previous Powerlaw memo, below we want to talk about Proof of Stake at its core, how staking compares to mining, and how Ethereum might differ from Bitcoin.

Unlike with Bitcoin, there are no mathematical puzzles to be solved in PoS. Staking is simply the act of committing collateral in a contract that is enforceable by some agreed upon set of rules. The collateral staked here must have tangible economic value, so that received rewards and slashed penalties may have the desired effect of incentivizing network participants to act honestly. We just established that PoS has a capital component that is economically relevant. That staked capital and its risk adjusted price of time dictate a certain amount of yield to be received for honest network participants. And were network participants ever to be found dishonest, then some or maybe all of their staked collateral may be slashed at once. That economic threat provides every network participants within the PoS context with a game theoretical dilemma. Being dishonest may result in an economic gain if an entity becomes able to deceive the majority of the network. That anticipated gain must then be greater than the potential loss of slashed collateral that the malicious entity has at stake. And that is fundamentally why PoS as a consensus mechanism is able to support blockchain networks that secure hundreds of billions in USD denominated economic value. Because there is no free lunch, and because the amount of money that one can lose is far more painful than the amount of money that may or may not be gained by trying to deceive other network participants.

Proof of Stake leverages core principles of the human experience, just like Bitcoin does, even though on different dimensions. Reputation on the PoS side of things has deep evolutional roots, because reputation is one fundamental aspect of human coordination. We can believe in something. Mathematics on the PoW side of things has deep roots in reality, because mathematics provides one fundamental framework to reason reliably about our understanding of the universe, and everything within. On the surface of it all, consensus mechanisms allow for coordination. How well any given consensus mechanism performs, or which consensus mechanism should be preferred is once again highly contextual. Saying that Bitcoin is better because it uses Proof of Work is like saying humans are better because they breathe air. It is a nonsensical statement to make, because not everything is breathing air, and the question everyone ought to ask is still this. Better at what? And why does that matter anyway? Fish do not breathe air. Fish extract oxygen through their gills. On the face of it fish rather look like breathing water, and even if that were to be wrong, then fish are still better swimmers than humans. What we try to express here is that the nature of any underlying consensus mechanism may not be definitively useful to judge the quality of any given blockchain network at a moment in time. So we have to look at other utility maximizing functions, if we want to figure out which blockchain is good at a particular use case, because all surrounding technical details and network configurations are distinctively selected to maximize those specific utility functions.

The narratives of the day are digital gold, chain go fast, and world computer. If you truly want a blockchain to provide you with anything that resembles digital gold, then said blockchain must be robust beyond doubt and in consequence never change. And as we mentioned last week already, the cost to produce a single BTC will eventually become larger than the value anyone can extract from the market in exchange. So the notion of never changing cannot be true in the fullness of time. If you truly want a blockchain to be very fast then you rely once again on a relatively small set of very powerful computers, opening up various centralization and therefore censorship vectors. The many tradeoffs underlying any world computer may be defined by a large set of diverse validators, allowing for the minimal acceptable network throughput of economic expressivity that cannot be censored. One beautiful aspect of Proof of Work is its most egalitarian distribution mechanism for initial token distributions while the underlying blockchain network is bootstrapped in its early days. Anyone can run some software, contribute economic security, and mine native token rewards over time. This is beautiful because in the early days the economic barrier to entry is so low that anyone with a laptop and an internet connection may participate. But far removed from its early days, PoW blockchains must either dilute their own value proposition via token issuance, or allow for economic expressivity to generate significant network fees. And Bitcoin as it stands today does neither of those alternatives. Solana set out to build a better Ethereum by maximizing one utility function and sacrificing another. That is all good and well, but this is also why Solana can barely be compared to Ethereum. Both leverage Proof of Stake, but either has a different vision for the future. In summary, Bitcoin doesn't even try to compete on economic expressivity, because it is fundamentally not a smart contract platform. And having that said, Bitcoin is then not even good enough at its own game, because Bitcoin cannot remain Bitcoin in the fullness of time. Period. Full stop. Fast chains like Solana trend towards centralization and have reliability issues on multiple dimensions. Ethereum is in fact the world computer, because of its large and diverse validator set, because of its liveness guarantees and because of its proven censorship resistance.

Consensus mechanisms serve a distinct purpose, that is mechanical by nature. Any other attribution of decentralization, security or economic value have to be made within the context of the underlying blockchain network and its own distinct value proposition. Proof of Work consumes many orders of magnitude more electricity compared to Proof of Stake. And any utility and second order consequence derived from all of that energy consumption, is not only temporary, but also irrelevant in the world we live in today. Bitcoin is not going to solve climate change by forcing the use of renewable energy. Ideas like pooling and rehypothecating resources are alive and well in all the blockchain ecosystems. We see mining pools on Bitcoin. We see delegated validators on Solana. And we see liquid staking services on Ethereum. We see restaking services and networks of networks all around us. And not only are the ideas the same, but also their consequences. And while it appears that everyone is essentially trying to build their own inferior version of Ethereum, we have to conclude that there is still no second best.

Our number for this week is about 10,000 solo stakers on Ethereum. We can't really know how many solo stakers there are on the network exactly, but recent statistics suggest that there is a range with 10,000 being the lower end of the spectrum. Solo stakers help Ethereum's decentralization profile, because thousands of individuals from all over the world help to secure Ethereum using widely available computer hardware on home internet connections. No individual can possibly afford to help secure Bitcoin today with a single miner. And if you then look at distributions of token ownership and network nodes, the case can arguably be made that Ethereum is more decentralized than Bitcoin, even though the devil is in the details. In any event, Ethereum continues to execute on its roadmap to serve the cryptographic world economy, while Bitcoin advocates are eagerly waiting for a greater fool to buy their coins, which does frankly not help anyone with anything. Milady.

