Month: August 2022

Authored by Mark Jeftovic via BombThrower.com,

Three reasons why The Merge proceeds at its own peril

“I personally like hard forks. Particularly, I like the fact that they give users a measure of control, requiring them to opt in to protocol changes. Sure, they can be a little more chaotic if they’re controversial, but that’s the price of freedom.”
— Vitalik Buterin

“Within the ranks of the people, democracy is correlative with centralism and freedom with discipline. They are the two opposites of a single entity, contradictory as well as united, and we should not one-sidedly emphasize one to the denial of the other.

Within the ranks of the people, we cannot do without freedom, nor can we do without discipline; we cannot do without democracy, nor can we do without centralism. This unity of democracy and centralism, of freedom and discipline, constitutes our democratic centralism. Under this system, the people enjoy extensive democracy and freedom, but at the same time they have to keep within the bounds of socialist discipline.”
— Mao Zedong, 1957

In 1958, Communist China’s Mao Zedong undertook a comprehensive program to reorganize his country’s agricultural engine into a Communist Utopia by collectivizing the farms. What happened instead was an unmitigated catastrophe that resulted in unprecedented poverty and widespread famine. Estimates range between 15 to 55 million Chinese people died, starving to death in their socialist paradise.

In early 2020 the Ethereum core devs decided that security for the base-layer of the Ethereum protocol would have to move away from Proof-of-Work (mining) to Proof-of-Stake (PoS). This decision is rationalized as an energy efficient, “climate-friendly” way to secure the blockchain.

Ethereum’ s “Great Merge” is borne from similar high-minded aspirations. Proof-of-Stake is ultimately collectivist in nature. Not only that but it is centralized in the sense that staked assets can be appropriated by some authority and “slashed” (seized and burned) if a validator approves a block that is later deemed to be afoul of “the rules”.

The desire to simply confiscate the funds of designated wrongdoers is seductive, but completely short sighted. It’s the same impulse that drives all campaigns of nationalization, expropriation and collectivization. This isn’t working. Why don’t we, the technocrats, suspend the rules, and simply commandeer these resources for ourselves?
— Nic Carter, If Eth Starts Slashing, It Burns.

Those rules… are largely undefined. After the merge happens, nobody with ETH staked will know for sure what the validator nodes they delegated to are ultimately going to do. Anybody who has who staked their ETH by now is already locked in. Even after the merge is complete, there is no timeline for unstaking in place. It could be six to months to a year, according to some reports.

Reason #1: Can Proof-of-Stake be shoe-horned into OFAC compliance?

The Tornado Cash situation is showing us how the new terrain of decentralized  blockchains are a level of abstraction beyond the industrial age regulations like those of the Office of Foreign Assets Control (OFAC). Originally designed to sanction  Specially Designated Nationals and financial institutions, Tornado Cash is now listed as an “entity” under the CYBER2 program.

It isn’t a “Blocked Person” or institution staffed by people, it’s a smart contract. An open source one, at that.

Once Tornado cash (and earlier Blender.io) were sanctioned, huge swaths of the Ethereum ecosystem piled on and started hastily enacting protocol level transaction censorship. It didn’t take long for merry pranksters to demonstrate the futility of this approach by “dusting” wallets of luminaries ranging from Coinbase CEO Brian Armstrong to Shaquille O’Neal with tainted ETH. Have they all violated sanctions now?

Simply remaining on proof-of-work (PoW) … would likely abate the problem. Stake exposes consensus to government will through regulated financial institutions, which are slated to dominate validation, whereas PoW is far more distributed and covert. Switching mining pools is instant and trivial; with PoS, it’s cumbersome. The validator set churns constantly in PoW and there is no hardware bottleneck as Ethereum still uses mostly GPUs.
— Nic Carter, If Eth Starts Slashing, It Burns.

It is worth noting that Bitcoin’s PoW chain has already had a flirtation with these issues. In May 2021, Marathon Digital (NASDAQ: MARA) announced it was the first Bitcoin miner in the world that would be mining only “OFAC compliant” blocks.  There was a loud response to this from within the community outlining the reasons why this was untenable.

MARA proceeded anyway. Less than a week later they scrapped the program and started signalling for Bitcoin’s Taproot upgrade instead.

How it started / How it went

On its own the uncertainty introduced by OFAC sanctions should at the very least postpone the merge. So far there is no talk of that happening.

