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Experts are still divided on the real impact blockchain tech can have on solving some fo the problems that ail AI.

Most technological revolutions come with an unforeseen darker side.

When Austrian-born physicists Lise Meitner and Otto Frisch first split the atom in the late 1930s, they probably didnt anticipate their discovery would lead a few years later to the atomic bomb. The artificial intelligence (AI) revolution is arguably no different. 

AI algorithms have been around for decades. The first artificial neural network, the perceptron, was invented in 1958. But the recent pace of development has been breathtaking, and with voice recognition devices like Alexa and chatbots like ChatGPT, AI appears to have gained a new public awareness.

On the positive side, AI could dramatically raise the planets general education level and help to find cures for devastating diseases like Alzheimers. But it could also displace jobs and bolster authoritarian states that can use it to surveil their populations. Moreover, if machines ever achieve general intelligence, they might even be trained to overturn elections and prosecute wars, AI pioneer Geoffrey Hinton recently warned.

Enormous potential and enormous danger is how United States President Joe Biden recently described AI. This followed an open letter in March from more than 1,000 tech leaders, including Elon Musk and Steve Wozniak, calling for a moratorium on AI developments like ChatGPT. The technology, they said, presents profound risks to society and humanity. 

Already, some countries are lining up against OpenAI, the developer of ChatGPT. Italy temporarily banned ChatGPT in March, and Canadas privacy commissioner is investigating OpenAI for allegedly collecting and utilizing personal information without consent. The EU is negotiating new rules for AI, while China is demanding that AI developers henceforth abide by strict censorship rules. Some amount of regulation seems inevitable.

An antidote to what ails AI?

With this as a backdrop, a question looms: Can blockchain technology remedy the problems that afflict artificial intelligence or at least some of them? Decentralized ledger technology, after all, is arguably everything that AI is not: transparent, traceable, trustworthy and tamper-free. It could help to offset some of the opaqueness of AIs black-box solutions.

Anthony Day, head of strategy and marketing at Midnight a side-chain of Cardano wrote in April on LinkedIn with respect to blockchain technology: We DO need to create a way to enable traceable, transparent, uncensorable, automated TRUST in where and what AIs will do for (or to) our world. 

At a minimum, blockchains could be a repository for AI training data. Or as IBMs Jerry Cuomo wrote several years back an observation that still rings true today: 

With blockchain, you can track the provenance of the training data as well as see an audit trail of the evidence that led to the prediction of why a particular fruit is considered an apple versus an orange. 

Users of centralized AI models are often unaware of the biases inherent in their training, Neha Singh, co-founder of Tracxn Technologies an analytics and market intelligence platform tells Magazine. Increased transparency for AI models can be made possible using blockchain technology.

Many agree that something must be done before AI goes more heavily mainstream. In order to trust artificial intelligence, people must know and understand exactly what AI is, what its doing, and its impact, said Kay Firth-Butterfield, head of artificial intelligence and machine learning at the World Economic Forum. Leaders and companies must make transparent and trustworthy AI a priority as they implement this technology.

Interestingly, some work along these lines is underway. In February, U.S.-based fintech firm FICO received a patent for Blockchain for Data and Model Governance, officially registering a process it has been using for years to ensure responsible AI practices. 

FICO uses an Ethereum-based ledger to track end-to-end provenance of the development, operationalization, and monitoring of machine learning models in an immutable manner, according to the company, which has more than 300 data scientists and works with many of the worlds largest banks. Notably, there are subtle differences between the terms AI and machine learning, but the terms are often used interchangeably.

Using a blockchain enables auditability and furthers model and corporate trust, Scott Zoldi, chief analytics officer of FICO, wrote in an AI publication earlier this year.

Importantly, the blockchain provides a trail of decision-making. It shows if a variable is acceptable, if it introduces bias into the model, or if the variable is utilized properly. It records the entire journey of building these models, including their mistakes, corrections and improvements.

AI tools need to be well-understood, and they need to be fair, equitable and transparent for a just future, Zoldi said, adding, And thats where I think blockchain technology will find a marriage potentially with AI. 

Separating artifice from truth

Model development is one key area where blockchain can make a difference, but there are others. Some anticipate that devices like ChatGPT might have a deleterious effect on social media and news platforms, for instance, making it difficult to sort out artifice from what is real or true. 

This is one of the places where blockchain can be most useful in emerging platforms: to prove that person X said Y at a particular date/time, Joshua Ellul, associate professor and director of the Centre for Distributed Ledger Technologies at the University of Malta, tells Magazine.

Indeed, a blockchain can help to build a sort of framework for accountability where, for instance, individuals and organizations can emerge as trusted sources. For example, Ellul continued, If person X is on record saying Y, and it is undeniable, then that becomes a reference point, so in the future, individuals could build their own trust ratings for other people based upon what they said in the past. 

At the very least a blockchain solution could be used to track data, training, testing, auditing and post-mortem events in a manner that ensures a party cannot change some events that happened, adds Ellul.

Not all agree that blockchain can get to the root of what really ails AI, however. I am somewhat skeptical that blockchain can be considered as an antidote to AI, Roman Beck, a professor at IT University of Copenhagen and head of the European Blockchain Center, tells Magazine.

We have already today some challenges in tracking and tracing what smart contracts are really doing, and even though blockchain should be transparent, some of the activities are hard to audit.

Elsewhere, the European Commission has been looking to create a transatlantic space for trustworthy #AI. But when asked if blockchain technology could help offset AIs opaqueness, a European Commission official was doubtful, telling Magazine:

Blockchain enables the tracking of data sources and protects peoples privacy but, by itself, does not address the black-box problem in AI Neural Networks the most common approach, also used in ChatGPT, for instance. It will not help AI systems to provide explanations on how and why a given decision was taken.

When algos go crazy

Maybe blockchain cant save AI, but Beck still envisages ways the two technologies can bolster one another. The most likely area where blockchain can help AI is the auditing aspect. If we want to avoid AI being used to cheat or engage in any other unlawful activity, one could ask for a record of AI results on a ledger. One would be able to use AI, but in case the results are used in a malicious or unlawful way, would be able to trace back when and who has used AI, as it would be logged.

Or consider the autonomous driving vehicles developed with AI technology in which sensors, algorithms and blockchain would provide an autonomous operating system for inter-machine communication and coordination, adds Beck. We still may not be able to explain how the AI has decided, but we can secure accountability and thus governance. That is, the blockchain could help to trace who or what was really at fault when an algo went crazy. 

Even the aforementioned EU official can foresee blockchain providing benefits, even if it cant solve AIs black box problem. Using blockchain, it might be possible to create a transparent and tamper-proof record of the data used to train AI models. However, blockchain by itself does not address the detection and reduction of bias, which is challenging and still an open-research question.

Implementing a blockchain to track AI modeling

In the corporate sector, many companies are still struggling to achieve trustworthy AI. FICO and Corinium recently surveyed some 100 North American financial services firms and found that 43% of respondents said they struggle with Responsible AI governance structures to meet regulatory requirements. At the same time, only 8% reported that their AI strategies are fully mature with model development standards consistently scaled.

Founded in 1956 as Fair, Isaac and Company, FICO has been a pioneer in the use of predictive analytics and data science for operational business decisions. It builds AI models that help businesses manage risk, combat fraud and optimize operations. 

Asked how the firm came to employ a permissioned Ethereum blockchain in 2017 for its analytics work, Zoldi explained that he had been having conversations with banks around that time. He learned that something on the order of 70%80% of all AI models being developed never made it into production. 

One key problem was that data scientists, even within the same organization, were building models in different ways. Many were also failing governance checks after the models were completed. A post hoc test might reveal that an AI-powered tool for fraud detection was inadvertently discriminating against certain ethnic groups, for example. 

There had to be a better way, Zoldi recalls thinking, than having Sally build a model and then find six months later after shes already left the company that she didnt record the information correctly or she didnt follow governance protocols appropriate for the bank.

FICO set about developing a responsible AI governance standard that used a blockchain to enforce it. Developers were to be informed in advance of algorithms that might be used, the ethics testing protocols that need to be followed, thresholds for unbiased models, and other required processes. 

Meanwhile, the blockchain records the entire journey in every model development, including errors, fixes and innovations. So, for each scientist who develops a model, another checks the work, and a third approves that its all been done appropriately. Three scientists have reviewed the work and verified that its met the standard, says Zoldi. 

What about blockchains oft-cited scaling issues? Does everything fit on a single digital ledger? Its not much of a problem. Well store [on the blockchain] a hash of lets say, a software asset but the software asset itself will be stored elsewhere, in something else like a git repository. We dont literally have to put 10 megabytes worth of data on the blockchain. 

A moral and legal responsibility

Commercial developers would be well served to heed experiences like FICOs because political leaders are clearly waking up to the risks presented by AI. The private sector has an ethical, moral and legal responsibility to ensure the safety and security of their products, said U.S. Vice President Kamala Harris in a statement. And every company must comply with existing laws to protect the American people.

The concerns are global, too. As the EU official tells Magazine, To ensure AI is beneficial to society, we need a two-pronged approach: First, further research in the field of trustworthy AI is necessary to improve the technology itself, making it transparent, understandable, accurate, safe and respectful of privacy and values. Second, proper regulation of AI models must be established to guarantee their responsible and ethical use as we propose in the [EU] AI Act.

The private sector should weigh the benefits of self-regulation. It could prove a boon for an enterprises developers, for one. Data scientists sometimes feel like they have been placed in a difficult situation, Zoldi says. The ethics of how they build their models and the standards used are often not specified and this makes them uncomfortable. 

The makers of AI devices dont want to do harm to people, but theyre often not provided with the necessary tools to ensure that doesnt happen. A blockchain can help, though, in the end, it may be one of several self-regulating or jurisdictional guardrails that need to be used to ensure a trustworthy AI future.

You talk to experts and they say, Were smart enough to be able to generate this technology. Were not smart enough to be able to regulate it or understand it or explain it and thats very scary, Zoldi tells Magazine.

 
All in all, blockchains potential to support a responsible AI has yet to be widely recognized, but that could soon change. Some, like Anthony Day, are even betting on it: Im not sure if blockchain truly will save the world, but Im certain it can save AI.

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Deluged by NFTs and memecoins, Bitcoin has suddenly become a worse version of Ethereum. There are conflicting ideas about how to fix it.

The launch of BRC-20 tokens and Ordinals NFTs on Bitcoin has transformed the No. 1 blockchain overnight into a clunkier version of Ethereum.

The core developers and miners who signed off on the networks Taproot upgrade in November 2021 never envisaged this would be the result. Bitcoin now suffers from many of the same problems that have bedeviled Ethereum for years, including scammy memecoins and shitcoins, NFTs of monkey pictures hogging block space and skyrocketing transaction fees.

The network is even having to deal with incidences of miner extractable value (MEV), whereby miners profit by reordering pending transactions.

Im kind of upset at myself for not realizing, says Quantum Economics founder Mati Greenspan, a Bitcoiner since 2013.

It took these guys starting to hype up JPEGs on Bitcoin until I was like: Oh shit, what did we just do? He laughs ruefully.

Some Bitcoiners on Bitcointalk and Twitter refer to the impact of Ordinal NFTs and BRC-20 tokens as an attack on Bitcoin, an exploit of Taproot, or simply as spam clogging up the network.

Its sparked a fierce debate over whether unexpected outcomes are precisely the sort of outcomes you should expect from a permissionless protocol, or whether something needs to be done to get rid of them.

Why are Bitcoin fees so high?

BRC-20 tokens were only launched by anonymous developer Domo back on March 8. They use Ordinal inscriptions of JavaScript Object Notation (JSON) data to deploy token contracts, mint tokens and transfer tokens. Some argue this is horribly inefficient and costs four times as much in transaction fees as if they just used binary.

Alongside the inefficiencies, theres also a gold rush for minting memecoins. Someone will deploy a contract with a ticker for a new token and a max supply, and then traders rush in to mint as many as possible in the series, on a first come, first served basis, at whatever fee rate gets them priority. These tokens have already surpassed $1 billion in market cap even though Domo argues they will be worthless.

But they are here to stay at least in the short term with major wallets already adding support for BRC-20 tokens. And newer developments, such as the launch of a Uniswap fork that amassed $500,000 in trading of smart BRC-20 tokens (SBRC-20) in just a few days, suggest that the building of a permissionless new ecosystem on Bitcoin is set to continue.

Fees too high to bank the unbanked 

Greenspan points out that while the flurry of interest has seen Bitcoin transactions hit an all-time high, the number of unique addresses plummeted, meaning fewer people are accessing the network. And while transaction fee revenue has overtaken the block reward seen by many as the only way to ensure Bitcoins security after another couple of halvings it comes with a lot of issues.

I spoke to one miner yesterday who said his revenue has doubled, which is nice, especially ahead of the halving, so its good for miners, but its terrible for the countries of Nigeria and El Salvador, for example, where, suddenly, the average cost to send a transaction is $30, he says. The dream of financial inclusion on Bitcoin has been temporarily postponed.

Read also: What its actually like to use Bitcoin in El Salvador

Interestingly, this isnt the first time someone has put a token or NFTs onto Bitcoin. Counterparty led the way with NFTs on Bitcoin, with Spells of Genesis and Rare Pepes in 2015 and 2016. And stablecoin Tether also launched a token on Bitcoin back in 2014 via the Mastercoin protocol (which later became Omni).