Nine out of ten people can be almost anything they want and the only limiting factor for them is time and the price they are willing to pay. - xh3b4sd

Humans have to agree on a lot of different things in life, every single day. Consensus describes what a group agrees on. The way in which we come to consensus is defined by a protocol, a set of rules that allow for complex behaviour to emerge. Nation states in the western world thrive for a protocol called democracy, which exists in many different flavours. Blockchain networks mostly utilize the two most prominent consensus mechanisms called Proof of Work and Proof of Stake. Both of those protocols work in fundamentally different ways. And when people talk about them, they often confuse the core of those protocols with a lot of different mechanisms that are blockchain specific at a moment of time. What I want to say with that, is that a child for instance is very different at a moment in time when we say that child is 3 years old, compared to that same child at a moment in time when we say that child is 9 years old. The child is the same, and it is human every time we look at it, but its composition and ability may be vastly different across space and time. Looking at blockchain networks, they too evolve on a temporal arch, representing different values and expressing different behaviours at any given moment in time. Now, blockchain networks are supposed to be reliable and never change in some very important ways. We expect from a blockchain that nobody may change its history, because that very history may say that I own 10 tokens of something valuable. And anyone changing that history may take those 10 tokens away from me. The way in which blockchain networks guarantee that nobody can change this history is called consensus. This week, let us look at one of those two consensus mechanisms below.

Proof of Work as a consensus mechanism provides everyone participating in the network with a puzzle to solve. The purpose of this puzzle is to proof to everyone that you did something very difficult. The nature of this puzzle is therefore mathematical. Solving this mathematical puzzle in the context of PoW implies to process a lot of digital calculations in order to find the required answer. And since we wander the digital realm, we need powerful computers to do this work for us. As we can imagine, powerful computers require a lot of electricity to operate. So on a global scale the fundamental challenge for participants in PoW blockchains becomes to be the best at, at least one of two things. Either network participants have infinite electricity to their disposal, or computer chips able to solve an infinite amount of mathematical puzzles instantly. The kicker is that neither of those extremes can be realized today. In any event, there might be somebody out there who mastered the best technology at the time, providing that player with the fastest computer chips on earth. In a similar vein, there might be somebody out there who can afford to spend the most amount of energy on all of those PoW puzzles. Those dimensions would provide fundamental advantages to any one player. In consequence, every enabling force may end up being a vector for centralization. If you are the best at something, you dominate the game. Blockchains are supposed to remove that aspect of domination by effectively neutralizing it. That is where any consensus mechanism defines the rules to level the playing field. In an interconnected, capitalistic world, PoW tries to neutralize centralization vectors by utilizing commoditized resources. Those resources are electricity and GPUs. On average, high performance GPUs and cheap electricity is somewhat evenly distributed across various pockets on the surface of our planet. And that means that PoW blockchain networks like Bitcoin are relatively decentralized. Up to this point we only touched the consensus mechanism itself. We did not discuss any given moment in time of Bitcoins evolution. We did not even mention cryptocurrencies. We left out token issuance, difficulty adjustments and security budgets all together.

The great equalizers for Proof of Work consensus mechanisms are our ability to make fast GPUs and cheap electricity widely available. Though, those two things alone make no blockchain network. The incentive to participate in any endeavour are inputs and outputs, economically speaking. Humans only do something if their perceived output is at least equal to, or greater than the perceived input that they themselves sacrificed to begin with. That anticipated delta between the input provided and the output received is the reward that motivates any individual to expend any amount of energy. The incentive that we talk about here in the context of blockchain networks are token rewards that network participants may generate for themselves by acting honestly on behalf of the network that those participants are serving. That is then the mechanism by which BTC is mined when solving the mathematical puzzles that we began our story with above. Given the ability to mine BTC, there must be an underlying capacity or limit, to which extend those cryptocurrencies may be mined. And when we talk about Bitcoin's token issuance schedule, then we automatically talk about Bitcoin's security budget. Because Bitcoin is designed to spend ever more resources on mining ever fewer coins. A network's security budget describes how sustainable said network is at operating, and how good it is at securing itself over time. With higher operating costs and fewer rewards to mine, Bitcoin as a network always needed the value of BTC to go up in order to sustain its own system. One of Bitcoins challenges in the future will be to sustain its own system while fewer and fewer BTC rewards may be mined, all the while higher and higher operational costs must be covered. Economically speaking, the cost basis to produce 1 BTC steadily increases, and will reach a level of 100,000 USD in the near future. And once the amount of money that someone can get for a single BTC goes lower than the amount of money that it takes in order for any BTC to be produced, then Bitcoin as a Proof of Work network shrinks in its ability to operate and secure its own value proposition. All of that is to say that long term, Bitcoin's security budget is unsustainable, and it is almost certainly guaranteed that Bitcoin as it exists today, will not exist in ten years time from now. The irony of Bitcoin's security budget is its unique selling point, which is to never change. 21 million BTC is all there will ever be, and given this constant, at some point in the future Bitcoin will first stop to grow, and then start to diminish, because eventually there will be no value left for anyone to extract by operating the system. And at that point Bitcoin becomes a liability to operate, an unsustainable energy leak. Technologically it is possible to make Bitcoin fit for the future, but the irony pointed out above is that this means change, and fear, and uncertainty, and doubt. And nobody can tell how any of this will ever be worked out. Ask 5 people today how Bitcoin is going to address its security budget in the future, and you will get 6 answers. Proof of Work itself is a beautifully elegant mechanism, because it forces humans to battle with nature by a way of pure energy and math. But Bitcoin today, at a moment in time, is destined to fail, or change beyond recognition. One way or another, Bitcoin is going to be no more. And no amount of hand waving is going to change that.

