Vitalik: Orthodoxy is the scarcest resource in the crypto ecosystem

This article is from Ethereum founder Vitalik Buterin's blog, and compiled by Gong Quanyu and Echo.

The investment in network security (i.e., PoW mining) by the Bitcoin and Ethereum ecosystems far exceeds the total of all other aspects combined. Since the beginning of this year, the Bitcoin network has been paying miners about $38 million in block rewards on average per day, plus about $5 million in transaction fees daily. The Ethereum network ranks second, paying an average of $19.5 million in block rewards daily, along with an average of $18 million in transaction fees.

At the same time, the annual budget of the Ethereum Foundation is only $30 million, used for research, protocol development, grants, and various other expenses. The spending on R&D in the Bitcoin ecosystem may be even lower, with annual R&D costs around $20 million.

Clearly, this spending pattern represents a massive misallocation of resources. The value provided by the 20% of network hash power is much smaller compared to the value that resources allocated for research and core protocol development can provide. So why not cut 20% of the PoW budget and redirect those funds to other areas?

The standard answer to this dilemma relates to concepts like "public choice theory": while we can easily identify some valuable public goods and allocate some funds to them at once, establishing a regular institutional pattern for such decisions risks policy chaos, which is not worth it in the long run.

But whatever the reason, we face an interesting fact: the organic entity of the Bitcoin and Ethereum ecosystems can attract billions of dollars in capital, yet there are strange and hard-to-understand restrictions on where that capital goes. The powerful social forces that create this effect are worth understanding, and they are the same social forces that allowed the Ethereum ecosystem to first gather these resources (while the technically nearly identical ETC did not).

This social force is key to helping blockchain networks recover from 51% attacks and is the foundation of various extremely powerful mechanisms that extend far beyond the blockchain space. In the following chapters, I will give this powerful social force a name: legitimacy.

1. Tokens Belong to the Social Contract

To better understand the power we are dealing with, an important example is the legendary story of Steem and Hive. In early 2020, Justin Sun acquired Steemit Inc., which is not the same as the Steem blockchain, but the company held about 20% of the STEEM token supply. The community, of course, did not trust Justin Sun, so they conducted an on-chain vote to formally establish a long-term "gentleman's agreement" that the tokens held by Steemit Inc. would be held in trust for the common good of the blockchain and should not be used for voting.

With the tokens held by exchanges, Justin Sun struck back, gaining enough node control to unilaterally control the Steem blockchain. The community had no further options, so they forked the Steem blockchain and named it Hive, copying all token balances from the STEEM blockchain, except for those tokens that participated in the attack, including Justin Sun's.

The lesson we can learn from this situation is that companies never truly "own" tokens. If they did, they would have the actual ability to use, enjoy, and abuse those tokens in any way they wanted. But in fact, when the company tried to abuse those tokens in a way the community did not like, they were successfully stopped. The situation here is similar to the model of unissued Bitcoin and Ethereum rewards: these tokens are ultimately not owned by keys but by some form of social contract.

We can apply the same reasoning to many other structures of the blockchain. Take the ENS project’s private key multisig as an example, which is controlled by seven prominent members of the ENS and Ethereum communities. But what if four of them got together and "upgraded" the registrar to one that could transfer all the best domain names to their own registrar? In the context of the ENS smart contract system, they would have the full capability to do so, and there would be no challenge. But if they really tried to abuse their technical capabilities in this way, everyone knows what would happen: they would be ostracized by the community, the remaining ENS community members would sign a new ENS contract to restore the original domain owners, and every Ethereum application using ENS would redirect their UI to the new interface.

Legitimacy governs various games of social status, discourses of knowledge, language, property rights, political systems, and borders, and even blockchain consensus works in the same way: the only difference between a soft fork accepted by the community and a 51% attack is legitimacy. After a 51% attack occurs, the community can coordinate additional forks to eliminate the attacker.

2. What is Legitimacy?

To understand how legitimacy operates, we need to delve into some game theory. There are many situations in life that require coordinated behavior: if you act in a certain specific way, you may achieve nothing (or worse), but if everyone acts together, the expected outcome can be achieved.