Ban the spam, say Bitcoin maxis

On Bitcointalk, there is much discussion of fighting off the attack on Bitcoin, with some claiming its the work of malicious Bitcoin SV devs. Users are talking about a soft fork to enforce strict Taproot validation script size, ways the protocol can filter out what they see as spam or even a hard fork to reverse Taproot.

Bitcoin developer Luke Dashjr stated that action should have been taken months ago. Spam filtration has been a standard part of Bitcoin Core since Day 1. Its a mistake that the existing filters werent extended to Taproot transactions […] since this is a bugfix, it doesnt really even need to wait for a major release.

Glassnodes lead on-chain analyst, Checkmate, tells Magazine that he believes this sort of censorship is against the entire ethos of Bitcoin and notes there are already optional mempool rules enabling node operators to filter ordinals if they choose.

From my view, any attempt to ban or censor these transactions is far more of an attack on Bitcoin than leaving them be. They are within consensus rules, and when a loud minority of individuals want to change the rules to stop something they dont like, that is the real attack.

But podcaster Chris Blec made the case on Twitter that limiting transaction types to ensure the health of the network wasnt censorship. 

If it doesnt depend on the content of the message or the sender of the message, then its not censorship, he said.

Hass McCook, a former member of the Bitcoin Mining Council and a Bitcoin true believer, is no fan of Ordinals but thinks trying to get rid of them is a step too far, saying:

The only thing more important than Bitcoin is freedom. My general take is I personally dont like it and dont see value in it. But I dont want to censor it. I think that could go down a very dark path.

If the protocol allows for something and somebody is happy to pay to do that thing, then it is what it is.

Impossible to ban Ordinals anyway

Andrew Poelstra, director of research for Blockstream, is one of the inventors of Taproot. He doesnt like the upgrades toxic offspring either but doesnt see any practical way to stop them. 

As near as I can tell, there is no sensible way to prevent people from storing arbitrary data in witnesses without incentivizing even worse behavior and/or breaking legitimate use cases, he wrote.

Read also: Is Bitcoin a religion? If not, it soon could be

Its not going to be possible just to ban useless data, he said, noting that people could just hide useless data like NFTs inside of useful data like dummy signatures or public keys.

Doing so would incur a 2x cost to them, but if 2x is enough to incentivize storage, then theres no need to have this discussion because they will be forced to stop due to fee market competition anyway.

Ignore them, and theyll go away

The best-case scenario and the most likely, according to interviewees for this piece is that interest in the tokens and NFTs will die down as the memecoin fad plays out. 

Network congestion on Bitcoin is not a new thing, right? says Greenspan. It usually comes with hype. But also it leaves when the hype is over.

Whats most likely to happen is people are gonna run out of money.

But if Ordinals continue to have an outsized impact on the network, theres always the nuclear option of forking Bitcoin to modify or remove Taproot. Blec and many others have raised the possibility, though it seems mostly hypothetical at this stage. 

Fork Bitcoin to get rid of Ordinals

Greenspan says, while its always possible to implement a hard fork, itll split the network. And nobody wants that.

McCook says the market chose Bitcoin, rather than Bitcoin Cash or Bitcoin SV during the scaling wars in 2017, and he predicts the current version would win over a fork with Taproot.

Id take the Ordinals one. So, even though I dont find any value in Ordinals, maybe I need to inscribe something in the future that I need to have absolute censorship resistance, he says.

This could potentially have pretty powerful implications. Lets say Julian Assange decided to do his WikiLeaks info dump as an inscription, this is a very useful thing.

Greenspan also believes the benefits of using Bitcoin to store data have only just begun to be explored.

People are now aware that Bitcoin has the ability to store files. And Im excited to see what, you know, forward-thinking developers will do with this new tool. More than just creating memes.

Make the tokens better

When he released BRC-20, Domo added, I believe there are almost certainly better design choices and optimization improvements to be made.

Plenty of people agree. One of the easiest improvements would be to use binary rather than the JSON format, which developer John W. Ratcliff argues is one of the most inefficient data formats anyone could use. He believes this would reduce BRC-20 tokens from 89 bytes to 19.

This means that they are paying over four times as much in fees to commit these BRC-20 tokens than necessary, he said.

Hashrate Index researcher Colin Harper says that using binary code could reduce bandwidth by as much as 80%. However, this wouldnt entirely solve the problem, as Bitcoin influencer Udi Wertheimer points out, given the spike in fees is due to token minting degens bidding up fees to get their transaction prioritized into order to mint or snatch up low serial number tokens before the supply runs out.

Theres also another way to issue assets on Bitcoin called Taro, which Domo says is a better solution. Taproot Asset Representation Overlay is a proposed protocol that will allow people to issue digital assets on Bitcoin that can be transferred to Lightning for fast and cheap transactions.

Read also: Attack of the zkEVMs! Cryptos 10x moment

Build a virtual machine on top of Bitcoin

A much more radical and experimental approach is being taken by Trustless Computer, which is behind a Uniswap v2 fork called Trustless Market that enabled $500,000 worth of swaps in its first three days.

The projects documentation states its working toward a Turing-complete virtual machine called BVM built on top of Bitcoin to enable a DeFi ecosystem.

Core team member @punk3700 tells Magazine it is not a layer 2, its a protocol within layer 1 that works like Ordinals but uses SBRC-20s.

Instead of writing text files to Bitcoin, Trustless Computer writes smart contract transactions to Bitcoin. Raw files vs. programs/logic/apps. He claims this cuts down the bandwidth required for the tokens by 80%90%.

I think the BRC-20 in their current form (using text files) are a flash in the pan, he says. You cant use paper and pen to build an alternative scalable financial instrument.

Our SBRC-20 implementation is different. We use smart contracts, the same ERC-20 smart contract on Ethereum. It works exactly as programmed.

Ordinals is v0.1 of what is possible on Bitcoin. Trustless Computer shows that you can build a full DApp ecosystem on Bitcoin.

He expects that well see MakerDAO, Aave, Compound and other smart contracts deployed soon, which, if it works as he claims it will, would be a huge change for Bitcoin.
 
While the project has recieved coverage in other major crypto news outlets, Magazine hasn’t verified their tech works as promised, and the extent to which you can integrate smart contracts with Bitcoin is debateable, so tread carefully.

Can we scale Bitcoin with ZK-rollups?

The influx of NFTs and token minting on Bitcoin has shown the blockchain remains unable to scale to deal with increased demand, meaning the more popular it gets, the worse it works.

The Lightning Network is usually touted as the solution, but Nostr creator Fiatjaf noted it has been unable to cope with the recent fee spike. Channels are too fragile, it costs a lot to open a channel under a high fee environment, to run a routing node and so on, he wrote, stating that users instead had to rely on the centralized Lightning providers.

Greenspan believes that gradual progress toward scaling is the only safe solution to ensure Bitcoin remains bulletproof. 

“Weve seen Segway; weve seen Taproot. I mean, these are, these are good progressions and steady scaling. Which is whats best usually for a decentralized network of this size. You dont want to rush things because you might break them. As weve seen.

Read Also: Reformed altcoin slayer Eric Wall on shitposting and scaling Ethereum

Various parties, including StarkWare and blockchain researcher Eric Wall, have been investigating scaling Bitcoin using zero-knowledge (ZK) rollups, which is Ethereums plan to solve its very similar challenges.

But ironically, while the surge in demand caused by Ordinals has shown that further scaling is required, its also made it much less likely the community would agree to a new hard fork to enable ZK-rollups. After all, they voted for Taproot and look what happened?

I doubt that will ever happen, says Checkmate.

I am also skeptical of even a soft fork since the unintended consequences of the witness discount have woken everyone up to the risks of change.

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The epic highs and lows of cryptocurrency trading make traders particularly prone to addictive trading behavior.

An often overlooked aspect of the cryptocurrency markets reputation for volatility is the effect sudden market changes can have on the mental health of traders and investors.

Addiction to day trading, or pathological trading, is already well-known among stocks and commodities traders and has been extensively documented by medical professionals. There are even rehab programs devoted to treating day-trading addiction.

With its possibility of life-changing money for those lucky or savvy enough to catch it, the crypto market has generated its fair share of trading addicts.

To get a better understanding of the mechanics of cryptocurrency trading addiction and how to recognize it, Magazine sat down with Tony Marini, senior specialist therapist at Castle Craig Rehab in Scotland, and Aaron Sternlicht, co-founder of New York-based private practice Family Addiction Specialist.

What is cryptocurrency trading addiction?

Sternlicht defines cryptocurrency trading addiction as the persistent or recurrent pathological compulsion and obsession to engage in the behavior of investing in or trading cryptocurrencies despite negative consequences to personal and/or professional areas such as financial loss, disruption to relationships, career problems, mental health issues, and other such negative consequences.

He believes that addictive behavior goes well beyond just buying and selling tokens. When a traders time is fully consumed with chart analysis, market research, data review, fundamental analysis or investor sentiment, there may be a problem.

Its all about neurotransmitters

The body makes a neurotransmitter called dopamine that the nervous system uses to deliver messages between nerve cells. Sternlicht says that when the price of crypto goes up and someone completes a successful trade, they receive a rush of dopamine, bringing about a feeling of pleasure. 

The volatility of cryptocurrency coupled with the fact that it can be traded 24/7 can result in excessive and regular boosts of dopamine that make it much more addictive than trading other assets such as stocks, Sternlicht says. Over time, those who develop an addiction to cryptocurrency trading come to depend on it to bring on excitement and feelings of pleasure.

Sternlicht says some stimuli that release excessive amounts of dopamine such as sex, drugs, video games and social media are more likely to become addictive. He believes that due to volatile price fluctuations, successful cryptocurrency trades fall into that category.

On the flip side, other natural pleasures like eating a great meal or watching a beautiful sunset can become less stimulating and less appealing. The individual becomes preoccupied with their stimuli of choice while losing interest in other life experiences that they used to find enjoyable, as it is the brains natural inclination to seek out pleasure, Sternlicht says.

Marini points out that not everyone will become a compulsive gambler, a cocaine addict, an alcoholic or a crypto trading addict. But he believes that 3% of Brits are compulsive gamblers. The UK Health Security Agency (formally Public Health England) has estimated that about 2.2 million adults are problem gamblers or are at risk of addiction. Both Marini and Sternlicht agree that cryptocurrency addiction is very similar to gambling addiction and is treated as such.

With 33% of the country participating in the cryptocurrency market, Marini worries that hes just seeing the tip of the iceberg. I was finding there were more and more people coming through the doors that had been really drawn into cryptocurrencies, Marini says. 

Since 2016, Castle Craig has had over 200 clients come in with cryptocurrency trading addiction. Marini believes cryptocurrency draws people in much quicker than gambling because of its volatility. They were looking at the pricing constantly because it fluctuates all the time. And with over 20,000 different cryptocurrencies now, theyre spending so much time on different media sites watching the cryptocurrencies, and that is becoming a problem in their life, Marini says.

Still, according to Sternlicht, most people can trade crypto without worrying. Although most individuals can invest in and trade cryptocurrencies without developing a pathological issue, some individuals develop pervasive impairment related to their trading behavior that results in addiction, Sternlicht says.

Who is at risk?

Although there is no way to determine precisely who will develop an addiction to cryptocurrency trading, Sternlicht believes that those with frequent exposure to crypto, those who have experienced other addictions, or those who have had problematic gambling experiences are more susceptible. Family history of addiction, underlying mental health issues, impulsivity or risk-taking personality traits may trigger addictive behavior in traders.

In Sternlichts experience, crypto traders are frequently well-educated and financially savvy. They feel like they have a market edge and know something others dont. For example, they may spend extensive time researching the fundamentals of a particular project, or they may be highly skilled at analyzing charts, macroeconomics, market sentiment and other speculative measures. This is what is known as the illusion of control.

In a 2014 study, researchers from the Universidad de Deusto and University College London stated that the illusion of control consists of overestimating the influence that our behavior exerts over uncontrollable outcomes. According to Sternlicht, that false sense of security can encourage traders to take more risks and trade more frequently. If traders feel they have an edge, they may be more likely to place risker or larger trades and develop an addiction to trading.

Marini created the Crypto Curve, a diagram that maps out the life cycle of these types of risky behaviors. Not to be confused with the well-known crypto J-curve, which models the market value of a cryptocurrency over time, Marinis Crypto Curve visualizes the evolution of addictive trading from highly fulfilling and desperation to realization, recovery and growth.

How do you know if you have a problem?

According to Sternlicht, some signs to look for include unsuccessful attempts to stop or moderate trading, thinking about crypto when not trading, associated feelings of guilt and shame, and hiding losses from loved ones. Lying, stealing, selling things or borrowing to continue to trade are also red flags.

One client of Marinis worked for a financial company and embezzled $1.5 million in Bitcoin. He then lost $1.2 million of the stolen funds. Another client who came to Castle Craig for substance abuse and was able to abstain subsequently earned half a million euros trading cryptocurrency. Two years later, the client returned to the clinic, having relapsed with drugs and alcohol and lost all their crypto.

Additional signs of addiction may include spending money allocated for living expenses on crypto, prioritizing trading over relationships and career opportunities, difficulty concentrating, loss of interest in non-crypto activities, and difficulty sleeping due to trading or trading-related activities. 