The decentralization aspects of a blockchain network are incredibly important, and by consequence incredibly complex. Decentralization is a very technical term that expressed in the real world can mean a lot of different things. On a purely technical level, decentralization means "in many different places at the same time", as opposed to the opposite centralization "in a single place". So decentralization is the property of something happening concurrently across a broader spectrum across space and time. The relevant question for us to ask now is on which dimensions this property should be expressed in order to actually qualify as decentralized in the context of blockchain networks. And the answer is unfortunately that there is no single right answer. In fact there are multiple dimensions on which decentralization must be expressed simultaneously, but the degree to which every single dimension should express the property of decentralization may very well vary dramatically. The dimensions that interest us the most in this context are for instance geographic distribution, because we want our blockchains to be validated from many different places all around the world. Then there is the economic barrier to entry, which dictates who might be able to participate in validating a blockchain network. And that barrier must optimally be as low as possible, because the lower the barrier to entry, the more different people may be able to help validate the network in order to keep it honest for everyone involved. There is also the ownership distribution of the associated network token, which is relevant because a blockchain is of no use, if some single person or entity controls virtually all of its coins. And to make the 4 horsemen complete, we need to consider the structural architecture that allows a blockchain network to evolve and adapt across space and time. That structural architecture is of deeply cultural nature. And so, any social layer rooted in complacency or impotence may very well cause its governed systems to perish eventually.

In the spirit of all of the above, our number for the week turns then out to be 5%, because that is the estimated amount of BTC owned by all Satoshi wallets. We can now go on to believe that this is a good thing because those coins will never move again, removing about 1 million BTC from circulating supply, and number go up. But, we can also believe that those coins will be the first to move once quantum computers manage to break modern encryption schemes, because that alternative version of our universe represents a real threat within the next couple of years. And then number go down. All roads lead to either death or change for Bitcoin in the near term future, and nation states governed by the most fallible, considering to put BTC into some kind of national reserve, do by my estimation not quite grasp the forces that they are meddling with. Until next time, let's try to get the big things right.

Optimizing something that should not exist in the first place, is a sin. - xh3b4sd

Overfishing regulations and game engines have some things in common. Those things are fundamental principles in mechanism design. And with that we have once again pretty universal patterns in our toolbox in order to understand any complex system. In one form or another, the source of truth should never be provided by the players of the game. And why is that? Because players are incentivized to win the game, not to report the truth. Collusion of players on reported data may lead to the entire game being exploited. No matter if we talk about men who work the sea or children playing candy crush. Complex systems pose complex problems. And with any problem, the question becomes how to frame it? How to look at a problem, and how to think about it in its own context? Understanding how many fish are in the ocean, and understanding how much candy somebody crushed requires the reporting of data. The data that we need in order to understand the state of a system must come from somewhere. And in mechanism design the question is always who should be allowed to report which data, because the ability to define what is true and what is real can be an extremely powerful weapon. And as with any weapon, you can use it to do harm, or to do good. So, who should report fishing data for us to know what is happening in the ocean? Humans know almost nothing about the ocean. We know more about the surface of the moon than we know about the surface of the sea. We can look up through air and space. But we cannot simply look down through the gushing water. It only takes 1000 meters into the ocean and all sunlight is completely gone. The distance between the earth and the moon is almost 385 million meters, and on a clear night we can see all the way through, with our own eyes. Those kinds of context specific circumstances have to be considered when we want to figure out how much Salmon somebody is allowed to catch. We should consider what the fishermen have to say, but we should not just take their word for it. What we can do is to look at the amount of fish that they actually bring home. In addition to that, we should also consider other environmental factors that for instance change temperatures and acidity levels of the water. The ocean is a complex system in and of itself. All the data that we gather, and all the models that we employ in order to understand what is actually happening in the sea, may or may not be relevant, right and independent. The reader may notice that we have opened up a whole can of worms, and there is no one right approach to solve the problem at hand. In fact, all we can do is to implement a solution that provides a desirable set of tradeoffs, given the best of our abilities. For our intents and purposes here, the bottom line is, don't just ask the fishermen, because players may collude. The same applies to game engines. You don't just ask the Tetris player how many points they got. If you are the game engine, then you tell the player what's what. That is particularly relevant if the game at hand has a time component or schedule to it. Imagine a game in which everyone is speeding through a maze. We cannot simply rely on the players to tell us where they are at any given moment in time. In order to make the game fair and eventually fun, we have to tell every player where they start and where they are based on their desired input of movement. The trick here is to only allow the player to define their own delta of a navigational choice. Meaning, given a player's current position, and given their instruction to move north, the game engine can calculate the new position without allowing players to cheat and jump ahead illegally. This approach is specifically important in classes of games in which players are forced to move through the game at a certain speed. Here every player is pushed along the map, and the only player input may be what turn to take next. The interesting dynamic here is that the game engine cannot differentiate whether players get disconnected or simply do not wish to change direction. The takeaway here is this. The more well defined the rules of the game, the more efficient the implementation, because a well defined mechanism allows for beautiful code to be written.

Over the past days and weeks there have been huge wildfires around Los Angeles, devastating many homes and claiming too many lives. Not to mention how we even got here, the response and incident management of the highest ranks in the State government of California has been just as shocking to me. There are many things to be done for people and State after a disaster like those wildfires took place. Things of constructive nature. Things that directly help to be better tomorrow. And the leadership in the sunny state of California chose now to make it easier to snitch on people for increasing prices of goods and services, instead of making it easier to build new homes. The cardinal sin of mechanism design is to think that you are the better resource allocator than the market itself. And instead of directly helping to increase supply, the governments choice was now to promote the idea of an enemy within its own system, which is but a mere distraction from what actually matters during these trying times. The idea that any form of price controls via social infighting would be useful to anyone who lost what was near and dear, is absolutely backwards. The history of the 21st century will be written by mechanism designers. And I think everyone has the responsibility to make sure that we are getting better at this together.