A natural example is whether to drive on the left or right side of the road: which side people drive on is not actually important as long as they are all driving on the same road. If you change direction at the same time as everyone else, and most people like the new arrangement, you will gain a net benefit. But if you are the only one changing direction, no matter how much you enjoy driving on the other side, the final outcome will be quite negative for you.

Legitimacy is a higher-order acceptance paradigm. If people in a certain social context widely accept and play their part in creating that outcome, and everyone does so because they hope others will do the same, then the outcome in that social context is legitimate.

Legitimacy is a phenomenon that naturally arises in cooperative games. If you are not in a cooperative game, there is no reason to act according to your expectations of how others will behave, so legitimacy does not matter. But as we have seen, cooperative games are ubiquitous in society, making legitimacy very important.

These mechanisms are driven by an established culture where everyone pays attention to these mechanisms and acts consistently. Everyone has reason to believe that since others are following these mechanisms, if they make different choices, it will only create conflict and incur losses, or at least leave them alone in a lonely forked ecosystem. If a mechanism can successfully make these choices, then it has legitimacy.

There are many ways to achieve legitimacy. Typically, legitimacy arises because what is being legitimized psychologically attracts the majority. However, people's psychological intuitions can be very complex. It is impossible to fully enumerate the theories of legitimacy, but we can start from the following aspects:

• Legitimacy of Violence: Some people can persuade everyone that they have enough power to impose their will, and resisting them will be very difficult. (Similar to moral coercion)

• Legitimacy of Continuity: If something is legitimate at time T, it is assumed to be legitimate at time T + 1 by default.

• Legitimacy of Fairness: Some things can satisfy people's intuitive concepts of fairness, thus becoming legitimate.

• Legitimacy of Process: If the process is reasonable, then the output of that process has legitimacy (for example, laws passed by democratic countries are sometimes described this way).

• Legitimacy of Performance: If the output of the process leads to results that satisfy people, then the process can gain legitimacy (for example, successful dictatorships are sometimes described this way).

• Legitimacy of Participation: If people participate in choosing the outcome, they are more likely to consider it legitimate. This is similar to fairness but not exactly the same; it depends on the psychological desire to remain consistent with your previous actions.

3. Legitimacy is a Powerful Social Technology

The funding situation for public goods in the cryptocurrency ecosystem is quite poor. Hundreds of billions of dollars are in circulation, but the public goods critical for the sustained survival of capital receive only tens of millions of dollars in funding each year.

There are two ways to respond to this fact. The first way is to take pride in these limitations and feel proud of your community's brave efforts to address these limitations (even if they are not particularly effective).

This seems to be the route the Bitcoin ecosystem often takes:

The self-sacrifice of the teams funding core development is as admirable as Eliud Kipchoge running a marathon in under two hours: it is a testament to human perseverance, but it is not the future of transportation (or in this case, public goods funding).

Just as we have better technologies that allow people to cover 42 kilometers in an hour without special perseverance and years of training, we should also focus on building better social technologies to fund public goods at the scale we need, treating it as a systemic part of our economic ecosystem rather than a one-off charitable act.

Now, let’s return to cryptocurrency. The main strength of cryptocurrencies (and other digital assets like domain names, virtual land, and NFTs) lies in their ability to allow communities to gather large amounts of capital without any individual personally donating that capital. However, this capital is constrained by the concept of legitimacy: you cannot simply allocate it to a centralized team without undermining its value.

Blockchain ecosystems, including Ethereum, place great importance on value freedom and decentralization. Unfortunately, most public goods ecosystems within these blockchains remain authority-driven and centralized. Whether it is Ethereum, Zcash, or any other major blockchain project, there is often one (or at most 2-3) entities whose spending far exceeds that of others, leaving independent teams wanting to build public goods with almost no options. I refer to this public goods fundraising model as "Central Capital Coordinator for Public Goods" (CCCP).

This situation is not the fault of the organizations themselves; they often do their utmost to support the ecosystem. Rather, it is the rules of the ecosystem that are unfair to the organizations, as they place them under unfairly high standards. Any single centralized organization will inevitably have blind spots, and at least some team members will not understand its value. Therefore, creating a more diverse and resilient way of financing public goods to alleviate the pressure on any one organization is highly valuable.

Fortunately, we already have prototypes of alternatives. The Ethereum application layer ecosystem already exists and is becoming increasingly robust, demonstrating its public consciousness. Companies like Gnosis have been contributing to the development of Ethereum clients, and various Ethereum DeFi projects have donated hundreds of thousands of dollars to Gitcoin Grants matching pools.