Reason #2: Ethereum Hard Fork Risks

Let’s start by saying the preferable way for Ethereum to move from PoW to PoS would have been to do a hard fork. That would have been driven by consensus, free markets and voluntary choice. If Beacon chain is truly a superior, better way to do it, then we would expect the critical mass of users and applications to move there.

Say what you will about Bitcoin Cash, the hard fork that resulted from the Blocksize Wars was exactly the right way to do it. Everybody made up their own mind, nobody was forced onto either chain – participants had the same starting position on each chain, and market forces took it from there.

That’s not what’s happening here. This was decided from on high, and damn the torpedos, it looks like it’s going through. No choice, other than to bounce onto another Layer 1 entirely.

That is unless, there is some manner of rebellion or coup d’état among Ethereum’s miners to run a hard fork of their own. There have been a few rumblings of this.

Where people may hastily conclude that the risk of this happening, and succeeding are small, simply spinning out another Ethereum Classic (ETC) of marginal importance, things could play out differently this time.

I direct to you to two Twitter threads, the first by Miles Suter

1st issue:

ETH miners are contentiously preserving the PoW chain.

Bc DeFi & stables are integral to ETH’s value prop, issuers like USDC essentially select which chain wins & which collapses.

Scary that future forks live or die based on a US company. https://t.co/qUJp7XAG2l

— Miles Suter 🏴 (@milessuter) August 18, 2022

..and the second by Lyn Alden

I’ve seen a lot of people critique proof-of-stake but I’ve not seen many people point out that stablecoin custodians can basically decide the outcome of a hard fork for any blockchain that relies heavily on its DeFi ecosystem for its value proposition. pic.twitter.com/5alHREJsbt

— Lyn Alden (@LynAldenContact) November 29, 2021

…which table the real possibility that in the event of a hard fork that remains on PoW, the decision on which chain actually wins out may be made by some outside entity entirely, like Circle.

Reason #3: What if it doesn’t work?

At a technical level, Ethereum is about to do the equivalent of switching out all the engines on a passenger jet while it’s in mid-flight. Even if they get it right, a large player within the Ethereum ecosystem may get it wrong. If that player is big enough,  it could derail the merge.

In an interview on Bankless, the merge team lead Tim Beiko framed it as a possibility wherein if some large player like Geth (the most widely used Ethereum command line client) messes up, it could impact the system to the point where the Ethereum core devs may have to decide on a hard fork to save the system.

To be clear, he stated he was not worried about Geth in the least, he just used them as an example. It could be any large ecosystem player. I’m not worried about them either, but think: Metamask, Infura, some large Defi or Dex or something hardly any of us have ever heard of but everything uses (the ongoing situation involving the busted eth.link domain is a fitting microcosm here).

The merge itself could go flawlessly and then be derailed by a large ecosystem player having issues.

What To Do About It

Beiko was doing the Ethereum equivalent of Fed jawboning to allay any concerns around the merge. It had the opposite effect for me.

This is not investment advice, but I’m excerpting what I sent to The Crypto Capitalist (our premium letter) on how I’m personally positioning (bracing) for the merge:

• I reduced my own Ethereum exposure, knowing I could miss out on gains if I’m wrong or that ETH can move faster than Bitcoin during an up cycle. I reduced exposure by 70% and added to my stack of Bitcoin (the anchor asset in this space, nothing else compares).

• Real Bitcoin: unwrap any wrapped assets like wBTC (Wrapped Bitcoin) and get it back into its native form before the merge.

• Consider removing any staked, lent, or collateralized assets from any liquidity pools, DeFi applications, yield farms, go back into a non-algorithmic stablecoin, like USDC.

• If you staked any ETH into liquid staking (like Lido or Rocketpool) I’d sell those back into ETH and then do whatever. Reduce into Bitcoin like I did or just leave it in ETH if you think that overall, Ethereum will be fine.

If Ethereum does run ahead of the merge, it has all the makings of a textbook “buy the rumour, sell the news” setup. Even without the aforementioned showstoppers.

From where I’m sitting, the merge to Beacon Chain is almost entirely downside risk, with very marginal upside. To paraphrase Thomas Sowell, “Much of the impetus toward the Ethereum’s move to PoS involves replacing what worked with what sounds good”

I’ve been generally supportive of the Ethereum project from nearly the beginning and my main business has been active in the Ethereum Name Service (ENS) ecosystem since 2017. Gripes aside about gas fees (which won’t be solved by the merge, btw) Ethereum is an ambitious project that provided the rails for DeFi and tokenization which I thought had the potentional to end-run an obsolete banking system.