In the world of Ethereum, we have heard that L2s are apparently about to hit a "brick wall". Over half of all blobspace is already consumed by only 2 chains. The concern being trolled at us is now that the current growth rate implies the total breakdown of Ethereum's scaling roadmap within a matter of months. Ok then, let's take a step back for a moment. At first, "rollups would never scale", they said. Then it was, "nobody wants to trust rollups". And now that rollups scaled so much because everyone wanted to trust them, we hear that rollups can't scale no more. In other words, rollups couldn't scale and they did not have any demand, but then rollups did in fact scale because of all the demand for them, which leads us to a usage problem, which we were told would not exist in the first place. Well, that is all very confusing and quite convoluted. To make things easy again, we can simply say this. We are getting concern trolled all the time by people with ulterior motives. Fun fact, the word "ulterior" means "lying beyond what is evident". And isn't that a beautiful way to come to a conclusion. In any event, let us address two relevant points about Ethereum's roadmap regarding scaling via L2 rollups. For one, we are operating precisely at blob target for more than two months now. The dynamic here, and what that effectively means is this. Blobspace is free to use up until the blob target. Once we operate above the blob target, L2 rollups go into price discovery for blobspace in an open market, which increases congestion fees. The interesting fact about the blobspace usage in the wild has been that L2 rollups managed to prevent paying higher amounts of congestion fees due to all kinds of tricks in data submission management. We could say that the blob target saturation is by no means exhausted at this point, which renders certain concern trolling arguments mute in my mind. And the second point that we have to mention here is simply that more blobspace capacity will be rolled out the coming months and years. And if blobs where the only thing that allowed us to scale Ethereum, then yes, we probably would have a problem. And as already mentioned in the first point, many different initiatives to scale Ethereum are certainly underway, rest assured.

1% ETH is our number of the week this time around, because that is the allocation reported for a wealth management firm in New York. Now, 1% is not much. Why do we even talk about this? This news is interesting because this 1% is the only allocation of digital assets that said wealth management firm made across its clients. No other crypto exposure. No BTC. No SOL. Just ETH. And one other data point I found fascinating the past couple of days. Between 2020 and 2025, 36 different blockchains have been in the top 10 by DeFi TVL. That means over a 5 year period, which is frankly almost all of DeFi's existence, 36 different contenders have been going into and coming out of this particular top 10 leaderboard. Here is the kicker. Over all of that time, Ethereum has been number 1 in that leaderboard. All of that is to say that Ethereum is where it's at. Always has been.

It is time to betray destiny and make your own way. - xh3b4sd

Markets are full of asymmetries in perception and reality. You hear about memecoin millionaires every day, but you never hear about all the people who lost everything gambling the pension away. This is called survivorship bias. Our perception is bombarded with success, until we are made to believe that success is all there is in this world. And nothing could be further from the truth. And why is that? Because everything that does not survive simply dies and vanishes. So you won't hear about all the dead bodies typically, unless somebody tells the stories of all those fallen soldiers. Everyone around you is so full of themselves. So full of all those broken stories that our minds keep telling us to be true, whether they are in fact true or not. Understanding the little circus monkey in our heads, acknowledging that it exists, and realizing when it is talking some nonsense into us again, are all vital aspects of survival, as human beings, and as capital allocators. In dating, everyone seems to have children but you. The illusion here is that everyone with children is outside all the time, which means you can see those kind of people on a regular basis. That regular perception creates the belief that everyone around you has children, because that is all you can see. The reality is, what you see is not all there is. And so, all the people that do not have children, are not always visible, creating an unrepresented cohort of individuals for which we do not naturally know how large and therefore representative it truly is. That is a form of sampling bias, because we are only observing those samples that are visible to us, which creates an unrealistic and thus unrepresentative data set. It is like people wondering why everyone around them is reproducing, except they themselves. The truth is that there are always large amounts of individuals who get naturally selected against by an evolutionary process. People die early, from disease or calamity. Or people are simply undesirable. This is in fact normal for a subset of the population. And I guess our perception these days has been so manipulated by social media, making everyone believe that it is normal to be happy, beautiful and successful. As a matter of fact, if all you want to be in life is happy, then you shall suffer like no other. The philosophy of systemic therapy is what I would call "people aren't, people behave". And when you act like you deserve to be happy, then you start looking for all kinds of examples and people for which that very idea appears to be true. That is then called confirmation bias, because we are only looking for the evidence that we truly want to believe. The sooner we learn that we are not entitled to anything, the sooner we become responsible for ourselves, and in turn become better at what we are doing. The world does not just bend to your will. And so you have to take the world for what it is, whether you trade the markets, or look for the love of your life.

Every other day the market does something weird, and all kinds of people come up with all kinds of explanations for why something happened the way it did. Not to spoil the story here, but most of the people out there get the market entirely wrong, probably every single time. So much so that misinformation spreads up to a point at which we get unwarranted market panics and bank runs, for actually no reason at all. We just witnessed such an incident allegedly based on the BTC that got once seized by the FBI in October 2013 throughout the Silk Road case. This seizure process started almost 12 years ago. So why panic now? The many lengthy legal processes during asset forfeitures go through various stages, which may be misinterpreted by outsiders. Such a misinterpretation did now just happen once again with a court ruling that the Silk Road BTC forfeiture process can proceed. The proceeding of this forfeiture was by some now interpreted as the immediate selling of billions of Dollars of BTC, which is absolutely false. All that was ruled now, was that the legal process to forfeit those assets may continue. And the attentive reader may notice that the continuation of a legal process is not exactly equal to the selling of coins. In fact the selling of those Silk Road BTC may not conclude for another year. And the market impact itself will be minuscule in any event, given that BTC does a daily trading volume of 60 billion USD today, and given there are only 6 billion USD of Silk Road BTC to sell. The only thing that happened in the markets was the heard, the compounding of human emotion. And if there is one force to lose in any market, then it is of emotional nature. Pull it together man.