Treatment options

For those seeking outpatient help, Sternlicht tailors treatment to meet the needs of each client. Although he doesnt have a one-size-fits-all approach, there is a general, modifiable framework. After an in-depth evaluation by his team, customized treatment plans are created that may include therapy, coaching, psychiatry, family/couples counseling, financial oversight, sleep-exercise-nutrition monitoring and daily check-ins. Drug and alcohol testing may also be applicable. Sternlicht also integrates mindfulness and holistic therapies. 

Financial monitoring is a key component of Sternlichts approach. With all of our cryptocurrency addiction clients, we find it beneficial to set up financial monitoring systems of their assets, including bank accounts as well as trading platforms if they are still active. Digital wallets are accounted for as well, Sternlicht says. 

Sternlicht believes that overseeing assets and sometimes, even temporarily removing control of those assets from the client can help the individual become accountable and focused on recovery. This financial oversight can be performed by a trusted friend or family member, a financial professional, or a member of Sternlichts staff. 

During a session, a client might focus on identifying trading triggers and establishing coping skills to refrain from trading, building trust and setting boundaries in relationships, or working through mental health issues and trauma. 

Between sessions, the team tracks sleep, nutrition, exercise and digital usage. Recovery is like a puzzle of various pieces, and the more pieces that are put together, the better chances the individual has to live a thriving and successful life, Sternlicht says.

According to Marini, Castle Craig treats cryptocurrency addiction as a form of gambling addiction. They combine cognitive behavioral therapy with a 12-step approach. The first step is admitting there is a problem. Im powerless over this addiction, and because of that, my life becomes unmanageable. It just means that I have a problem here. And then when we look deeper into it, we find that I am the problem, Marini says.

Also read: Joe Lubin: The truth about ETH founders split and Crypto Google

The six-week residential program includes one-on-one therapy and group therapy. Marini believes group therapy is important because of validation and togetherness. In group work, you get that identification with someone else, so you dont feel alone anymore. The one-to-one therapys great, but the group work is probably the biggest part of it, Marini says.

According to Marini, equine therapy, art therapy and significant holistic practices are included in treatment. Recovery also focuses on avoiding post-treatment relapse and cross-addiction into substances. For example, Marini suggests that due to the volatility and 24/7 nature of cryptocurrency trading, some might turn to amphetamines to be able to stay awake longer.

In the end, Marini believes that recovery is about finding oneself and understanding what addiction is and why it causes certain behaviors:

It’s about finding yourself again. So awesome. We do an awful lot of that.

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The Silk Road hacker lived the high life for a decade with his stolen billions — but was caught due to a transfer of pocket change.

Where would you hide $3.4 billion worth of Bitcoin? For James Zhong, the ideal spot was to store it on a computer with its circuitry exposed placed in a used Cheetos popcorn tin hidden in a bathroom closet under a pile of blankets.

Zhong, now 32, was sentenced to a year in federal prison last month for a hack that took place almost 11 years ago. His victim? Ross Ulbricht, the proprietor of the Silk Road dark web drug marketplace where Bitcoin found its first significant use case, as an underground currency. Today, Ulbricht is himself serving two life sentences plus 40 years for his part in operating the illegal marketplace, but darknet markets continue to flourish.

Somewhat ironically, billionaire Zhong was caught due to a transfer of just $1,000 worth of BTC to an address hed used previously.

Lifestyle of a crypto billionaire

How much is $3.4 billion? One could build another Burj Khalifa the worlds tallest tower, located in Dubai ($1.5 billion) and make the winning bid on Leonardo da Vincis Salvator Mundi the most expensive painting ever sold ($450 million) and still have over a billion left over to purchase a sports team, yacht and fleet of private jets. Its almost beyond comprehension.

But Zhong lived in the American city of Gainesville, Georgia, where around $1 million is enough to purchase the luxurious four-bedroom lakefront property he called home. According to some sources, gaining attention from women was among the key motivations of Zhong who is autistic and was reportedly bullied in school. Court documents hint at his lavish lifestyle:

Indeed, in the 51 months before law enforcements overt search of Zhongs residences, Zhong dissipated approximately $16 million of crime proceeds, spending lavishly on real estate investments, luxury products, travel, hotels, nightclubs, and other expenses.

If his online posts are anything to go by, Zhong can also be said to have been something of a party animal, using cocaine on weekends and bragging about being drunk while keeping an eye on the markets. Perhaps this comes with the territory of stealing billions from a drug kingpin.

All this was presumably financed with the roughly 2,900 BTC that the government did not recover from his theft. Zhong stole 50,000 BTC and converted his free Bitcoin Cash into another 3,500 BTC. However, only 50,591 BTC was seized.

Silk Road

Where did all this begin? Possibly with a Bitcointalk user named Teppy, who in June 2010 made a post titled A Heroin Store outlining a thought experiment about how a heroin store might operate, accepting Bitcoins, and ending drug prohibition in the process. The post connected Bitcoin to libertarianism and suggested that this would enable the new currency to become truly disruptive.

It was a cutting-edge concept. Pizza Day, which saw Bitcoin exchanged for real-world goods for the first time a pair of pizzas for 10,000 BTC had happened just three weeks prior.

Eight months later, in February 2011, Silk Road opened for business in the hidden back alleys of the web. To access the Tor dark web, users need to download special software, explains Ethan Lou, an occasional Magazine contributor and the author of Once a Bitcoin Miner. He speaks from experience. Tor, he notes, has many legitimate uses for those who value privacy, including leaking information to the press.

Its pretty easy if you have some basic tech know-how. Once you get in, you see that it looks like the internet from the 1990s.

Sellers could list their items for sale on Silk Road, and the website would hold funds in escrow until items were received by the buyer, who could rate the item and seller. Often, administrators would adjudicate disputes. In months, the site grew to host over 10,000 listings of controlled substances, eventually processing around 1.5 million transactions. One early user was podcaster Peter McCormack, who called it Amazon for drugs and told Magazine how he wound up in hospital after three grams of cocaine arrived one day and he got carried away literally, in an ambulance.

Authorities close in

By June, U.S. Senators Chuck Schumer and Joe Manchin had written to the attorney general and the Drug Enforcement Agency, demanding they take action against the marketplace.

Some of those actions were off-the-books, such as those by DEA Special Agent Carl Mark Force IV, the lead undercover agent who in 2015 was sentenced to 6.5 years for various crimes connected with the case. This included demanding exchanges freeze BTC accounts in order to withdraw the coins for himself as well as faking the death of site administrator Curtis Green, whom he had actually arrested, in order to collect money from DPR, who allegedly wanted him dead.

The website came to an end on Oct. 1, 2013, when a couple started bickering in San Fransiscos Glen Park Library. This caught the attention of the nearby Ulbricht, who turned his head from the laptop he was working on. It was a trap. At that moment, FBI agents swooped in from behind bookshelves and grabbed Ulbrichts laptop before he could log out and lock away his 144,000 BTC the proof he was DPR.

Ulbricht received a double life sentence plus 40 years with no possibility of parole. Many in the Bitcoin community and beyond have criticized the sentence as unjust, particularly considering the nonviolent nature of his crime. FreeRoss, an organization dedicated to advocating for his release, archives statements by politicians and industry leaders speaking in favor of his release. As Lou asks:

Are two life sentences reasonable for someone who did something that is nonviolent?

A pirates billions

During Ulbrichts sentencing, the funds earned by the site were declared proceeds of crime, meaning the Bitcoin was confiscatable by the U.S. government. The approximately 144,000 BTC found on Ulbrichts laptop was now U.S. property.

Under U.S. law, authorities can effectively bring a case against money or other goods and seize them under civil forfeiture laws without necessarily arresting the person possessing them. This naturally extends to digital currencies like Bitcoin, explains Jason Corbett, a lawyer whose firm, Silk Legal, specializes in cryptocurrencies.

The government disposed of its newfound Bitcoin via a series of auctions held by the U.S. Marshals Service in 2014. Venture capitalist Tim Draper famously purchased 30,000 BTC for $18 million. Functionally, the auctions legitimized Bitcoin by removing all doubt regarding its legality: How could the government sell something it considers illegal?

But some of the Bitcoin was missing, all traceable from the Silk Road addresses. About 50,000 had been stolen from Silk Roads hot wallets back in September 2012.

It was not a sophisticated hack. Zhong deposited 500 BTC into the Silk Road platform, only to make five withdrawals for 500 BTC a few seconds later, tricking the wallet software into returning 2,500 BTC to him. This was repeated several times using different accounts and increasing amounts, netting Zhong approximately 50,000 Bitcoin out of Silk Road in just a few days, according to court documents. At the time, this amount of Bitcoin was worth around $600,000.

Unexpected Bitcoin Cash windfall

In 2017, Bitcoin was forked in a move championed by Roger Ver and Jihan Wu. This allowed every Bitcoin holder to redeem 1 BCH for each Bitcoin they held.

Many proponents believed that Bitcoin Cash was the true Bitcoin, but Zhong, writing as the aptly named Loaded, took to the Bitcointalk forum to disagree. That summer, he went on to exchange his 50,000 BCH for 3,500 additional BTC. As the U.S. government views the stolen Silk Road BTC as proceeds of crime, it similarly views the BCH later assigned to them as equally confiscatable.

As a decade passed, the value of Zhongs stolen treasure grew exponentially into the billions. However, with Zhongs blockchain signature pointing to the lost Silk Road coins, it was only a matter of time before U.S. investigators took notice. There were, and probably still are, eyes on the forum at the center of the Bitcoin movement, where Ulbricht himself had posted under the name Altoid.

Thats the trail that eventually led Trevor McAleenan, a special agent with the U.S. Internal Revenue Services Criminal Investigation Division, to rummage through the contents of Zhangs bathroom closets in 2022 in search of approximately 53,500 [BTC in] Silk Road Crime Proceeds. He recovered 50,591 BTC, which, using a conservative estimate of the lowest spot price of BTC on the date of the search, amounted to $3,388,817,011.90.

Not a tin pot setup

Though Zhong hid much of his BTC in a tin, Special Agent McAleenan described his setup as sophisticated, made up of multiple computer servers, virtual private networks, cold wallets, virtual machines, numerous layers of encryption, and multiple Bitcoin nodes. Over the first several years following his 2012 heist, Zhong kept his loot on two addresses of approximately 40,000 BTC and 10,000 BTC.

Perhaps in an attempt to make the connection to the hack appear more distant, he began periodically moving the Bitcoin for example, splitting the 10,000 BTC address into 10 addresses holding 1,000 BTC each in 2020.

In an apparent attempt to further obfuscate the funds, that same year he pushed approximately 750 BTC of the Silk Road Crime Proceeds through a decentralized Bitcoin mixer, which is software that effectively mixes cryptocurrency from various addresses together to make it unclear from which source a final balance comes, thereby aiming to break a connection to tracked coins such as those involved in Silk Road.

While technically anyone can use a site like Blockchain.com to follow transactions including Zhongs on the Bitcoin chain, it is worth noting that the IRS went beyond this, using blockchain tracing and forensic software to string suspicious addresses together more easily. While such software does not add any new information, it makes interpreting the data easier.

Feds swoop in

Despite his VPNs and encryption and various attempts to hide the Silk Road coins, Zhong must have slipped up at some point, as the IRS was able to track him by his IP address a unique identifier assigned to each device that connects to the internet. This IP address was then matched to records held with Zhongs internet service provider as well as an exchange where he sent some coins to be traded, presumably obtained by a warrant requiring these records to be released.

The successful recovery of the Bitcoin came down to identifying the movements of the coins in question and following them to an exchange where Zhong had deposited and sold 119 BTC, worth somewhere in the region of $1 million, in 2019. Despite attempts to mix and obfuscate, the coins connection to Zhong and Silk Road was confirmed by a transfer of a mere 0.07750842 BTC around $1,000 in leftover change that was sent from Zhongs account to a Bitcoin address previously used to move 1,000 BTC of Silk Road funds.

This suggests that Zhong was caught losing him $3.4 billion due to laziness in reusing an address instead of creating a new one, or perhaps even for worrying about 0.08 BTC when selling 118 BTC, to begin with. The Swan Bitcoin exchange, for example, explicitly discourages users from reusing addresses due to negative implications such as diminished privacy and diminished security, which Zhongs case appears to demonstrate.

And so, a search warrant was issued and executed about two years later, in November 2021.

The same BTC address controlled by Individual-1 that received change of approximately 0.07750842 BTC in 2019, as indicated in the Exchange records, also is associated with a BTC address that Individual-1 used to transfer 1,000 BTC that Individual-1 had unlawfully obtained from Silk Road, wrote McAleenan.

Zhongs other loot

In addition to coins held on a computer, Zhong had other assets spread around his house within a kitchen drawer and a floor safe filled with tightly bound stacks of cash. There was also a tiny amount of silver and gold bullion and a collection of rather peculiar coins known as Casascius coins.

Casascius coins are physical Bitcoin on which the private key is hidden under a peelable hologram sticker. They are historical artifacts of the Bitcoin movement dating back to 2011. Magazines 2021 piece on the topic declared such coins as the ultimate privacy coins, as theres nothing to associate the owner with an address and they can be traded a million times without ever leaving a record on the blockchain.

Theoretically, of course, this would make physical Bitcoin a very attractive way to launder money or pay for drug deals.

Zhong appears to have done just that, effectively trading his red-hot criminal proceeds for pre-Silk Road 2011 Bitcoin that appears entirely clean.