Gitcoin Grants have achieved high legitimacy: its public goods funding mechanism (quadratic funding) has proven to be neutral and effective in reflecting community priorities and values, as well as filling gaps in existing funding mechanisms.

By putting a small amount of treasury funds into public goods that make the ecosystem relied upon by the public possible, we can strengthen this nascent public investment ecosystem. There are many ways to support public goods: long-term commitment to supporting Gitcoin Grants matching pools to aid the development of Ethereum clients, or even launching your own donation program that can extend beyond specific application layer projects.

Of course, the value of community support is limited. If competing projects (or even forks of existing projects) offer users better products, users will flock to and switch to the alternatives.

However, these limitations vary in different circumstances. Sometimes the community's influence is weak, but at other times it is strong. An interesting case study in this regard is the case of Tether versus DAI.

Tether has many scandals, yet traders have consistently used Tether to hold and transfer dollars. Despite the benefits of decentralized and transparent DAI, it has not managed to take away a significant portion of Tether's market share in the eyes of traders, but DAI's advantage lies in its applications: Augur uses DAI, xDai uses DAI, Pool Together uses DAI, and the list of applications is growing. Which DApps use USDT? Far fewer.

Thus, while the power of community-driven legitimacy is not infinite, there is still considerable leverage to encourage projects to allocate at least a few percent of their budgets to the broader ecosystem.

4. NFTs: Supporting Public Goods Beyond Ethereum

Using the concept of legitimacy supported by the public to derive value from outside Ethereum to support public goods has value that far exceeds the Ethereum ecosystem. NFTs present a significant and direct challenge and opportunity, likely to greatly assist many types of public goods, especially creative public goods, at least partially addressing their long-term and systemic funding shortages.

However, this could also be a missed opportunity: when Elon Musk sold his tweet for $1 million, it had no social value, and as far as we know, that money only belonged to him (notably, he ultimately decided not to sell). If NFTs simply turn into a casino that largely benefits already wealthy celebrities, that would be a less interesting outcome.

Fortunately, we have the ability to help shape the outcome. What people find attractive in NFTs and what they do not is a legitimacy issue: if everyone agrees that one NFT is interesting and another is poor, people will prefer to buy the first because it has both higher bragging rights value and personal pride in owning it, and because others think so, it may resell at a higher price. If the concept of NFT legitimacy can be pushed in the right direction, there is an opportunity to establish solid funding channels for artists, charities, and other organizations.

Here are two potential ideas:

First, certain institutions (or even DAOs) could mint "blessing" NFTs in exchange for a portion of the revenue for charitable causes, ensuring that multiple groups benefit simultaneously. This blessing could even come with official classifications: are the NFTs dedicated to global poverty alleviation, scientific research, creative arts, local journalism, open-source software development, empowering marginalized communities, or others?

Second, we could collaborate with social media platforms to make NFTs more visible on people's profiles, showcasing the values they are committed to. This could be combined with the first point to encourage users to favor NFTs that contribute to valuable social causes.

5. Conclusion

In summary, the concept of legitimacy is very powerful and appears in any environment where cooperation exists, especially on the internet, where cooperation is ubiquitous. There are various ways legitimacy can form: violence, continuity, fairness, process, performance, and participation are important factors.

The strength of cryptocurrency lies in its ability to gather large amounts of capital through collective economic will, and this capital is initially not controlled by anyone. Instead, these pools of capital are directly controlled by the concept of legitimacy.

Starting public goods funding by issuing tokens at the foundational layer is too risky. However, fortunately, Ethereum has a very rich application layer ecosystem where we have greater flexibility. Part of the reason is that there is an opportunity not only to influence existing projects but also to shape new projects that will emerge in the future.

The Ethereum ecosystem cares about mechanism design and social-level innovation. The public goods funding challenges within the Ethereum ecosystem are a great starting point. But this extends far beyond Ethereum itself. NFTs are an example of a large capital pool that relies on the concept of legitimacy.

The NFT industry could be a huge boon for artists, charities, and other public goods providers, far beyond our virtual world, but this outcome is not predetermined; it depends on positive collaboration and support.