One thing that every person should know about in our day and age is how to read a chart. Understanding a thing or two about statistics, how charts ought to look like, and what a chart tries to convey, may even be recognized as superpowers at times. Everyday people fall victim to chart crimes, committed more or less deliberately. A chart crime is the misrepresentation of data, period, full stop. This misrepresentation may be of varying nature. You may see a line chart of various categories, and the goal was to get a sense of categorial distributions. You may come across a histogram showing only the timeframe of an asset price increase, and the goal was to inform about past performance. Or you may be shown a bar chart in which the y-axis does not start at zero, and the goal was to compare the growth of various sectors visually. All those are different forms of chart crimes, maybe caused by incompetence, or worse, because of the intention to deceive. If you want to show the categorial distribution of something compared to the whole, then you should not use a line chart, but maybe a pie chart. If you want to show past performance, then you cannot leave out the timeframe in which an asset underperforms. And if you want to reflect the real growth difference between certain sectors, then you should anchor the quantity axis at zero, because otherwise you may visualize some minuscule growth difference as if one sector grew twice as much as its contender. Know thy chart milady.

The influencer talking points to FUD on ETH these days concern the so called fragmentation of L2s. Today L2 rollups are not very interoperable. Working across those networks is not easy. So the argument is that ETH is bad because L2s are not seamlessly connected with one another. Technically this is true today. But what is also true, is that half of the ecosystem is focussing on solving those interoperability issues rather sooner than later. So what will eventually be true, is one seamless Ethereum experience. And my bet is that once this is true, another fact will also still be true. And that fact will be, that L1s will then still be fragmented across each other, just like they are today. The Ethereum community is actively working on alleviating certain composability problems across the L2 ecosystem. Nobody is credibly working on doing the same for L1s as far as I know. The real challenge for blockchain networks to overcome is not to integrate L2s with one another, because this challenge will be solved within the next 5 years. The real challenge for blockchain networks to overcome today and in the future, is to convince any user of your monolithic benefits, given the cryptographic economy unfolds almost entirely on Ethereum.

This week's number turns out to be almost 13%, which is the share of all blobspace that the World Chain L2 uses today. I found that interesting because World Chain shows a steady pace in growing blobspace demand. And even though World Chain isn't a regular talking point on Crypto Twitter, this L2 rollup is likely to continue its growth trajectory for months and years to come. Funny enough, the difference in long term holder percentage between ETH and BTC is also 13% at this point. ETH long term holders stand at 75%, whereas BTC long term holders stand at 62% at the time of writing. Long term here implies the holding of coins for longer than one year. My sense is that this spread will widen further towards the end of this cycle. I am not sure how meaningful this metric ought to be by itself. Though I found it interesting to see that ETH is leading over BTC in another relevant category. I would be curious to hear what people think about the long term holder metric and what it possibly means for the trend of asset price appreciation and network decentralization. If you are reading this, feel free to reach out and share your thoughts with us. Until then, onwards!

Doing well is not a function of capital. - xh3b4sd

Social systems require free markets for fair equilibria to emerge. But free markets are competitive by nature, and therefore less fair to begin with. So you want your system to be designed in a way where the most critical activity becomes the easiest thing to do for practically anyone to participate in that very value capturing process. The question might be, where to draw the line for accessibility in a world of tradeoffs? Some things can only be made so easy, until the laws of physics may get in the way, or until our current understanding of technology reaches its own very limits. Health insurance might be such a system in which participation is designed to be as easy as possible. Participating in health insurance, at least in most parts of the western world, works by paying into that very health care system, which entitles individuals to gain access to health related treatments. The bar for participation in this case is financial, and mechanism designers have to make the difficult decisions of defining how much has to be paid in exchange for a certain amount of health related treatments. Up and coming generations, far removed from the inner workings of reality, might claim that health care is a human right. Another social construct far removed from reality. Resources are finite, and if they are not, then they should be treated as if they were. Why, you might ask, dear reader? Because what you can afford today, you might not be able to afford tomorrow. Today the price for something might be affordable. Tomorrow the price for that thing might increase beyond what you can afford. Or the other way around. Today you might have the money to afford some thing. And tomorrow you run out of money, turning every affordable thing into insurmountable challenges. Maybe that is what health insurance was supposed to protect you from all along. Insurance is a promise to protect you from certain harms that are supposed to be unforeseen. And the point that I would like to make here is that insurance cannot protect you from yourself, if you become your own worst enemy. The basis for a functioning health care system are healthy people in the first place. The limits of our available technologies today can usually not reverse the harm that was already done to you. And too many people requiring assistance in the form of insurance put a strain onto those systems, that those systems can only bear so much. A liferaft can only fit a certain amount of people. If you put too many people into any liferaft, then everyone will drown. Insurance cannot protect you from the harm that you do upon yourself. And insurance can also not cover every single one of us. Once too many people become so irresponsible that they all require some form of protection, then that very system will eventually break under the pressure of society. Equilibria of complex systems are so interesting here, because the same system may find itself in the state of many different equilibria temporarily, given enough time. The larger the time scales, the more different becomes the meaning of the word "temporary". Our planet, billions of years old, might go through temporary changes in geology or climate until another new equilibrium is reached. Those periods might last thousands or even millions of years. Temporary at cosmic scales. Unimaginable at human scales. The mechanical definition of equilibrium is rather strict. Mechanically, it is only considered an equilibrium, if the net force affecting a particle is exactly zero. The rate of change inside complex systems may never be zero, and yet the system itself may operate in a stable state that we would consider equilibrium. This relative stability of complex systems keeps those systems in a stable range of states, until a new range of relative stability has emerged. Earth can exist as a planet, whether it is covered in water or dust, whether the surface of this planet is hot or cold. Health insurance can exist to protect you, whether you can afford it or not, whether you prioritized to live a healthy life or a life of excess. What I want to say is that you can make life decisions in a vacuum and extract value from a system temporarily as long as that system remains functional under exploitation. But that does not mean that we as humans are going to be successful long term with that approach across society. Social systems require free markets. And making it too easy for everyone might not only mean to increase participation, but also to increase participation in value extraction. As we said it before. There are only 3 letters in politics: MEV.