As far as we know, however, Zhong cooperated with authorities and returned all his remaining Bitcoin, a factor that played a role along with his young age and autism in his getting a short sentence and the more serious money laundering charges dropped, which would typically lead to many years in prison.

In Zhongs case, the government appeared far more interested in securing the criminal proceeds for themselves rather than Zhong, whose criminal activity amounted to stealing from another criminal.

Had Zhong hacked any other dodgy site, its unlikely authorities would have been interested in catching up with him a decade after the fact. According to Corbett, wire fraud is the electronic equivalent of mail fraud and has become a sort of catch-all for prosecutors, as virtually any financial crime today involves the use of the internet.

Zhong was sentenced for wire fraud committed against Silk Road, which is a reminder that fraud is still fraud even if committed against a criminal enterprise.

The dark side

Despite Ulbrichts sentencing, the Dread Pirate Roberts may live on. The name came from the movie The Princess Bride, in which DPR was not a single feared sea captain but a title passed on from pirate to pirate. True to the myth, Silk Road 2.0 was launched within a month of the arrest, operating for two years until Blake Benthall, a former administrator of the original Silk Road, was also arrested by the FBI. Despite this, at least two sites calling themselves Silk Road 3.0 were soon again operational, along with a myriad of similar marketplaces using different brands.

In Once a Bitcoin Miner, Lou writes about his experience visiting one of these marketplaces out of curiosity while a student. He soon spent almost half a Bitcoin about $100 to purchase a small amount of LSD, which never actually arrived. Naturally, there was far more than just drugs offered:

Various marketplaces offered stolen credit card details and passwords, drugs and guns. You could also hire someone to say the right words to the police so that a tactical team would raid a house of your choice, a process called swatting. My friends and I even found purported assassinations on offer just unbelievable.

According to Carnegie Mellon research professor Nicolas Christin, as much as 4.5% to 9% of all exchange trades in the early days of Bitcoin were related to the dark web drug market. Considering this, there is no denying that the black market was among the first use cases of cryptocurrency, a fact that still fuels apprehension among the public regarding cryptocurrency. Lou, a journalist, takes a slightly more optimistic view:

Even if the use case is not a very nice one, I think it still is a use case. As they say, any publicity is good publicity.

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Joe Lubin explains what really happened in 2014 when two co-founders were pushed out and how Ethereum really is becoming the “World Computer.”

Theres a narrative thats grown up around Ethereums two most important co-founders, Joe Lubin and Vitalik Buterin, to explain how they went in different directions almost a decade ago.

It suggests the pair fell out over the blockchains future direction, with the idealistic 20-year-old Buterin determined to turn Ethereum into a nonprofit foundation, while Lubin and others wanted to commercialize the technology via a for-profit company.

That wasnt really what happened, the billionaire founder of Ethereum infrastructure and software firm ConsenSys tells Magazine during an in-depth interview in Tel Aviv.

What happened was people were looking for a way to explain why these two people were bumped out of the project. And that was a convenient way to label it. But that wasnt the reason they were moved.

Lubins referring to Ethereums infamous Red Wedding in 2014 when the eight co-founders and the team gathered to incorporate Ethereum as a company.

The meeting descended into bickering and infighting over internal politics that saw a devastated CEO Charles Hoskinson pushed out of the team, along with underperforming co-founder Amir Chetrit.

I think its true that I and several people on the team like maybe everybody else believed that you need to draw businesses in, you needed economic, commercial validation in order to build better things, even open-source software, the 58-year-old says in his slow, measured tones.

But that wasnt the root of why I started ConsenSys or why two people were bumped off the project.

Red Wedding and Crypto Google

As documented in Camilla Russos history of Ethereum, The Infinite Machine, the co-founders had gathered in Zug, Switzerland on June 7, 2014, to sign a document transforming Ethereum into a for-profit company. But instead of signing the contract, tensions boiled over Hoskinsons management style and personality, Chetrits contribution to the project, Ethereums future direction and other internal political issues.

After much back and forth, the decisions were all left to the gangly 20-year-old math genius whod created the project in the first place. After some time alone on the terrace, he returned to say Hoskinson and Chetrit were out, and Ethereum would become a nonprofit foundation instead of a company.

Vitalik wrote an amazing white paper it was right place, right time, incredible vision and it attracted lots of people of disparate backgrounds, and we worked together well for chunks of time, Lubin says by way of context.

We had differences of opinion, at times, those differences of opinion boiled over famously… infamously. And there was a moment where two people were bumped out of leadership, and up to that point, we were having discussions about whether we were going to be purely nonprofit, or whether we were going to pursue a nonprofit track, put it under a foundation, and then the same group of people who worked so nicely together would build Crypto Google together.

And it became apparent to all of us that we probably werent going to build Crypto Google. But it was also clear to all of us that nobody was even close to being able to build Crypto Google and that were just building the foundation and the platform for a long time.

Lubin was already planning his own for-profit company to build out Ethereums application layer when the decision was made, and it spun into life not long afterward.

While other co-founders, such as Gavin Wood (Polkadot), contributed more to the early protocol itself, arguably none of them, apart from Buterin, has since contributed as much as Lubin to what Ethereum is today. While ConsenSys didnt turn into Crypto Google, its infrastructure and apps are as important to Ethereum now as Google is to the web.

ConsenSys wasnt formed to commercialize it. It was formed to continue the vision and the mission of the Ethereum platform, Lubin explains.

Related: The Vitalik I know Dmitry Buterin

Who is Joe Lubin?

Born in Toronto in 1964, Lubin studied electrical engineering and computer science at Princeton in the mid-1980s, where his roommate was another future crypto billionaire, Mike Novogratz of Galaxy Digital. Amazon founder Jeff Bezos was in the same faculty, though Lubin tells Magazine they never met. 

Lubin has had a surprisingly diverse career, working in AI, robotics and autonomous music creation for a number of different employers. He founded a hedge fund and was the vice president of private wealth management at Goldman Sachs, but nothing world-changing, according to Novogratz, as quoted in the Financial Times in 2021.

Joe was one of the brightest among us, a forward thinker, but by 45 hadnt done anything to stand out, Novogratz recalled. I dont think any of our gang would have guessed how things would turn out.

Related: Heres how Ethereums ZK-rollups can become interoperable

The combination of his near-front-row seat to the September 11 attacks on the World Trade Center and then the global financial crisis shook him to his core. He said at the ConsenSys Ethereal Summit in May 2017 that the events had made him feel as though we were living in a global society and economy that was figuratively, literally and morally bankrupt.

He believed a slow, cascading financial collapse was taking place, which made him receptive to the ideas in the Bitcoin white paper, which he read in 2011. The following year he moved to Jamaica with his girlfriend, who was trying to forge a career in dancehall music, and he became a music producer while investing in Bitcoin and waiting for the collapse.

During a trip home to Toronto in late 2013, he attended a Bitcoin meetup alongside another co-founder, Anthony Di Iorio, and encountered a kid named Vitalik Buterin, who was touting his just-written white paper for an improved version of Bitcoin called Ethereum. Lubin was blown away, and he became an official co-founder in early 2014.

Approaching 50, he was an odd fit with a bunch of anti-establishment 20-something-year-old coders, but his Jamaican music production background gave him just enough cachet with the team to get by. And, of course, Lubin and Di Iorio personally bankrolled around $500,000 to $800,000 of the funding necessary to get Ethereum off the ground.

Lubins experience also helped the team avoid potential pitfalls and roadblocks, and he insisted on early meetings with the United States Securities and Exchange Commission and hiring high-priced lawyers to minimize the extraordinary legal risks.

ConsenSys arises!

ConsenSys was founded in Switzerland in October 2014 for legal reasons, which subsequently led to a nasty ongoing court battle between employees and shareholders who claim they werent properly compensated when the assets were transferred to an American entity. 

Related: Account abstraction supercharges Ethereum wallets: Dummies guide

But it actually operated from a graffiti-covered warehouse in Bushwick, Brooklyn. The aim was to build out applications and infrastructure for Ethereum by investing in startups, incubating projects and consulting with firms like JPMorgan and BHP Billiton on how to incorporate this new technology. It spawned more than 50 businesses early on, including a poker site, a prediction market and a healthcare records firm. But by all accounts, its early years were pretty slapdash, with no real corporate structure.

MetaMask software developer Dan Finlay spoke about the early days on the Epicenter podcast.

ConsenSys was this wonderful, just kind of chaotic incubator at the early stages. I dont know, there must have been hundreds of different experiments getting validated and tried out there. And there was a really exciting energy, he says, adding that a lot of projects got built before Ethereum could support them:

Back then, it was very normal to just kind of build your application as if the blockchain was going to scale or did scale already.

In 2018, a Forbes investigation suggested that pretty much all of ConsenSys projects were in the red, and the company was burning $100 million a year on non-profitable projects, including an asteroid mining company.

Not long after, Lubin axed a bunch of underperforming projects, culled the 1,200-strong headcount and reset the company into ConsenSys 2.0 with a much more corporate and accountable culture.

Despite being worth $7 billion after its most recent $450-million fundraising round in 2022, ConsenSys let go of another 11% of its staff in January of this year. Lubin tells Magazine it was readying itself to survive bad conditions as macroeconomic and geopolitical storm clouds gathered.

We wanted to ensure that we had significant runway so that we can stay strong and build, he says, revealing it was eyeing a number of acquisitions that if were able to bring some on board that will add really valuable pieces.

Centralization vs. decentralization

Anyone whos listened to Lubin speak will know that hes genuinely committed to, and a proponent of, the benefits of decentralization.

So, is there tension between running a centralized company like ConsenSys that provides the crucial infrastructure to a decentralized blockchain? 

I dont think theres a tension, he says.

Its all about progressive decentralization. Theres nothing wrong with having an entity that is organized in one way that is trying to build something that is organized in a different way. 

Lubin explains that the products ConsenSys is building need to achieve product-market fit; otherwise, theyre kind of useless, and so bringing something forth, wholly and perfectly decentralized, is very difficult it may be impossible.

ConsenSys most crucial infrastructure is called Infura, which offers Ethereum nodes as a service, making it easier for developers and users to connect to the network. Its basically an intermediary service between decentralized apps (DApps) and the blockchain that projects rely on to stay up and running. 

Infura probably works a little too well, as much of the Ethereum ecosystem is dependent on it. That means if Infura goes down, so too do half the networks projects, including Uniswap, Compound, MetaMask and Aave. 

Its also a weak point for censorship and was criticized by some for complying with the Tornado Cash sanctions.

Decentralizing Infura

ConsenSys has been working on a plan for some time now to decentralize Infura. This will take the form of a marketplace of competing infrastructure providers that offer similar services, of which Infura itself would be one.

Lubin believes its extremely important to make this happen.

Ive been a proponent of decentralizing Infura since the start but more actively since five years ago, he says.

What weve run into is that our ecosystem keeps having these wicked growth spurts, he continues, adding, It was a sub-priority to keep things going rather than to start a parallel project to parallelize and decentralize and thats going pretty well right now.

The protocol will either be called XFura or the Decentralized Infura Network Protocol.

The idea is that we believe now that we can take a high-performance product and federate the protocol, initially do a lot of hand-holding with other providers and then we situate Infura on the protocol, he says.

Its pretty close. There are a bunch of very sophisticated partners that are working closely with EG [Galano], the lead of the project. I cant give you a date.

Although Infura researcher Patrick McCorry went out of his way in an interview with Cointelegraph to say censorship resistance was not the point of decentralizing Infura, thats certainly one of the benefits.

A decentralized network would enable DApps to pick and choose providers, allowing them potentially to get around censored protocols or addresses like Tornado Cash.

I like the idea that theres optionality, says Lubin, carefully noting that different providers would operate in different nation-states and jurisdictions.

I think that works well if theres a lot of them and if theres real choice, so you can always go to an uncensored service and be sure that theyve got enough validating power so that youre gonna get your transaction processed fairly rapidly.

However, he adds its equally possible that future aspects of the protocol are obfuscated so that no one actually knows whats in a packet or a transaction. He says he knows of people already working on protocol enhancements who will make this happen, and the explosion of layer 2s and layer 3s makes it even more likely.

If theyre already glommed in and impossible to read, then its hard to imagine that regulators will either care that much or have the ability to do anything, he says.

Im sure [there is] lots of criminal activity that flows through AWS and Azure and every mail server everywhere. So, theres a level of infrastructure that you just cant halt because its doing mostly useful activity.

Decentralizing MetaMask

The other core bit of infrastructure provided by ConsenSys that underpins the entire Ethereum ecosystem is its ubiquitous browser wallet MetaMask. Its also being sort of decentralized by crowdsourcing the development of new features and the addition of new blockchains.

Called MetaMask Snaps, itll turn the browser wallet into a permissionless platform for others to build on one proof-of-concept Snap enables MetaMask to act as a Bitcoin wallet.

The MetaMask Grants DAO [decentralized autonomous organization] will get increasingly decentralized and will incentivize people to build cool things, to start companies that permissionlessly innovate that we have nothing to do with, says Lubin.

He explains that over the years, MetaMask was approached by numerous blockchains looking for support, but after theyd crunched the numbers, there wasnt enough activity to justify splitting its focus from Ethereum. Snaps, though, will open the doors to everyone.

Crypto regulations

Lubin is unconcerned about the possibility of Ethereum being declared a security, saying, Its as likely and would have the same impact as if Uber was made illegal.