But this move to Proof-of-Stake seems misguided, taking the wrong path to get to a dubious goal. While Ethereum’s Great Leap Forward won’t result in millions of peasants starving to death, in a worst case scenario it could put about a quarter trillion dollars of wealth at risk or in limbo.

*  *  *

Sign up for The Bombthrower mailing list to get updates straight into your inbox and get a free copy of The Crypto Capitalist Manifesto while you’re at it. Follow me on Gettr, Telegram or if you haven’t been kicked off Twitter yet, there.

The UK’s biggest warship has suffered an embarrassing setback, breaking down shortly after setting off on a “landmark mission” to the United States. The HMS Prince of Wales experienced an “emerging mechanical issue” – according to a UK defense ministry spokesperson – and is now broken down just off Britain’s southern coast. 

The ship is the Royal Navy’s second aircraft carrier, having becoming fully operational last year, and costs an estimated £3 billion. It is further considered a “NATO flagship”. The breakdown came a mere day after it left Portsmouth on Saturday.

“HMS Prince of Wales remains in the South Coast Exercise Area while conducting investigations into an emerging mechanical issue,” a Royal Navy spokesperson said. 

The deployment to the US coast was supposed to be for four months, but after a history of problems in only its first year on the seas, the whole mission could be now in question, per The Guardian: 

Divers have been inspecting the 930-foot carrier after damage was reported to a propeller shaft, according to the Navy Lookout news site.

The vessel – Britain’s largest warship and Nato’s flagship carrier – has had a history of problems, getting stranded in Portsmouth at the end of 2020 after flooding in its engine room damaged the electrics. During its first two years in service, the carrier reportedly spent fewer than 90 days at sea after springing leaks twice in five months.

The planned joint mission once entering US waters is to focus on F-35 fighter take-offs, as well as operations involving advanced drones. This was going to involve stops in New York, as well as Halifax in Canada and the Caribbean. 

A defense and maritime monitoring site Navy Lookout had this to say:

“Should the issue prove to be serious it goes without saying that this is extremely unfortunate and not a good look for the RN [Royal Navy].”

Reports are further strongly suggesting this is no minor issue for the 65,000-tonne warship, but that a “significant technical fault” has forced its halt.

It didn’t take long for Chinese state pundits to begin trolling and mocking the plight of the state of the art carrier…

UK aircraft carrier HMS Prince of Wales broke down just after departing from Portsmouth. Lol, how is the James Bond 007 series able to make a sequel in the future? pic.twitter.com/ZGeeESe4DH

— Hu Xijin 胡锡进 (@HuXijin_GT) August 29, 2022

BBC and others have further cited Navy Lookout to speculate the following: 

The website says a photograph of the carrier leaving Portsmouth shows only a wake on the port side suggesting a problem with the other propeller shaft.

It states that, unless the problem can be resolved at sea enabling the warship to continue its journey to the US, it might need to go into dry dock at Rosyth in Scotland early, ahead of a planned inspection in 2023.

However, there’s as yet been no official UK defense ministry confirmation of propellor damage, the extent of possible damage, or when the carrier might continue on its journey.

By Jan-Patrick Barnert, Bloomberg Markets Live reporter and commentator

The message from central bankers at Jackson Hole has been crystal clear and stocks didn’t like it: fighting inflation remains a top priority.

The double salvo of bad news for equities came within 30 minutes. A Reuters report about ECB officials considering a 75bps hike at their next meeting triggered a sharp decline for stocks, made worse by hawkish comments from Fed Chair Jerome Powell that “restoring price stability will likely require maintaining a restrictive policy stance for some time.”

The Stoxx Europe 600 Index tumbled 1.7%, ending the second week in a row in the red and snuffing out any hopes of a swift resumption of the summer rally. The selloff was even more brutal on Wall Street on Friday.

“The reference to demand-induced inflation from the Fed’s standpoint has shaken many market participants awake and will likely change their view on the overall situation,” says Comdirect Bank strategist Andreas Lipkow.

Friday’s market reaction underlines how premature investors were in assuming a Fed policy pivot point or peak inflation — or both — were within reach. Rather, more inflation fire-fighting for longer is the message that now needs to be priced in.

Instead of stocks seizing an opportunity to resume their advance after giving back a chunk of their summer gains, it now looks like the retracement might run longer and deeper. Plus, there are some tough resistance levels in the path of any meaningful advance, which could prove difficult to crack, especially as Europe confronts an energy crisis and the threat of a recession.