Being able to hold two seemingly opposing thoughts in mind at the same time is a challenging prerequisite for making sense of the world. The context in which we are mentioning this particular piece of timeless wisdom is the sentiment of some US voters post election. The argument here goes as follows. Some may have voted republican due to campaign promises of deporting illegal immigrants. Some of those voters may now be concerned with the fact that the new administration wants to increase immigration for highly qualified individuals. The simplified version of the problem at hand could be defined like this. We were promised less immigrants, and now you want to invite more of them. Looking at the United States as a complex system, I see those two things once more through the lens of inputs and outputs. Illegal immigrants and those less desirable individuals can be removed from the system because they may not serve a highly valued purpose in the current configuration of said system. At the same time, you want to allow highly skilled workers to immigrate into your nation state if those individuals may serve a highly valued purpose in the current configuration of the system. In short, you should constantly try to add to the top 90% and remove from the bottom 10% in order to remain competitive long term as a whole. Which campaign promises may be fulfilled at the end of the day is likely to be a matter of compromise, which in turn is the basis of our democracies. One man one vote.

Over the holidays we saw blobs as the number 1 burner of ETH within a 7 day period. That alone was pretty cool to see, because it tells the story of Ethereum native data availability and that L2 rollups provide an increasing demand for ETH the asset. Some may have asked about the cause of this increase in blobspace demand. And the somewhat funny answer to that question was, nothing. As it turned out, blobspace demand did not increase at all. And as cool as blobspace and all its driving factors are, the story that we need to tell here is about the difference between nominal and relative values. As it turns out, blobspace demand was rather constant over the past couple of weeks. What simply happened in the real world was holiday season, and with that came a decline in all other activities happening directly on Ethereum L1. So while blobspace demand remained constant, the ETH burn for every other burner category declined due to inactivity in those other sectors onchain, pushing blobspace up the ETH burn leaderboard relative to everything else. We can takeaway two fantastic insights from this occasion. First, nominals don't matter as much as the context in which they appear. As with most things in economics, what matters often more is the rate of change and the relative standing of a metric, and not so much its own absolute value in isolation. And second, L2 rollups are not so much parasitic as they are constant demand drivers for ETH the asset, all year round.

Our number for the first week of this new year is 13 billion USD in ETH ETF onchain holdings. Within about 6 months the ETH ETFs have absorbed almost 3% of all ETH supply. That in itself is a testament to those who argued nobody would want to invest in those Exchange Traded Products. But as we mentioned above, nominals don't matter much as they never reside in a vacuum by themselves. The context in which we have to look at ETH ETF holdings onchain are the equivalent metrics for BTC ETFs. Over 5.7% of all BTC supply at current date has been allocated to BTC ETFs within roughly 12 months, the entire past year that is. This means almost 110 billion USD are held today in those Exchange Traded Products. The estimations of those who claimed ETH ETFs will see inflows to the extend of 10% - 20% of BTC inflows have been proven right, so far. Today ETH ETFs did only up to 12% in onchain holdings compared to BTC ETFs. And on top of that, ETH ETFs saw only any meaningful engagement during the past two months of last year, ever since the Republicans secured a political landslide in the US presidential election. You know what that means. Job's not finished.

And after all, the real fortune is to have yourself under control. - xh3b4sd

The Powerlaw memo is all about mental models, in particular about how to think. And one of my favourite takeaways this year is the difference between inputs and outputs of complex systems. W38 described how easy it is to mistake inputs for outputs, and in the process get the understanding of any system completely backwards. I find this notion of inputs and outputs so compelling because we can describe literally any complex system as a black box that consumes inputs on one end, and produces outputs as a result. The nature of that concept is for outputs to change when the inputs start to differ. And that directional dependency may explain a lot about the intricacies of whatever is happening inside that black box, that very complex system. In other words, when you ask the wrong question, you get to the wrong answer. Flipping it on its head, suppose you found the right answer, you must have asked at least one right question, otherwise you could not have made the right conclusion. Ask yourself what was here first, the forest, or the creek?

The future of mankind has always been about technology. There is an interesting question to be asked about life in the universe. When we look for alien civilizations we are not looking for traces of life. We are looking for traces of technology. I don't know if we are still going to be here in a thousand, less a million years from now. In any event, it looks to me like humans are on a trajectory to become the tools that they build. W07 talked a lot about the rather weird fact how it can possibly be that two arguably interdependent technologies get invented at the same time. Imagine a civilization discovers only one of two extraordinarily powerful technologies. The discovered technology may increase the chances of that civilization's extinction, without its balancing counterpart. Imagine that very problem to be one of the great filters according to Fermi's paradox. The two technologies that we invented now at the same time are blockchain networks and machine learning. And I am quite convinced that public blockchains have to become the agentic substrate of artificial intelligence, if anyone wants to embed it into the digital economy for productivity increases. And if we could take away only one thing from this year of Powerlaw memos, than it would be that the future will always become more technologically advanced, which in our generations today means more digital.