There would be tremendous outcry from not just the crypto community but different politicians, certain regulators.

Theres a sense of frustration from Lubin that this ground even needs to be covered again, saying that ConsenSys has been through all of this in discussions with the SEC and Commodity Futures Trading Commission over many years.

We went in there on a voluntary basis five years ago or something like that, when theyre just trying to wrap their heads around what tokens were, he says.

They thought back then that everything was a security; we think [we] helped them significantly understand that lots of tokens are not securities and then they went away, and Gary and his team now think almost everythings a security.

But he believes that the renewed focus on regulations in the wake of the FTX and stablecoin collapses will ultimately be a good thing.

We now have the worlds attention, and smart people who care will prevail because it just makes sense, he says.

And sure, there will be people with agendas who dont want to see it that way. Maybe the banking lobby will help them not see it that way. But in terms of finally paying a lot of attention to trying to regulate an important space, I do believe that clear heads will think through this and that people will start to understand the benefits of decentralization and make good regulation for CeFi [centralized finance] and no regulation for tech, crypto.

Crisis equals opportunity

In fact, Lubin is remarkably philosophical and sanguine about all the regulatory, game theory and technological challenges facing Ethereum. For example, he concedes centralization of staking on platforms like Lido could become a concern, but because progressive decentralization is baked into the nature of the ecosystem, it wont be a problem for long.

Things dont start very decentralized, he says. These are still pretty new innovations, and our ecosystem is pretty exacting. If you want to be in the Ethereum ecosystem proper, then youre not going to want to try to dominate something, youre not going to want to operate centralized for very long. The ecosystem will identify that as problematic and come up with solutions for it, which is great.

In Lubins world view, problems are just short-term issues you deal with as part of the process of making the project better.

I see things as processes. I hope we run into lots of complications in the near term, and all the way through, because every complication just points out how we can build a more robust platform and a more decentralized platform. Yes, hopefully, well run into lots of difficult problems.

Lots of smart people have good solutions that are being built.

Also read: Ethereum is eating the world You only need one internet

The future of Ethereum

The big question is, where does he see Ethereum heading? Does he believe the worlds entire financial system could end up running on Ethereum using ZK-Rollups?

Lubin says the founding conception of Ethereum was that it would become a world computer, and he suggests that was still in the cards.

I think several of us thought early on that we were building the Star Trek computer essentially, he says, explaining it handled pretty much anything and everything.

And so, I think that decentralized protocols will be the underlying trust foundation for lots of heterogeneous architectures. So, its possible that Ethereum will scale sufficiently so that we can have one trust foundation and then build lots of layer 2s and layer 3s and up.

There have been many computer revolutions for the last 200 and something years and this is another one.

So, the answers yes. And the answer will take time to unfold. It would be impossible to rearchitect the global economy or global financial system in a short period of time.

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Does AI need blockchain and crypto to incentivise the humans in the loop — or to help keep the robots in line?

Text generator ChatGPT is the fastest-growing consumer app ever, and its still growing rapidly.

But the dirty secret of AI is that humans are still needed to create, label and structure training data and training data is very expensive. The dark side of this is that an exponential feedback loop is being created where AI is a surveillance technology. And so, managing the humans in the AI loop is crucial.

Some experts believe that when (potentially) robots take over the world, theyd better be controlled by decentralized networks. And humans must be incentivized to prepare the data sets. Blockchain and tokens can help but can blockchain save humanity from AI?

ChatGPT is just regurgitated data

ChatGPT is a big deal according to famed AI researcher Ben Goertzel, given that the ChatGPT thing caused the Google founders to show up at the office for the first time in years! he laughs. Goertzel is the founder of blockchain-based AI marketplace SingularityNET and an outspoken proponent of artificial general intelligence (AGI) computers thinking for themselves. That means he sees where ChatGPT falls short more clearly than most.

Whats interesting about ChatGPT and other neuro models is that they achieve a certain amount of generality without having much ability to generalize. They achieve a general scope of ability relative to an individual human by having so much training data.

Read also: How to prevent AI from annihilating humanity using blockchain

In other words, ChatGPT is really one function achieved by the brute force of having so much data. This is not the way humans achieve breadth by iterative acts of creative generalization, he says, adding, Its a hack; its a beautiful hack; its very cool. I think it is a big leap forward. 

Hes not discounting where that hack can take us either. I wont be shocked if GPT-7 can do 80% of human jobs, he says. Thats big but it doesnt mean they can be human-level thinking machines. But they can do a majority of human-level jobs. 

Logic predicated on experience remains harder for AI than scraping the internet. Predicate logic means that humans know how to open bottle caps, for example, but AIs need trillions of data to learn that simple task. And good large language models (LLMs) can still turn language into presumptive logic, including paraconsistent logic, or self-contradictory logic, explains Goertzel.

If you feed them the whole web, almost anything you ask them is covered somewhere on the web.

Goertzel notes that means part of Magazines questioning is redundant. 

Ive been asked the same questions about ChatGPT 10 times in the last three weeks, so we couldve just asked ChatGPT what I think about ChatGPT. Neuromodels can generate everything I said in the last two months, I dont even need to be saying it.

Goertzel is important in AI thinking because he specializes in AGI. He says that he and 90% of his AGI colleagues think LLMs like ChatGPT are partly a distraction from this goal. But he adds LLMs can also contribute to and accelerate the work on all kinds of innovation that could play a role in AGIs. For example, LLMs will expedite the advancement of coding. LLMs can even help ordinary people with no coding abilities to build a phone or web app. That means non-tech founders can use LLMs to build tech startups. AI should democratize the creation of software technology and then a little bit down the road hardware technology.

Goertzel founded SingularityNET as an attempt to use blockchain and open-source technology to distribute access to the tech that controls AGIs to everyone, rather than let it stay in the hands of monopolies. Goertzel notes that ChatGPT and other text apps deploy publicly viewable open-source algorithms. And so, the security infrastructure for their data sets and how users participate in this tech revolution is now at a crucial juncture.

For that matter, so is AI development more widely. In March, OpenAI co-founder Elon Musk and more than 1,000 other tech leaders called for a halt to the development of AI or rolling out systems more powerful than GPT-4. Their open letter warned of profound risks to society and humanity. The letter argued the pause would provide time to implement shared safety protocols for AI systems. If such a pause cannot be enacted quickly, governments should step in and institute a moratorium, they posited.

Goertzel is more of an optimist about the techs potential to improve our lives rather than destroy them, but hes been working on this stuff since the 1970s.

Reputation systems needed

Humayun Sheikh was a founding investor in the famed AI research lab DeepMind where he supported commercialization for early-stage AI and deep neural network technology. Currently, he leads Fetch.ai as CEO and founder. Its a startup developing an autonomous future with deep tech.

He argues that the intersection between blockchain and AI is economically driven, as the funding required to train AI models is prohibitively expensive except for very large organizations. The entire premise behind crypto is the democratization of technology and access to finance. Rather than having one monopolized entity have the entire ownership of a major AI model, we envision the ownership to be divided among the people who contributed to its development.

One way we can absolutely encourage the people to stay in the loop is to involve them in the development of AI from the start, which is why we believe in decentralizing AI technology. Whether its people training AI from the start or having them test and validate AI systems, ensuring regular people can take ownership of the AI model is a strong way to keep humans in the loop. And we want to do this while keeping this democratization grounded in proper incentivization mechanisms.

One approach to this is via emerging reputation systems and decentralized social networks. For example, SingularityNet spin-off Rejuve is tokenizing and crowdsourcing bio data submissions from individuals in the hope of using AI to analyze and cross-match this with animal and insect data in the hope of discovering which parts of the genome can make us live longer. Its an AI-driven, Web3-based longevity economy. Open science should be paid is the thought and data depositors should be rewarded for their contributions.

The development of AI is dependent on human training. Reputation systems can deliver quality assurance for the data, and decentralized social networks can ensure that a diverse slate of thoughts and views are included in the development process. Acceleration of AI adoption will bring forth the challenge of developing un-opinionated AI tech.

Blockchain-based AI governance can also help, argues Sheikh, who says it ensures transparency and decentralized decision-making via an indisputable record of the data collected and decisions made that can be seen by everyone. But blockchain technology is only one piece of the puzzle. Rules and standards, as we see in DAOs, are always going to be needed for trustworthy governance, he says. 

Goertzel notes that you cant buy and sell someone elses reputation, and tokens have network effects. Blockchain-based reputation systems for AI can ensure consumers can tell the difference between AI fakes and real people but also ensure transparency so that AI model builders can be held accountable for their AI constructions. In this view there needs to be some standard for tokenized measurement of reputation adopted across the blockchain community and then the mainstream tech ecosystem. 

And in turn, reputation systems can expedite AI innovations. This is not the path to quick money but it is part of the path for blockchain to dominate the global economy. Theres a bit of a tragedy of the commons with blockchains in the reputation space. Everyone will benefit from a shared reputation system.

Blockchains for data set management

Data combined with AI is good for many things it can diagnose lung cancer but governments around the world are very concerned with how to govern data. 

The key issue is who owns the data sets. The distinctions between open and closed sources are blurred, and their interactions have become very subtle. AI algorithms are usually open-source, but the parameters of the data sets and the data sets themselves are usually proprietary and closed, including for ChatGPT.

The public doesnt know what data was used to train ChatGPT-4, so even though the algorithms are public, the AI cant be replicated. Various people have theorized it was trained using data sets including Google and Twitter meanwhile, Google denied it trained its own AI called Bard with data and conversations with ChatGPT, further muddying the waters of who owns what and how.

Famed AI VC Kai-Fu Lee often says open-source AI is the greatest human collaboration in history, and AI research papers usually contain their data sets for reproducibility, or for others to copy. But despite Lees statements, data, when attached to academic research, is often mislabelled and hard to follow in the most incomprehensible, difficult and annoying way, says Goertzel. Even open data sets, such as for academic papers, can be unstructured, mislabelled, unhelpful and generally hard to replicate. 

So, there is clearly a sweet spot in data pre-processing in AI meets blockchain. Theres an opportunity for crypto firms and DAOs to create the tools for the decentralized infrastructure for cleaning up training data sets. Open source code is one thing, but protection of the data is crucial.

You need ways to access live AI models, but in the end, someone has to pay for the computer running the process, notes Goertzel. This could mean making users pay for AI access via a subscription model, he says, but tokenomics are a natural fit. So, why not incentivize good data sets for further research? Data analysis pipelines for things like genomics data could be built by crypto firms. LLMs could do this stuff well already, but most of these pre-processing steps could be done better by decentralized computers, says Goertzel, but its a lot of work to build it.

Human-AI collaboration: Oceans of data needing responsible stewards

One practical way to think about AI-human collaboration then is the idea of computer-aided design (CAD), says Trent McConaghy, the Canadian founder of Ocean Protocol. Engineers have benefited from AI-powered CAD since the 1980s. Its an important framing: Its humans working in the loop with computers to accomplish goals while leveraging the strengths of both, he says. 

McConaughy started working in AI in the 1990s for the Canadian government and spent 15 years building AI-powered CAD tools for circuit design. He wrote one of the very first serious articles about blockchains for AI in 2016.

CAD gives us a practical framing for AI-human collaboration. But these AI-powered CAD tools still need data. 

McConaghy founded Ocean Protocol in 2017 to address the issue. Ocean Protocol is a public utility network to securely share AI data while preserving privacy. Its an AI play using blockchain, and its about democratizing data for the planet. Impressively, its the sixth-most active crypto project on GitHub.

Blockchain has a lot to say about getting data into the hands of the average person. Like Goertzel, McConaghy believes that distributed computers can make an important contribution to protecting AI from unsavory uses. IPFS, Filecoin, Ocean Protocol and other decentralized data controllers have led this mission for the past few years. 

Data farming at Ocean already incentivizes people to curate data assets that they think will have a high volume of activity for AI development. Examples include enterprise data marketplace Acentrik, AI assistants for organizations outfit Algovera, and decentralized data science competitions protocol Desights. The problem for AI people is getting more data and the provenance of that data, McConaghy says.

Blockchain can help AIs with the secure sharing of data, (the raw training data, the models and the raw training predictions) with immutability, provenance, custody, censorship resistance and privacy.

McConaghy sees this as a huge plus for integrating the two. He grew up playing ice hockey and driving tractors and hacking computers in Saskatchewan, but he always remained an AI nerd by profession. AI converts data to value, but humans must decide which data assets might be good.

Ocean Protocol has taken this even further to build the foundations of an AI data economy. It tokenizes data assets so that people can publish valuable data as NFTs and tokens, hold them in wallets, put them for sale on data DEXs and even manage them in data DAOs. Tokenizing data unlocks the data economy by leveraging DeFi tooling. But will these efforts go mainstream before AI does?

Decentralized computers please for autonomous robots

AGI is when computers start thinking for themselves and building better versions of their own source code. Human-level AGI can read its own source code and existing math and computer science and can make copies of itself to experiment with and then build the next level ASI artificial super intelligence, Goertzel explains.

In Goertzels mind, its a lot better for this technology to be directed by everyone than a single player like a tech company or country.

If you deploy an AGI system across millions across the world, and someone cant put a gun to your head and say, Give me the system blockchain solves that problem, right? Blockchain solves that problem better than it solves the problem of money, Goertzel argues. 

Goertzel specifically defines AGI as software or hardware with a robust capability to generalize beyond its programming and its training; its able to create significant creative leaps beyond the info its been given. 