Those bearish headlines came at an unpleasant moment for European stocks. As we pointed out last week in Taking Stock, the market has lost crucial positioning factors, options mechanics and short covering that helped it push higher.

A glance at volatility futures with expiries between one and nine months shows that while the front-end has calmed down significantly over the course of the last three months, the back-end remained stubbornly high. It’s a sign that parts of the market weren’t expecting as smooth a ride as the VIX Index decline alone suggests — or at least that investors keep hedging for the unknown future.

Other fundamentals are also keeping stocks on edge, with August’s preliminary PMI prints in recession territory, inflation expectations rising again and a threat to dividends and buybacks in Europe looming as corporate margins come under pressure.

“The Fed needs to engineer much tighter conditions to slow the economy, and therefore needs all assets to price higher risk premia,” says Peter Chatwell, head of global macro strategies trading at Mizuho.

International Atomic Energy Agency (IAEA) chief Rafael Grossi said Monday that he is personally leading a team to inspect Ukraine’s Zaporizhzhia nuclear plant. He confirmed the UN-authorized team is currently en route following fresh shelling over the weekend.

The US and Western allies have called for a demilitarized zone around the plant, warning that a potential ‘Chernobyl-like’ disaster could occur if more isn’t done to safeguard the nuclear reactors. The Russian side, which has had 500 troops occupying the plant since March, has rejected the idea of demilitarization – blaming Ukraine for ongoing shelling of the plant – while inviting in the IAEA-UN inspectors. 

The day has come, @IAEAorg‘s Support and Assistance Mission to #Zaporizhzhya (ISAMZ) is now on its way. We must protect the safety and security of #Ukraine’s and Europe’s biggest nuclear facility. Proud to lead this mission which will be in #ZNPP later this week. pic.twitter.com/tyVY7l4SrM

— Rafael MarianoGrossi (@rafaelmgrossi) August 29, 2022

Last Thursday the plant was disconnected from the power grid for the first time in its history, but hours later restored, whith safety backup measures kicking in, which also as a last resort includes large diesel generators. Ukrainian President Volodymyr Zelensky blamed the Russians for shelling the last working powerline to the plant, which the Kremlin rejected. Other reports said a fire from a burn-pit was to blame.

The UN nuclear watchdog has long been warning over “the very real risk of a nuclear disaster” as the site risks becoming destabilized and with the systems that suppor the reactors being exposed to possible further damage from fighting.

As of Monday, Russia’s RIA news is reporting that a Ukrainian missile has a struck the roof of a fuel depot at the Zaporizhzhia plant, however, at this early point the claim is unconfirmed. Additionally according to the latest:

LOCAL AUTHORITIES SAY SITUATION AT ZAPORIZHZHIA NUCLEAR POWER PLANT IN UKRAINE IS UNDER CONTROL, RADIATION LEVEL IS NORMAL – RIA

As we detailed earlier, the Ukrainian operator of the plant Energoatom said in a Saturday Telegram post, “As a result of periodic shelling, the infrastructure of the station has been damaged, there are risks of hydrogen leakage and sputtering of radioactive substances, and the fire hazard is high.” Energoatom has updated its alert to detail and allege the following: 

Nevertheless, “during the last day, the Russian military continued to fire at Energodar and the site of the Zaporizhzhia nuclear power plant,” the agency said Monday morning.

Ten people were injured, including four plant workers, and as of 10:00 am (0700 GMT) the plant “operates with the risk of violating radiation and fire safety standards,” Energoatom said on Telegram.

“The occupiers, preparing for the arrival of the IAEA mission, increased pressure on the personnel of the plant to prevent them from disclosing evidence of the occupiers’ crimes at the plant and its use as a military base,” it added. 

Meanwhile G7 countries have issued a statement demanding access to the plant “without impediment” for the UN-IAEA inspectors, saying that for the mission to be successful the team must “engage directly, and without interference, with the Ukrainian personnel responsible for operating these facilities.”

The Ukrainian government has already accused Russian forces of seeking to orchestrate a cover-up, however. For example, one Ukrainian diplomat has told local media that Russia is “artificially creating all the conditions so that the mission will not reach the site.”

The IAEA’s Gross didn’t indicate Monday the precise day his team hopes to arrive, but only said vaguely the ground mission is to begin “later this week.”