This year revealed to us that everyone is trying to build Ethereum. People are running Bitcoin sidechains and tell you those are L2 rollups. People are working on L2 rollups on top of Solana and call them network extensions. Celestia set out to build a rollup centric ecosystem from the start, but the only semi successful product they have going over there is data availability, which in itself is not really valuable without some kind of moat around economic security. Well, and there is Ethereum building Ethereum. And when you get the chance to bet on one thing, why not the original? W26 discussed how everyone is building a worse version of Ethereum. Trying to replicate what somebody else is good at, is not at all bullish for that replica. Public blockchains must be decentralized, permissionless, censorship resistant and credibly neutral. And that means, any system that aims to build networks of networks must have the technology and security in order to facilitate an economy on top of itself. Bitcoin does not have the technology. Solana and Celestia do not have the security. I do not think that blockchains are winner takes all innovations. It is more likely that we will see our space to culminate and submerge over the coming years, providing one coherent crosschain user experience. The underlying economies may follow certain powerlaw distributions, and their tokens may accrue value more or less successfully. However these crazy experiments may play out, we will continue to follow along those once in a lifetime opportunities.

Earlier this year we predicted another Trump presidency in the United States as explained in W21, and in W11 we wrote that the ETH ETFs are going to be approved rather sooner than later. The Powerlaw memo nailed it twice with those predictions, and the turn of events caught a lot of people off guard. What has been unfolding towards the end of this year couldn't have been more profound for the crypto industry at large. The timeline split once when a bullet only scratched the ear of Donald Trump during his first assassination attempt. Yes, the first attempt on his life, because there have been at least two documented cases in which attackers tried to take his life throughout election campaigns. The timeline split then once more when Trump finally became president elect post election day. The see change unfolding from here promises the crypto industry to not be stifled by rogue regulators anymore, for which there existed no logic reason to begin with whatsoever. Not only are we going to see more crypto innovation taking hold in the world because of the vibe shift brought forward by the upcoming administration, but also because of the supreme court overturning the doctrine of Chevron Deference, reported in W27.

W46 discussed the concept of emotional granularity and how to train it. At its core, emotional granularity is really just about awareness. It is about the ability to perceive basically any thing, and upon perception being able to articulate what one observes cognitively. In the issue of W46 we framed a thought experiment, like a word game, that can be played alone or with others together. Simply take any thing or concept, and explain it from as many angles as possible. Doing that you will notice how many different dimensions of complexity, scope and context open up in front of your inner eye. The ability to visualize, the ability to articulate, and the knowledge about complex systems is what we are fundamentally training with emotional granularity. And now, why does any of this matter? Because, if anything, the world is full of complex systems. And only if we understand complex systems do we have a tiny little chance to understand how the future possibly looks like. And I say this. The very best people in any discipline or industry have a very high emotional granularity in their respective areas of competence.

This year was in parts all about tokenization. We covered this concept in multiple memos throughout the entire year of 2024. At its core, tokenization is to represent any asset or thing in the form of an associated token onchain. We discussed the benefits and motivations of TradFi giants like BlackRock utilizing tokenization. In W24 I wrote about a prediction that I wanted to make, which went as far as saying that one day tokenized assets will trade on the TXSE offchain, while being integrated with onchain property rights on Ethereum mainnet. All the puzzle pieces that we cover all the time here in the Powerlaw memo fit perfectly together and based on our understanding of the future it just makes so much sense for BlackRock to pursue these or similar ventures. Most notably, Stablecoins were the big winner this year, and it was just recently when we covered an all time high of over 200 billion USD in issued Stablecoins, most of which resides on Ethereum L1.

The Dencun upgrade activated blobs on the 13th of March as covered in W11. That hardfork enabled a new fee market for data availability secured by Ethereum L1. Quickly after the upgrade concluded successfully many L2 rollups switched over from calldata to blobs, causing their own gas fees to drop up to 98% on average. The events following the Dencun upgrade brought feelings of joy, confusion and fear. Fewer fees collected means less cashflow. And to this day we are still in some form of existential crisis across the entire Ethereum community, because long held assumptions get challenged when everyone is wondering what makes blockchains and their tokens valuable. Amidst all those debates we can see how people think, deceive and lie, sometimes out of ignorance, but more often out of self interest. We had to learn once more that what you read on Crypto Twitter is not all there is. And we had to learn once more that this is the dark forest out there after all. Everyone out there has only the best of you in mind, your money.

Our number this week, the last number for this year, is an all time high of weekly active addresses across the whole of the L2 ecosystem. That number is 10.6 million according to Grow The Pie data. Onchain metrics are up into the right all across the crypto industry. And I would say most metrics related to the rollup centric roadmap are no different. From my point of view our industry has made so much progress this year alone, it is impossible to cover all of the technological and cultural developments accurately. I think we are going to keep winning next year on many different dimensions. So much so that 2025 has the potential to embed this industry ever deeper into the world economy. Higher for longer!