By my estimates, we are now three to eight years from human-level AGI, then a few years to super human AGI. We are living in interesting times.

In the medium term, in the next three to fvie to eight years, we will see a breakthrough in strongly data-bound AIs, to a human level, then after that breakthrough, then what happens?

Many agree that whats coming next in AI development may be one of the important use cases for blockchain governance. AGI will cause world leaders to meet. AGI needs to be open-source running on millions of machines scattered across the planet, says Goertzel. So, no country can take control of it and no company can take control of it.

The crypto angle for AI is a little bit different, he explains. AI and later AGI needs governance mechanisms for decision-making beyond its training data and programming. Reputational integrity for data sets is crucially important. For this reason, he argues that reputation cant be fungible for AI data sets. When an AI goes rogue, who you gonna call?

Decentralized technologies cant be the full solution

De Kai, professor of computer science and engineering at HKUST and distinguished research scholar at Berkeleys International Computer Science Institute, agrees the key bottleneck for democratizing AI is the enormous computational resources running AIs. But he is not sure decentralized technologies can be the full solution. We will never get to the Terminator stage if we dont tackle the immediate problems now. There are existential problems of AI subconsciously tearing society apart. We need to tackle human biases and the issues of biases of AI.

He says that decentralized technologies are still highly experimental, while these Web2 problems must be tackled first because they are causing us issues here and now.

AIs make decisions about things you dont see everyday. Search engines, YouTube, TikTok they decide the things you dont see, creating more polarized views and leading to untenable domestic and geopolitical splintering.

Transparency of the data sets is crucial, says Kai, but if the data set is the entire internet, then that data set is effectively open-source. Google is trained 100% on the internet, LLMs will rapidly supplant search engine algorithms soon, he argues. LLMs can be trained near-100% off the internet, he argues.

So, Kai disputes the idea that blockchain will solve the problem of unruly AIs.

The flipside of that [decentralized computing for AI] is the argument that it leads to Skynet Hollywood scenarios, and they can make AI more autonomous by themselves. Decentralization of that computing power is not the solution, as you can unintentionally end up with legions of AIs.

What is the best solution then? Decentralization is useful to a point, but its not a magic bullet. Web2 has created unintended consequences. We need to learn from that logic and understand blockchain is one foundational tech that offers a lot of advantages but, again, it is not a magic bullet. 

But of course, not all data is freely available on the internet: scientific studies, medical data, personal data harvested by apps and lots of other privately held data can be used to train AI.

One of the most useful tools, he says, is creating large-scale simulations to see how this may all play out. The question, he says, is deciding what we decentralize and what do we not decentralize.

Conclusion: Better data pre-processing using blockchains

So, what is the sweet spot for blockchain + AI? Blockchain being seen and used as a critical piece of mainstream AI development would be that proverbial sweet spot, says Sheikh.

Centralizing the location of all the data of an AI model view is not optimal for AI development in our view. Instead, by enabling the humans who trained the model to have ownership of their own data and get incentivized based on the impact they made on the accuracy of the insights will further accelerate the adoption of AI. AI models from such a platform can be more scalable and sustainable with improved security and privacy.

In the 70s80s, one of the biggest mistakes was to assume that what we were doing with AI was correct. We have to test our assumptions again now, worries Kai.

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The EOS community took on the centralized company behind the blockchain — and won. Now comes the fight to get back into the top ten.

Whatever happened to EOS? After the biggest ICO in history, the former top 10 token now languishes around number 53. But the community has since taken back control and is determined to restore the smart contract platform to its former glory.

If youre a newcomer to the crypto industry, you may not even be familiar with The Biggest ICO in History, which launched EOS.

EOS began in June 2018 with great fanfare, an active community and strong tech. Led by Dan Larimer, of Steemit and Bitshares fame, there was a palpable area of excitement with the introduction of new tech, including the delegated proof-of-stake (DPoS) system and EOS Worker Proposals to fund projects that grew the ecosystem.

Block.one, the company behind EOS, raised an astonishing massive $4.1 billion over 12 months.

And then nothing much happened. The community waited and waited for the promises to be fulfilled.

I was very disappointed when little or none of those ideas came to fruition, Douglas Horn, CEO of Goodblock, tells Magazine. To be honest, I would say Block.one did a deceitful ICO, whether that was planned from the beginning or not. Thats my personal assessment.

The exact reasons EOS didnt go anywhere are disputed, but development dried up, and the community often felt left out. Some say they volunteered to take on the development of new projects but werent supported or even told to halt work by Block.one, as their efforts encroached on developments of its own. In other cases, micro-grants were given on the proviso that no other funding could be used. Typically, those micro-grants were not enough and those mini-projects also ran out of runway. 

Also read: Journeys in Blockchain William Quigley of WAX

There are some success stories, with WAX and Alien Worlds the exceptions that prove the rule, but otherwise, it was a moribund ecosystem. In the interim, Block.one came to an agreement with the SEC to pay a fine of $24 million in order to avert any suspicion that the token was a security (an agreement that has subsequently been overturned and which may cause significant new problems for Block.one). 

Two white elephants

Despite the many promises, Block.one basically stopped developing the base tech, then termed EOSIO, and diverted its focus to two vanity projects: the $150 million Voice decentralized social media platform that has since transformed into an unimpressive NFT marketplace; and Bullish, an exchange that ostensibly used the ICO money to provide liquidity. Trade volumes are around $200,000 a day for its BTC/USDC pair. 

(Block.one, former chief technology officer Larimer and CEO Brendan Blumer were contacted for comment.)

So in 2021, the community started fighting back with the formation of the EOS Network Foundation. Enter Yves La Rose, CEO of EOS Nation, an original block producer, into the fray. Block producers in EOS provide the tech to validate nodes, with the top 21 receiving a fee for maintaining the network.

La Rose is not without his critics, with some of those in the original Block.one brigade calling him a bully. On the other side, the newly energized EOS community sees him as a bit of a hero. And since history is written by the victors, it looks as though La Rose is going to emerge as the latter.

Who is Yves La Rose?

La Rose is a self-confessed nerd who started tinkering with his own computers when he was only six years old. Years later, he read the Bitcoin white paper and became a miner. But this didnt last very long. He could see there was very little scope for lone miners, and he didnt want to join a mining pool.

By 2016/2017, he could see a resurgence that offered more choices. ICOs were starting to become popular and CryptoKitties famously log-jammed the Ethereum blockchain. La Rose also became aware of Larimer and was seriously impressed with his crypto record and the new tech he was building for EOS. 

I chose EOS early on, says La Rose. And I made the leap into blockchain full time, forming EOS Nation back in January 2018 prior to the launch of the mainnet. And we waited. 

He was not the only block producer to find out that while ICO promises are easy, execution is hard.

None of those ideas came to fruition

Horn, previously the architect of Telos, is now the CEO of Goodblock, which provides foundational Web3 tools. Like La Rose, he was attracted by the potential of the tech offered by EOS by DPoS, the governance systems and the planned worker proposals. He, too, grew disillusioned and co-founded the Telos Blockchain in direct response to the absence of any perceptible activity by Block.one on the EOSIO code. 

In my personal opinion, I think the whole Block.one fiasco was an absolute fraud, Horn says. 

Of course, any lawyers reading this should take this as an exaggerated expression of opinion, rather than a criminal accusation, but it does show the depth of frustration that led him to draft the Telos white paper. 

Instead of waiting for them to fulfill their promises, I started to build and I was also very outspoken in my views, says Horn. He pushed for a roadmap from Block.one and when it was not forthcoming, he built his own for Telos.

Horn is renowned for his outspoken views but they are echoed across the community. However, some players prefer not to be named for fear of attracting blowback.

La Rose sees the problem coming from the fact that the ICO was just too damn big and Block.one promised too much.

There were a lot of expectations in the EOS community and I dont think Block.one had the skills to actually fill those shoes. Then we suffered one failed promise after the other. By the second anniversary, it was obvious they were not going to deliver anything on the code or for the community, says La Rose.

It was then that the ecosystem started hemorrhaging developers and community members. We tried to fill the gaps but without funding it was impossible. Other chains were popping up all the time and they secured funding and, more importantly, they set up foundations.

Rhett Oudkerk Pool, another original block producer with EOS Amsterdam and subsequently Europechain and Zaisan, also sees the massive success of the ICO as part of its downfall. 

They claimed they were tied up in legal wrangles with the SEC, and that sort of made sense. They said they were tied up in investigations and, as a result could not do anything. But then, if someone in the community wanted to create a worker proposal system, Block.one said they were already working on it. Theyd say dont worry, well do it. So the community would stop but Block.one never did anything and so they doubly killed initiative, says Oudkerk Pool.

La Rose resigned from EOS Nation to form the EOS Network Foundation (ENF) in August 2021. From the get-go, La Rose knew that all layer ones need a funded Foundation which would work to nurture the ecosystem, foster new development and oversee continued governance. Without Block.one at the helm, the ecosystem needed direction and leadership.

EOS community steps up

Daniel Keyes took over as CEO of EOS Nation after La Rose left, and hes also CEO of the community crowdfunding platform Pomelo, which was built after the velvet EOS revolution and helps fund projects on the network.

We had the community but no funding. We had a lot of broken hearts, and the community just left because they had to survive, he says, looking back.

Yves left EOS Nation to try and save the network. It was a lofty goal at that stage and there were several failed attempts, says Keyes.

Aaron Cox, CEO of Greymass, another EOS block producer, says, There was development happening in isolation but one of the biggest problems was this behemoth in the corner that just stamped over everyones efforts. We needed to stick together.

Decentralization takes on centralization

La Roses road to resignation took some time. He was originally drawn to the EOS white paper and, in particular, the worker proposal system it outlined but which never launched. La Rose says he tried a number of times to launch it and would get the backing of the community before Block.one essentially killed the proposals off.

There were veiled threats from Block.one, says La Rose. 

The second EOS conference was held in Rio in September 2020 and was a very grassroots affair. Again, La Rose and the other block producers worked hard to create a worker proposal system (WPS) and gained the backing of some 40-plus signatories. This was also canceled by Block.one.

At this stage, we knew we could not work with Block.one again, says La Rose. Everything that had been promised could just be words, but GitHub did not lie.

Marshaling the community against Block.one was difficult because of the intrinsic nature of decentralization. Momentum would be gathered but then lost as people drifted away after unsuccessful attempts to wrestle back control.

In June 2021, La Rose stepped down from EOS Nation. Hed given the past 40-odd months to EOS and he didnt want to bow out. He also knew EOS needed a foundation, and he could not be both a block producer and a stakeholder in a foundation.

He began planning and talking to the other block producers about what they wanted and what the newly formed ENF would look like.

At the end of the day this part was easy. Everyone knew something had to happen. Making it happen was a lot harder.

Oudkerk Pool remembers with happiness how La Rose persuaded 15 out of the 21 block producers to join together to stop the staking contract basically diverting revenue from Block.one back to the community. This was a watershed moment as it stopped Block.one from receiving funding from the community and it was only possible to change the contract with the agreement of 15 block producers.

First you get the money, then you get the power

The initial idea was that we could use this money to work on the software. And La Rose used that money to reward struggling block producers who had been working away with no funds. He asked for blue papers to outline what would happen next and we were given the role of writing the Core+ Blue Paper, an overview document to replace the white paper but there were seven documents altogether that covered the wallets, the yield etc, says Oudkerk Pool. 

Our own role was to do a commercial outreach and we took an EOS roadshow all over Europe and Dubai, says Oudkerk Pool.

Other coalitions were forming, in particular over the software. Horn was instrumental here. 

I knew we needed a roadmap and a plan. I stepped up to the plate and soon we had four block producers looking at the code the Antelope Coalition was formed to replace the now stagnant EOSIO platform. We were now in the driving seat, says Horn. We had our Jerry Maguire moment where we (Telos) said we were in and Yves said yes.

EOS, block producer UX, WAX and Telos joined forces to run the Antelope Coalition, a new group to build and maintain the EOS source code on GitHub. The team renamed EOSIO to Antelope at this stage, forking the code permanently. A number of key technologies were identified and work began on Inter Blockchain Communication (IBC) and implementation of the Ethereum Virtual Machine (EVM), which went live mid-April.

Wax and Upland fly the flag for EOS

Not everything on EOS had stalled and a couple of well-known projects successfully built their own ecosystems.

Lukas Sliwka, chief technology officer of WAX, spent the second half of 2018 building his blockchain team, hiring the right people and then running different POCs before essentially choosing EOSIO and launching the WAX blockchain in 2019. WAX, or WorldWide Asset eXchange, is a gaming and NFT platform. 

According to Sliwka, WAX is one of the most successful blockchains in the sector and, during the bull run in 2020/2021, averaged between 25 and 28 million transactions per day.

Sliwka says the project deliberately distanced itself from EOS. WAX is probably one of the best-kept secrets in the blockchain world as a result, he says. 

We basically took on the maintenance and protocol development ourselves that is, until the Antelope Coalition was formed, he says.

Also read: William Shatner tokenizes his favorite memories on the WAX blockchain

We already had our own blockchain protocol team, so we could hit the ground running. For example, as good as the Antelope stack is, there were issues on scaling which is a key learning point from WAX, he says. 

We saw our own blockchain grow by 50,000 to 70,000 accounts a day and that takes some serious scaling resources. I put my hand up from the start on scaling and also inter blockchain connection.

