📝

Selected writing and research

Beginner’s Guide to Bitcoin

From 2018-2019, Su Zhu and I created an introduction to Bitcoin that does not assume technical knowledge about crypto and makes the case from first principles.

  • We started by acknowledging the positive properties of fiat money and explained why Bitcoin is unlikely to replace fiat money, contrary to what most Bitcoin supporters would tell you.
  • In part two, we explained how a rules-based network can implement a social contract. This mental model has become the dominant model to explain
    • how Bitcoin can have properties like the 21M coin limit
    • why forks don’t inflate the supply, and
    • why a bug wouldn’t kill the network.

      • More generally, our article established that “the social layer” or “layer zero” is a very important part of each crypto network. I later double-clicked on this topic with a followup article:

    • Exploring Bitcoin’s core values and why we defend them: Many of Bitcoin’s properties are backstopped by the social layer. In this article, I created the first (and to my knowledge only) data-driven analysis of how Bitcoin’s “layer zero” would actually react to different negative events.
  • While the second part focused on why Bitcoin’s properties are extremely robust and hard to change, the third part explained what Bitcoin actually does and who it can benefit from it. In short, Bitcoin introduces the concept of digital property rights i.e. the ability to uniquely own a digital good without relying on any existing monopoly of violence and legal system.
  • We finished the series with an article that looked at Bitcoin as an investment, showing why Bitcoin’s price is the result of a variable demand meeting a fixed supply. Since the demand is fixed, any increase in demand will necessarily lead to an increase in the price, rewarding early adopters. Finally, we speculated on what the biggest sources of demand might be in the future.
  • Most of all, we should approach our understanding of Bitcoin with the necessary humility and distance. As we see in Visions of Bitcoin - How major Bitcoin narratives changed over time (w/ Nic Carter): The dominant narrative of what Bitcoin is has changed dramatically changed over time - and it can change again.

Layer 1 economics & security

One of my favorite activities in crypto is predicting how economic incentives will shape outcomes. One area that lends itself well to that is the consensus i.e. block production layer of public blockchains.

Why? Because the participants at this layer need to push every little advantage to stay competitive or risk falling off the treadmill. As a result, incentives have an usually high predictive value, much more than if we were dealing with the behavior of individuals or groups of people.

Staking pools and staking derivatives

I have long argued that Ethereum optimizing their PoS system for solo stakers will be ineffective because economic incentives push stakers toward delegating their stake to staking pools with professional node operators.

The market for staking pools is likely winner-take-all because of the ability to issue a staking derivative i.e. a liquid token that represents tokens that are actually locked up in a PoS validator. This staking derivative becomes more useful the more widely integrated and liquid it becomes, driving further utility to the already-leading staking pool.

Because the staking market heavily trends toward one winner, it is of existential importance that this winner becomes as trustless and decentralized as possible in order to retain the decentralization of the underlying blockchain.

These insights led me to partner with Lido, the leading liquid staking provider, as an angel investor. In collaboration with Georgios Konstantopoulos and the Lido team, we laid out Lido’s Roadmap to Decentralization. This post was widely praised in the community as one of the most honest analyses of a project’s trust assumptions and how to improve them.

EIP-1559

At least before Ethereum’s eventual transition to PoS, the Ethereum Improvement Proposal 1559 was often dubbed “the biggest change to any live blockchain”. It touches how the protocol prices transactions alongside key economic parameters like ETH’s inflation rate and miner economics.

Back when it was still in early proposal stage, my colleague Georgios Konstantopoulos and I reviewed this mechanism together. We quickly became convinced that EIP-1559 was so effective, it would eventually become the gold standard for blockspace market design not just in Ethereum but in every single blockchain.

To support that outcome, we contributed

Then, as the proposal picked up steam, we

Our original prediction turned out correct: EIP-1559 did not just win over the Ethereum community, it has since been adopted by the majority of all smart-contract blockchains out there.

Block subsidy

Miner-extractable value (MEV)

Other

Decentralized Finance (DeFi)

Decentralized Exchanges

DAOs and Tokens

MakerDAO

Launch mechanisms

Trading/investment guides

While I am not an active trader myself, I love the intellectual stimulus of talking to some of the best traders and learn about how they approach their craft. I also find that some of their mental models do in fact transfer to longer-term investing as well.

Lately, I am much more involved with such longer-term, early-stage bets and so in the future, I might add to this section with thoughts from my experiences as an angel investor.

  • Leverage 101 - A Short Primer (w/ Avi Felman): Leverage is one of the most misunderstood topics in crypto - many people use it but without understanding how it fits into optimal portfolio construction, and it often leads to them blowing up their portfolio. This primer will give you a very solid mental model for leverage, and applies to both trading as well as more “common” forms of leverage like student loans and mortgages.
  • 🎧Podcast: How to value Cryptoassets? - With Su Zhu and Hasu: One of the most asked questions is how to value crypto assets. While individual assets tend to have fixed or at least limited supply, at the industry level the number of different assets is unlimited. That paired with human psychology tends to create speculative bubbles or cycles. As these cycles progress, investors venture further out on the risk curve. The best performing assets experience indirect supply via copying, eventually leading the cycle to reset.
  • 🎧Podcast: Where do the Yields come from in Crypto? - with Su Zhu and Hasu: Defi popped up on the radar of many investors in 2020 when they noticed the very high yields you could get on both non-stable and stable coins. While the prudent investor has over decades of experience learned to not fall for offers that seem too good to be true, we unpack how the combination of unique circumstances did indeed lead to yields in the double and temporarily even triple-digit range.
  • 🎧Podcast: Perpetual Swaps 101 - with Su Zhu and Hasu: One of the most traded products in crypto is the perpetual swap. In this podcast, we explain how it works from first principles. We also explain its history, showing it has been around for a long time in traditional finance. Perpetual swaps are a great case study to understand concepts like the oracle problem, leverage/margin, funding rate mechanisms, and how to create debt-based stablecoins. This episode will also equip you with the knowledge to perform some relatively basic trade setups such as the cash-and-carry trade.
  • 🎧Podcast: Trading Options 101 - with Josh from Orthogonal, Su Zhu, and Hasu: This podcast with Josh from Orthogonal, one of the best options traders in crypto, is a good introduction to another very important asset class. Options allow traders to express any kind of view on volatility. Increasingly, options-selling strategies are also a form of generating a yield on idle assets (giving up some upside in the future to generate yield in the present).
  • 🎧Podcast: Art of Trading - with Light, Su Zhu, and Hasu: I was fortunate to sit down with Su and Light, two of the most prolific traders in the crypto space. Together we went very deep into the process and mindset of trading, parallels to professional poker, the importance of theses and invalidation, payoff structures, and risk management. Many have called this interview the best crypto podcast episode of 2020 and that they are still coming back to it more than a year later