Power law 47. The smaller the group the bigger the secrets. - xh3b4sd

Property rights rule everything around me. And the only thing that truly matters in this world, is what you can or cannot do. We grow up today in the comfort of our homes, far away from kinetic war or any form of military conflict. People grow up in western societies today, thinking that life is meant to be orderly and happy. I think we are meant to reach for the stars in life and grow beyond our own horizons. But none of that process is orderly nor happy all the time. The only reason why people have the safe space to enjoy themselves out there every single day is a form of powerplay, that keeps everyone in check who dares to act outside of some rather artificial societal norm. That powerplay makes everyone believe that life is good and that there is nothing to worry about. And nothing could be further from the truth. Because this portrayed safety hides the fact, that the system underneath is forming an ever stronger grip around your neck. In fact the worst thing that any nation state can do to its citizens, is to take more and more responsibilities away from them. Some might ask why any of this matters anyway. And to that I would say, that people in safe spaces are more like chicken in a cage than competent human beings. Everyone should ask themselves whether they want their lives to be controlled by the rule of law, or by themselves. This is not to say that we do not need laws in our societies. I like it very much that policemen and firefighters and doctors do come running when I need them the most. There definitely must be a force that guarantees property rights to everyone equally. On the geopolitical stage there are no laws and no property rights. Our very own colonial times and the monstrosities of slavery still echo that very sentiment. All there is at the top of all power struggles today, are military assets that have the ability to assure mutual destruction. Up until now human societies literally needed some person with a very big stick in order to ensure the individual right to any form of property. This big stick was traditionally some form of kinetic weapon, representing an input to our global world order. And just as humans enter the information age, kinetic weapons turn into outputs on the world stage, as our economies become more and more secured cryptographically. The decentralization of property rights is already reshaping the world as we know it in many different ways. The entire human knowledge is available with a simple internet connection. We generate productivity from digital products and services, without the need for any specific geographic location. Our moneys became shape shifters, being neither here nor there, while being controlled only by us, and nobody else. Not your keys, not your crypto. Remember that one? The wonderful systems that we have built in the past, the very systems that brought us prosperity for decades and decades on end, those systems slowly but surely turned against us in the warmth of our homes. Once upon a time the overarching principle for our systems was "For The People", which today sounds more like "For The System". In many places on this earth, there isn't much left "for the people" anymore, because all there is at all times are power struggles, as far as the eye can see. So in a way, MEV rules everything around me. And just like energy itself, MEV operates under the law of conservation. You cannot prevent MEV. All you can do is to redefine the power struggle. Public blockchain networks like Ethereum provide credible neutrality and unbreakable property rights, showing us a glimpse of a future in which traditional power struggles get redefined. How we want to define those new challenges of tomorrow is on all the mechanism designers who create the future every single day across our beloved industry. Everyone here can be an architect of their own life. Just as it should be.

Deutsche Bank is reportedly developing an L2 rollup using zero-knowledge technologies. And with that the largest German Bank is following many other industry leading corporate giants like Sony, BlackRock and Coinbase. The reason for all those digitally inclined companies to enter the blockchain space is once again related to the security guarantees that blockchain networks provide in the form of unbreakable property rights. Because those property rights allow corporations to settle any form of economic activity that is relevant to their own users and clients. And I think the reason for all of those businesses to embed themselves into the Ethereum ecosystem is Ethereum's crypto-economic zone of network effects. The largest amounts of stablecoins are on Ethereum. The most diverse user base can be found on Ethereum. The strongest property rights of the digital realm today can be used by paying for Ethereum's high quality blockspace. And so it is no wonder that more and more business interests are expressed on the most dominant smart contract platform. All tech companies that struggle with any form of compliance from a regulatory standpoint are going to have digital asset exposure one way or another. The future of the world economy is onchain. And our chains do only work with our tokens. In the words of Big V. The ticker is ETH.

We are soon going to see the first hybrid Bitcoin-Ethereum ETFs. That is a big deal because those kinds of financial instruments can provide us with inflow parity between the two largest digital assets on this planet. Reportedly, the proportion of BTC and ETH in those trust funds will be based on market capitalizations respectively. Today that means somewhere around 80/20 or 70/30. The coming year will bring all sorts of new financial instruments designed around BTC and ETH, while the world, for the most part, does still not understand the true value for any of those assets. This is the price of making history. We are at the forefront of economic, and frankly societal change in this industry. And I am not here to insinuate that some Exchange Traded Product will change the world. Far from it. The reason why those ETFs are important are the forces that introduce our technologies and capabilities to the world. Those ETFs are one mechanism for outsiders to acquire knowledge about public blockchains, which in itself creates a virtuous cycle. Over time more and more people are going to learn what cryptographically secured property rights actually mean and what you can truly do with smart contract platforms. This knowledge will lead to more adoption of the technologies that already exist, and in turn will bring more curious and brilliant minds into this industry to work on the future that today most cannot imagine. And in due time we are going to look back and realize, that some boring ETFs acted as trojan horses for a technological paradigm that changed everything underneath the face of the earth as we once knew it, once upon a time.

Our number for this week is 200 billion. That is the amount of global stablecoin TVL on top of all public blockchains today. Stablecoins reached escape velocity and represent yet another trojan horse that injects crypto into the lives of ordinary people all around the world. In other news, to me it looks like Solana season is over now. But let me humour you a little bit. Solana has an RWA market share of roughly 2.5% today. That is the share on Real World Assets, like stablecoins and other tokenized assets. Those 2.5% represent about 135 million USD and it doesn't look like there is any meaningful growth happening, for reasons. In comparison, Ethereum is now sitting at almost 80% RWA market share, which means 4 billion USD, and steadily growing. Why the difference of market share between those chains? Solana to this day has liveness and incentive issues. In other words, the Solana network has been unreachable a couple of times this year. And when the chain is down you cannot access your coins. Solana is also far more centralized in validator ownership and token distribution, which increases the risk of theft and manipulation. Ethereum is never down. Nobody can stop Ethereum. And nobody can steal your money over there. That is the reason why Ethereum will attract more L2 rollups. And that is the reason why Ethereum will attract more Real World Assets for tokenization. I say, nothing stops this train.