Upland.me, a metaverse property game following along the lines of the board game Monopoly, was also sitting on the sidelines, building its community. It actually did receive some of the funding from Block.one, in the form of the Finlab EOS VC Fund, which amounted to $18 million and allowed them to build without having to wait.

Co-founder Dirk Leuth says the coalition was exciting but there were teething troubles. 

EOS independence day

La Rose sees one benefit to the delays of actually kick-starting the blockchain that it allowed the ENF to learn from the mistakes of other layer ones, which came later. It also allowed him to try and work with EOS founder Larimer which ultimately failed.

A spokesperson for ENF said although Larimer continued to be an active member of the community through March 2022, his last contribution was when he shipped EOSIO/Mandel 3.0 at the end of January 2022.

There is some chat that Larimer was pushed out, but the mainstream conversations seem to indicate that the founder was still following the Block.one line, which was inconsistent with the new ENF policies.

As La Rose says: Fool me once thats on you, fool me twice and thats on me. We opted for EOS independence. With the Antelope Coalition, we rebranded the core code stack and we now maintain, grow and develop it. We hard-forked in September 2022 and that was the final nail in the coffin for Block.one.

Thats what we call EOS independence.

A key component in the new EOS ecosystem is that there are formal, well-oiled mechanisms on how to access funding either through Pomelo or the direct grant framework from ENF, which can reach up to $200,000. The EVM was launched in mid-April with a focus on gaming. A sizable tranche of funding a $20 million fund is allocated to this sector out of a total of $65 million.

ENV (V stands for Ventures) is the new $100 million-plus funding vehicle also set up by La Rose. It is a for-equity venture which is owned and operated by the ENF DAO.

No one denies there were many mistakes along the way. For Horn, it was the delays, which means theyre only getting up to full speed now. 

Keyes is in agreement. We are in catchup mode now. But were in a good position now to attract Web3 builders out there.

The future of EOS

Cox is also optimistic. I think the presence of our independent consensus mechanisms is the best outcome for our family of blockchains. We have this vibrant ecosystem of chains that exist today and there will be new chains dreamt up next year. We have momentum now.

Sliwka says hes also excited about the possibilities. What gets me excited is the fact that we, as a coalition, are going to solve these problems so we can all benefit. That is what Yves has done he transformed the ecosystem into something that was originally promised.

When asked about what was the most important element in the EOS revival tech, funding or community, the community gets the biggest vote from the interviewees. Although Cox reasonably points out that the ecosystem really needs all three to be a success.

Yves la Rose has really stepped up in a David versus Goliath battle. At times he has been hampered by the vision of a truly decentralized blockchain, at other times, that has been the strength. But he pays tribute to everyone else involved.

I may be the guy on camera for the revival but without the hundreds of people working daily on this project, it would not have happened. Its a humbling experience to be part of this movement, he says.

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Ethereum’s ZK rollups are engaged in a cutthroat competition. But they’ll need to join forces for Ethereum to win.

The past few weeks have seen a wave of zero-knowledge proof project launches, including Polygons zkEVM and Matter Labs zkSync Era on mainnet, and the Linea zkEVM from ConsenSys on testnet.

They join StarkWares long-running StarkEx solution and its decentralized cousin StarkNet along with a variety of other projects in development from Polygon (Miden, Zero, etc.) and Scroll.

They all promise faster and cheaper transactions to scale Ethereum using zero-knowledge proofs.

But is the brutal competition between ZK-rollups a zero-sum game where there can be only one winner? Or are we looking at a future in which lots of different rollups are able to work in harmony and interoperably?

Anthony Rose, head of engineering for zkSync, thinks the latter future is much more likely and predicts that one day, no one will think about which ZK-rollup they are on because itll all just be infrastructure. 

I think that if we dont get to that world, then weve probably failed, he says. Its the same way as somebody using Snapchat or Facebook doesnt really have to know about TCP/IP or HTTP its just the plumbing of the way the internet works.

But how do we move from a bunch of competing sovereign rollups to an ecosystem of ZK solutions that are interoperable and composable? 

People are already starting to think about this question, and all of the ZK projects Magazine spoke to have plans to make their projects interoperable with at least some other rollups although the extent to which that can happen likely depends on the development of standards and protocols.

Also read: Attack of the zkEVMs! Cryptos 10x moment

Zero knowledge about ZK-rollups?

If youre unfamiliar with the term zero-knowledge proofs which StarkWare insists should be called validity proofs theyre a way to scale Ethereum using cryptography. Rollups take the computation for tens of thousands of transactions off the main blockchain and write a tiny cryptographic proof back to Ethereum that proves the computation was carried out correctly.

Every proof we generate covers roughly 20,000 transactions and fits inside a single block of Ethereum, explains StarkWare co-founder Eli Ben-Sasson.

Despite this increase in transactions per block, zkSyncs Rose doesnt think Ethereum can come close to scaling up to become the base layer for everything via a single rollup.

A ZK-rollup on its own will not scale to the world that were talking about, Rose says. If we think that applications with some interactions on the blockchain are providing value to hundreds of millions of people, the scalability problem is still there to be solved.

Scaling is a little like internet bandwidth, in that the more you get, the more you realize you need. Back in 2017, Ethereum planned to scale using Eth2 sharding. This roadmap was then ripped up after ZK-rollups emerged in 2018 and promised vastly greater scaling, but only if Ethereum upgraded the blockchain with a different form of sharding (proto danksharding and then danksharding) to enable the ZK-rollups to achieve higher throughput.

Even then, Rose says its likely rollups will need to work in collaboration. This is a big active area of research for us, Rose says of interoperability. As the systems mature as well I think, naturally, this is kind of the pattern that these systems suggest.

Ethereum scaling is some way off

Its the early days yet for scaling, however. Although various solutions claim they can theoretically hit tens of thousands of transactions per second (or even talk about unlimited scaling), in practice, theyre hamstrung by data availability on Ethereum.

At present, between them, the various Ethereum scaling solutions and Ethereum are running at about 25 transactions per second (TPS). Ethereum itself has performed an average of about 12 TPS over the past month, Arbitrum One was at 7.2 TPS, Optimism at 2.65 TPS and zkSync at 1.6 TPS, according to ETHTPS.info. 

These numbers move around a bit and are low mostly due to demand rather than capacity. StarkEx is not covered, but StarkWare tells Magazine it averaged 5 TPS over the past month. 

Despite supply outweighing demand so far, interoperability between rollups would already be helpful to ensure that users dont get stuck in walled gardens. Optimistic Rollup users, for example, have to wait a week to withdraw funds, which rather limits interoperability.

ZK-rollups dont have that limitation and can allow instant withdrawals (but dont).

Also read: ZK-rollups are the endgame for scaling blockchains: Polygon Miden founder

Interoperable ZK-rollups are possible, but is it probable?

Bobbin Threadbare, founder of Polygon Miden, says interoperability between ZK-rollups is certainly technically possible, but whether it will happen in practice is a different question.

He explains that withdrawals arent instant yet because its not financially viable to put proofs on Ethereum that frequently, so transactions are fired off roughly every 10 or 20 minutes. As demand and throughput go up, this delay will become quicker and quicker.

And in that case, you get closer, closer and closer to this instant kind of movement between different places, he says. 

The second thing is that different rollups will have to have some kind of incentives to say, Okay, lets figure out how we can seamlessly move things from this to that. 

Threadbare adds, Very fast interoperability between ZK-rollups is technically possible, but a) People need to agree on standards, and b) They need to actually implement these standards in their systems.

And I think thats a much, much more complicated thing to do.

Interoperability is not composability

Theres a difference between interoperability and composability although people often use them interchangeably.

Interoperability is easier and basically involves being able to move funds from one layer-2 (L2) solution to another. By this definition, at least all of the rollups which share an L1 today already are interoperable! notes Optimism co-founder Ben Jones. 

Arbitrum’s Patrick McCorry also says that for basic interoperability, you can already send an asset from one rollup to another via Ethereum its just slow.

Or you could have some off-chain solution, maybe like Hop protocol, where theres someone in the middle who you give them the assets from StarkWare and then you take the assets to Scroll, and they provide some way to synchronize. So, theres ways to do that, he says.

Hop Protocol currently allows users to send funds between Ethereum, Polygon, Gnosis, Optimism and Arbitrum, though ZK-rollups arent currently supported. Connext offers a similar service, including BNB. A cross-chain DEX and bridge aggregator called Rango already connects StarkNet to other L2s.

Also read: Ethereum is eating the world You only need one internet

Declan Fox, product lead for the ConsenSys Linea zkEVM, expects support will be added soon. Many third-party bridge providers will continue to offer interoperability solutions for ZK-rollups, he says, adding that bridges have drawbacks around trust and fees.

At Linea, we value open systems and interoperability highly. The Linea testnet has already integrated many of the leading bridging solutions for this reason. In the future, Linea will be able to trustlessly interoperate with any of the layer 3 off-chain systems deployed on top of the layer 2 through their validating bridges.

MetaMask Snaps might help

Another possibility for interoperability is via the browser wallet MetaMask. ConsenSys is in the midst of developing new crowdsourced wallet extensions called Snaps that projects can develop that extend the capabilities of MetaMask.

MetaMask senior product manager Alex Jupiter says Snaps are still in the testing phase, but if we imagine a future where you know Snaps is stable, developers can extend it in all manner of ways. Of course, the next step is to get these different Snaps talking to each other. So, one ZK-rollup can talk to another ZK-rollup, right? And thats part of the vision of Snaps, and yeah, we want to make that world possible.

One Snap that has been demoed already enables MetaMask users to control Bitcoin via their Ethereum wallet, so getting ZK-rollups talking to each other certainly seems achievable.

Who knows where bridging is gonna go in the future as well. Im not an expert on ZK-rollups, but I dont think theres a core technical limitation of that being a problem in the future.

ZK-rollups and composability

Composability is the ability to initiate a transaction that involves operations on more than one different rollup. Jones calls it a stronger form of interoperability where chains can do more than just communicate asynchronously with each other but actually have transactions, which are aware of the state of each chain in some more real-time manner (think cross-chain flash loans).

This is likely to require the development of new standards and protocols, and Rose says that the sooner this happens the better. 

It is a strictly better user experience if teams can build through an interface, and we can attempt to have more standardization. I think there is appetite for some of this standardization as well, and I do think we will see more of it as these systems mature.

Fox says that to get to a point where we have synchronous composability, there will need to be a globally sequenced and ordered set of transactions across the different off-chain systems. This is theoretically possible with ZK-rollups thanks to SNARKs [a type of ZK proof] where, for example, a common sequencer could offer a UX of unified execution and pooled liquidity, he says.

Imagine making a DeFi trade where parts of the trade are executed on different chains for optimal liquidity all within the same transaction.

Optimistic about the Superchain

One potential coordination method might be Optimisms Superchain concept, which it announced at the same time Coinbase unveiled its base layer-2 fork of Optimism. 

Optimism is an Optimistic Rollup, which is another way to scale Ethereum, though more limited in potential throughput. According to the announcement:

The Superchain seeks to integrate otherwise siloed L2s into a single interoperable and composable system.

Jones tells Magazine, There is no silver bullet, but there are a couple of requirements for interoperability and composability the Superchain aims to address:

Shared Sequencing: To have a system where you can do a cross-chain flash loan, at the very least, at the time when that transaction is being processed, it needs to be included in both of the chains reliably. This requires some notion of sequencers being able to communicate, merge or otherwise network together.

Separation of Proving and Execution: Different applications have different security requirements, and those security requirements impose different kinds of restrictions on what interoperability properties can be achieved. By de-coupling the computation of chain state from the proving of cross-chain messages, we can maximize the interoperability of applications without fragmenting them to other chains.

He says the Superchain can connect optimistic and ZK-rollups as well as other chains, providing a shared, modular standard for all these innovations to happen on. 

It is going to be far easier to make these chains interoperate when they are built on the same codebase, compared to interoperating chains, which were written separately from the ground up, he says. 

However, underscoring Threadbares point about political issues being more complicated than technical issues, Arbitrum CEO Steven Goldfeder dismissed the concept out of hand.

The notion that were going to sort of coalesce on one particular technology stack a technology stack thats not even built out today, that doesnt have the core features that make it a layer 2 or make it a rollup the notion that we do that is, I think, a bit presumptuous, he told The Defiant.

Why connect ZK-rollups with Optimism?

And Arbitrum is built using Optimistic Rollups. It might be even harder to convince ZK-rollups with their higher potential throughput, to coordinate via Optimism. To some it might seem like connecting fiber optic cables together with copper wire.

However, Optimism is laying the groundwork to incorporate ZK proofs (validity proofs) in its systems with the Bedrock upgrade, and the Superchain will take this idea even further. Compatibility there is the goal, says Jones.

Other potential coordination methods are the Inter-Blockchain Communication Protocol from Cosmos or modular blockchain Celestia (though the latter seems to be trying to replace Ethereum as the data availability layer).

But ZK-rollups could also connect directly with each other. 

Polygon ZK-rollups will be interoperable

Polygon has a variety of flavors of ZK-rollup possible in development. They include Polygon Miden (similar to StarkNet), the Polygon zkEVM (compatible with existing EVM projects), Zero (recursive scaling) and Nightfall (Optimistic Rollups meet zero-knowledge cryptography).

Threadbare says that coordinating internally to hook up Polygons ZK solutions is easier than coordinating with outside projects, and he believes the technical challenges are doable. The team is working on the LX-LY bridge to enable this interoperability already. 

Because we are all part of the same company, then the technical integration becomes much easier to solve, he says. Moving between these rollups will be super, super simple.

The friction, its not two separate chains or three separate chains. It doesnt appear like that. Its just one Polygon that settles on Ethereum. And moving assets or funds or tokens between these different environments is super, super straightforward and easy. Thats the end game.

StarkEx and StarkNet

StarkWares Ben-Sasson says they are building similar interoperability between StarkEx and StarkNet.

Yeah, definitely. Were gonna be porting the StarkEx systems to be layer 3s over at StarkNet, and, at some point, for them to be solutions on top of StarkNet. Thats definitely the plan, he says.

Back in 2020, StarkWare released a blog laying out its plans for interoperability, but Ben-Sasson says that has been superseded. StarkWares Cairo is a Turing-complete language and virtual machine, which makes it similar in capability to a general-purpose computer.

A good analogy is to think of a layer 2 or a layer 1 as some computer that is just a bit slower than your laptop, but it has a lot of integrity and safety, he says. So, you can start just connecting these computer programs in various ways. Just like today, computers talk to each other and inter-operate or compose.

To get computers to talk to each other over the internet, a set of standards like TCP/IP and HTTP were developed. Ben-Sasson agrees thats the likely path for connecting validity-proof rollups, too.

Perhaps ZK-rollups can connect direct

StarkNet isnt working on standards like that at present, but Ben-Sasson suggests there may be other paths to interoperability. He says smart contracts can be written to interpret the different types of incompatible proofs used by different rollups. StarkNet uses STARKs as the name suggests; zkSync uses SNARKs, for example, while Polygon Zero uses recursive SNARKs called PLONKs.

Someone already wrote on StarkNet a smart contract that allows you to verify a Groth 16 SNARK, he says. 

This means the two rollups can communicate directly.

As long as you can, in chain one, verify the proofs of chain two, you can start having interoperability. StarkNet is already able to verify STARKs, and now also Groth 16 SNARKs, and Im pretty sure that very soon, well have things like, you know, PLONKs and Plonky and other kinds of systems.

So, at least in StarkNet, it should be relatively straightforward to be able to prove things happened correctly in other chains, and you can start having interoperability.

Fox tells me separately that Lineas system is already using the EVM to verify proofs (Groth16, PlonK, etc.) in a smart contract, which he says can make it interoperable with L3s.

Ben-Sasson says it seems likely that StarkNet would be able to connect to different rollups directly.

You can do it directly. You can do it because its a general-purpose computer and because of the validity rollup nature, right, that you can just have these systems talking to each other.

So, it sounds like the future is interoperable and composable.

Yes, it definitely is interoperable and composable. Yes. Definitely.

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The chairman of the SEC recently said that almost all cryptocurrencies will be regulated as securities. Questions remain whether that’s an accurate statement and if the agency is regulating tokens by enforcement.

In a February interview with New York Magazine, Gary Gensler, chairman of the United States Securities and Exchange Commission, said that just about every crypto transaction, with the exception of Bitcoin spot transactions and buying or selling things with cryptocurrency, falls within the jurisdiction of the SEC. 

In the interview, when discussing what types of crypto transactions should be regulated as securities, Gensler didnt mince words. Everything other than Bitcoin. You can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth, Gensler said. 

Gensler continued, They might drop their tokens overseas at first and contend or pretend that its going to take six months before they come back to the U.S., but at the core, these tokens are securities because theres a group in the middle and the public is anticipating profits based on that group. 

Gensler contends that the SECs jurisdiction over most cryptocurrencies is based on a 1946 Supreme Court ruling in the case SEC v. W.J. Howey Co. According to Investopedia, the W.J. Howey Co. sold citrus groves to Florida buyers. Those buyers would lease the groves back to the company. The company cultivated the trees and sold the oranges on behalf of the Florida buyers. Both would share in the profits. W.J. Howey Co. subsequently failed to register with the SEC, arguing that its transactions were not investment contracts. 

W.J. Howey Co. lost the case when the court ruled that the leaseback arrangements were investment contracts, thus establishing the Howey test wherein four criteria are used to determine whether something constitutes an investment contract: An investment of money, in a common enterprise, with the expectation of profit, to be derived from the efforts of others.

Is Gensler right that most cryptocurrencies meet the Howey test?

Mark Bini, an attorney at Reed Smith, says no. Bini is a former state and federal prosecutor who now represents corporations and individuals facing civil and criminal charges of crypto fraud, securities fraud and other crimes.

I think that the Howey test is not clear, and using this 1946 case about orange groves to decide whether a crypto is a security or not […] Im not sure that they dont need to update that, Bini says. He also finds it surprising that a stablecoin pegged to the U.S. dollar might qualify as a security under the rule since there is no expectation of profit. 

Bini asks, Would Chairman Gensler say, if the United States launched a digital currency, as theyve at least thought about doing, lets say that there was a crypto that was a pure digital dollar, would that be a security?

Congresspeople Jess Garca and Stephen Lynch agree with Gensler. In a recent opinion piece for The Hill, they argue that participants in the crypto ecosystem must come into compliance with existing securities laws. 

The lawmakers wrote, According to the SEC Chair Gary Gensler and recent court decisions, the vast majority of crypto assets are securities because they meet the Howey Test […] An investment contract exists when money is invested in a common enterprise with the expectation of profit resulting from the work of others. We agree with Chair Gensler that nothing about the crypto markets is incompatible with the securities laws.

With all the media coverage of Genslers recent statements, many in the crypto community might think that this is a new position for Gensler. Kevin Werbach, a professor at the University of Pennsylvania who leads the Wharton Blockchain and Digital Asset Project, tells Magazine otherwise. 

Both Chair Gensler and his predecessor, Jay Clayton, have repeatedly stated that the vast majority of digital assets are issued and purchased primarily for investment purposes and should be treated as securities, says Werbach. 

Werbach continues, There are tens or hundreds of thousands of tokens out there anyone can create one. The real issue relates to the projects that accumulated significant capital through the issuance of tokens. I think its fair to say that most of them would meet the Howey test in that issuance process […] But what does that mean today for ongoing trading and use of the tokens? 

Is the SEC regulating by enforcement?

On July 21, the SEC charged Ishan Wahi, a former Coinbase product manager, with insider trading, in addition to Wahis brother Nikhil and his friend Sameer Ramani.

From June 2021 to April 2022, Wahi allegedly shared confidential Coinbase information with Nikhil and Ramani, including upcoming token listing announcements. Nikhil and Ramani subsequently purchased and sold 25 crypto assets, at least nine of which, the SEC alleges, were securities. Profits accumulated in the scheme exceeded $1.1 million. 

According to Bini, the crypto community has long claimed that the SEC has been regulating by enforcement, and in this case, the SEC determined what tokens were securities and subsequently charged the defendants with a crime based on those decisions.

On the same day that the SEC and the U.S. Department of Justice announced Wahis indictment, Commodity and Futures Trading Commissioner Caroline Pham released a statement lamenting SEC overreach. In her statement, Pham quoted the Federalist Papers, a document published over 200 years ago that focused on counterbalancing branches of government.

Pham also said, The case SEC v. Wahi is a striking example of regulation by enforcement. The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities. 

Regarding the commissioners statement, Bini comments, Pham really said, Hey, youve overstepped here because there has been no action by Congress. 

When asked if the SEC has been regulating through enforcement, as opposed to rulemaking, Werbach tells Magazine, The securities laws are designed to be technology neutral, so there doesnt necessarily have to be a rulemaking to determine how they apply to different situations involving digital assets. If the SEC did proceed with rulemaking there are so many aspects to the digital asset world, and things change so quickly that many decisions would need to be addressed through adjudication and enforcement.

Werbach notes two challenges with the SECs enforcement strategy: First, its sometimes hard to find consistency in the remedies and the choice of targets. Second, the agency has been reluctant to provide guidance, no action letters, or other paths to separate legitimate from non-compliant firms. 

Although debate continues about the SECs approach to enforcement, there is no doubt that the agency has beefed up resources. In May 2022, the SEC announced that it had added 20 positions to its Crypto Assets Unit, a department responsible for investor protection and cyber-related threats. According to the statement, the unit is part of the Division of Enforcement and will grow to 50 positions. 

The SEC says the unit was established in 2017 and has brought more than 80 enforcement actions resulting in monetary relief exceeding $2 billion, and it will focus on investigating securities violations related to crypto asset offerings and exchanges, lending and staking protocols, decentralized finance platforms, nonfungible tokens and stablecoins.

Gensler believes that its all about protecting investors

When asked in his interview if a consumer-facing agency like the SEC is actively trying to discourage retail investors from participating in the crypto sector by delegitimizing crypto institutions, Gensler argued that his primary responsibility is investor protection. 

Gensler said, Im in a job where Im supposed to be merit neutral in terms of what risk investors want to take, but not neutral towards the investor protection the full, fair, and truthful disclosure you get when youre investing in a security.

Garca and Lynch concurred, writing, We agree with Chair Gensler that nothing about the crypto markets is incompatible with the securities laws and that investor protection is just as relevant, regardless of underlying technologies. 

The two members of Congress take it a step further arguing that existing security laws would force cryptocurrency exchanges, like FTX and others that lack corporate controls, into compliance and would protect investors from bad actors. 

Bini thinks that the SEC does have a role when it comes to protecting investors, including those in the crypto space, its just that Gensler doesnt have the authority to determine his own jurisdiction on the matter. I understand the SECs mission is to protect investors. Thats a very important mission, no doubt about it […] I think the criticism by the crypto communities is [Gensler] cannot by his own fiat just decide his jurisdiction.

As bad as Wall Street

Lynch and Garca argue that if crypto companies complied with existing securities laws, they wouldnt be able to launder money, misuse customer funds, and engage in other nefarious behaviors. 

The lawmakers wrote, The crypto industry is notorious for attempting to obscure the law by using the courts to challenge attempts at regulation and lobbying for regulatory carve outs that benefit them at the expense of everyday people. 

Garca and Lynch cited a recent report from Reuters that alleges Binance, among other transgressions, lobbied the U.S. Department of Justice to try to sidestep enforcement. The CFTC recently sued the exchanges CEO, Changpeng Zhao, for violations of the Commodity Exchange Act and CFTC regulations. 

Although they expand the argument beyond a defense of Gesler and the SECs actions, they point out that FTX and other crypto stakeholders have replicated the worst tendencies of Wall Street and Big Tech, have recreated many elements of the 2008 financial crisis, have subjected investors to incredible volatility, and have preyed on consumers. 

Policymakers must protect our economy from bad actors by urging the crypto industry to comply with existing laws, invest in solutions that are truly innovative, and create a more inclusive financial system, they wrote.

What about legislation?

Federal legislation would certainly create guardrails around the SEC and would help determine what federal agencies are tasked with regulating different types of cryptocurrencies. 

Werbach says, There are some areas, such as the treatment of stablecoins, where there simply isnt an appropriate existing federal framework, and there are important tax issues that will likely need legislative resolution. The CFTC needs greater legislative authority over spot markets in digital assets. With regard to securities regulation, the SEC could provide more guidance without legislation, but it has declined to do so.

Bini believes that effective legislation, like a stablecoin bill currently pending in Congress, would make investors feel more confident. 

Its unfortunate that there hasnt been a clear framework by the United States because I think its going to provide clarity to the industry. People who want to put money in crypto feel more confident if they feel like theres a clear framework and that theyre being protected, whether its the SEC or the CFTC, or if Congress came up with some new agency that was going to oversee crypto, says Bini.

Bini adds, I dont think that its up to him [Gensler] to decide where the SEC reaches in that should be up to Congress.

Maybe the courts will decide

Since the Howey test, a precedent established by a court decision, is the current method of determining whether something is a security, is it possible that the courts could set a similar precedent for cryptocurrency?

According to Bini, the answer is maybe, perhaps out of the Ripple case thats playing out in the Southern District of New York. Bini says that in the absence of Congressional action, you could have a landmark case like this one appealed to the Second Circuit, and then the Supreme Court, and that may provide clarity.

In December 2020, the SEC filed an action against Ripple Labs alleging that the company and two of its executives raised over $1.3 billion in an unregistered, ongoing securities offering. 

Last year, the judge in the Ripple case agreed to consider the fair notice defense, a protection derived from the Due Process Clause in the U.S. Constitution that guarantees a defendant be given fair notice of what constitutes an offense. 

The SEC unsuccessfully tried to quash the motion. Using the fair notice defense, Ripple Labs attorneys argued that the company couldnt have known that Ripples XRP token should have been registered as a security with the SEC because the agency never provided adequate guidance about what cryptocurrencies actually qualify as such.

The Second Circuit or the Supreme Court could endorse the SECs approach and note the continued vitality of Howey as applied to digital assets. Conversely, the Second Circuit and/or the Supreme Court could find for Ripple and reject the SECs approach. That could provide clarity in this area, Bini says. 

Irrespective of how this plays out, Genslers macro overview of cryptocurrency is clear, and the question remains as to how it might affect his regulatory proclivities. In the interview, he said, I dont think theres much economic use for a micro-currency, and we havent seen one in centuries. Most of these tokens will fail, because the question is about these economics. Whats the there there?

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