**A** (0:12):
All right, thank you everyone. So the, you know, the title of the, you know, the, the tagline for this event is where proof of stake goes next. And I'm here to tell you where it goes next is bitcoin. So this is the top secret roadmap for endgame for bitcoin proof of stake. Top secret because you know, it's a, this, you start talking about this, everyone gets mad at you. The Ethereum people get mad at you for talking about bitcoin. The bitcoin people get mad at you for talking about proof of stake. But I'm here to tell you why this is not just should happen, but needs to happen. So really quickly. A little bit about myself. My name is Sonny Aggarwal and I'm a self proclaimed bitcoin maxi. I kind of, you know, I love bitcoin. I've been, you know, that's what got me into the space. And my goal, you know, is how do I make bitcoin great, right? That's what brought me into the space. I have been working on proof of stake for seven years, right? I started working as a core developer of Tendermint and helped build the Cosmos network which is one of the first in production proof of stake networks in the world. And I am currently working on Osmosis, which is a Dex app chain. We're really focused on building up bitcoin liquidity and being the place to trade native bitcoin with the rest of the crypto ecosystem. And I'm also an advisor of Babylon. So I help come, I help create this idea of bitcoin restaking. And you'll find out later why. But so the claim here is that bitcoin will transition to a proof of stake which is super exciting. The only, you know, before you get there, too excited, the caveat is in a couple of decades, so you know, keep in mind we're operating at bitcoiner time scales here, but this is still the, it's the end game we're talking about, right? And what I'm not gonna be talking about here is the tired arguments of, you know, the energy consumption and all this stuff, right? Like this is a value judgment. You can make some people work on proof of stake for this reason. Some people have other reasons to work on it. You know, this is a value judgment. What we're really gonna be talking about is the security budget, right? This is not about a value adjustment. This is, this not, you know, the energy is maybe a should. Whether you believe it or not, this is why we need to switch to proof of stake. So just a reminder, proof of work. What's happening is you have a bunch of people, miners, mining, mining, mining, spending money to mine and eventually one of them finds the block and they get paid in some block reward for doing this. And so what happens is you have a total reward for producing the valid block. Let's call that beta. You have the total amount that the entire network is spending on that mining process. Let's call that lambda. And one thing to note is that that lambda cost is not just the energy cost. People usually like, oh, you have to spend that much energy. It includes both the energy cost and the hardware cost for the asics and mining hardware needed to produce that block. But the key key is that because of mining competition, lambda approaches beta minus epsilon. Epsilon is some level of miner profit. But what happens is if the, you know, the block rewards are going up, people are going to produce more hardware, people are going to hash more. You know, mining is a pretty competitive market, so more and more energy is being spent until the lambda cost approaches some, you know, very close to beta. Same thing is if the block reward goes down, that actually is faster because it will, you know, miners will just start shutting off hardware, right? They're going to start to decrease their energy consumption. So basically when block rewards go up, more money is spent via new hardware. When block rewards go down, less money is spent via turning off the asics and preserving energy costs. So it is slightly trailing. But at the end, you know, it's pretty close, right? You can find these charts where the energy cost trails the block rewards. We have a big problem. Beta is going to zero, right? The bitcoin has this built in system of a halving, right? Every four years the block reward gets cut in half. It started originally at 50 bitcoin and it gets cut in half 25, 12.5, 6.25. And right now we're in epoch five where the block reward is now only 3.125 bitcoin, which sounds like, you know, why are we not already in the crisis already? Well, this red line is the bitcoin block reward getting cut in half every four years. But the blue line is actually the dollar value of that block reward. Right? And what's nice is it's actually, you can see there's actually a trend line where it is going up. It has these spikes and troughs. But on a long enough timescale, the US dollar value of the block reward is going up, which means bitcoin's security budget is going up over time. However, this has mostly been driven by this nice beautiful property that we have that bitcoin has been relatively up only for the last, you know, we're literally at all time highs today, right? We have been all week. So, you know, bitcoin is in a constant going up and it's been at least doubling in price every four years. Will that sustain? Right. The problem here is, you know, bitcoin Today, it's a $1.5 trillion asset. You know, different people have different bull cases for bitcoin. My bull case or my base case for bitcoin is that we're going to flip gold, right? We're going to hit that $18 trillion asset. But the thing is, that's only a 12x left, right? 12x. You know, if you're doubling every four years, that only gives you three to four more happenings until we've hit the market cap of gold. And then from there on, unless it goes up more, the security budget is going to go down. You know, Michael Saylor has his like 13 million dollar target of Bitcoin. But even then, if you're, if you think that like bitcoin is going to flip all derivatives totally, right, you only have another 24 years, right? You have another six to seven happening cycles at some point. Bitcoin price cannot just go up forever. And we're going to enter a regime where the block reward is going to start decreasing over time and the system security is going to go down, reorgs are going to become more profitable. You're going to have to wait longer to get transactions confirmed. The entire system is just going to become very unsustainable. So how do we solve this? Right, One way is, well, the security budget actually includes two things, right? It's the block rewards, but it's also the transaction fees. So what if we just focus on increasing the transaction fees? In fact, this is what Satoshi had in mind, right in the white paper. He basically said once the block reward new coins stop minting, the system will rely completely on transaction fees and be inflation free. However, we can observe that unlike the block reward subsidy, as the bitcoin price goes up, this black line here is the bitcoin price we actually see. Transaction fees don't actually increase relative that much to the bitcoin price. Right? Bitcoin transaction fees today are roughly at the same level that they were during the bear market in 2022. Same level they were in the bear market in 2019, a bit more than they were during 2017. And we have these spikes usually related with high volatility periods like the beginning of a bear market. But Bitcoin transaction fees basically always settle down back to some relatively low level. And the reason is users are not infinitely price insensitive, right? Bitcoin kind of has two products, right? There's it's a capital asset and it's a payments network. And the thing is the transaction fees are primarily driven by its usage as a payment network, right? But if you think about it today, most of the value today is actually as the capital asset. Very few people use it as the payments network. And the reason is users are not price insensitive, right? And we see this happening that, you know, Bitcoin transaction fees, as we saw in the graph before, they peaked in 2017 bull market and they never, in the 2021 bull market, they never actually reached the same level as they did because users found other places to transact, right? Like Ethereum. Same thing's going to happen this cycle, right? I think Ethereum gas fees are never going to reach the same level that they were four years ago because now people have moved to Solana. And you know, users are, when it comes to payments, users are pretty price sensitive and there's a lot of alternatives to where they can get cheaper payments. Even if that means cheaper Bitcoin payments, right? You have things like lightning, Bitcoin L2s, you know, WBTC and CBBTC on Solana. So we just should not expect that the, the transaction fees on Bitcoin as right now will increase, especially while Bitcoin keeps this one megabyte cap. So well, what if we remove that one megabyte cap? Could we increase the number of transactions? So today Bitcoin is making about, for some context, in fees alone, it does about $463,000 of daily revenue from fees. Fees alone. Well, let's look at a chain that has for now effectively infinite, not infinite, but high levels of transaction volume like Solana. And we see that Solana is getting from transaction fees, MEV fees and such, it's getting a total of $5 million of daily revenue today, which is close over a 10x of what Bitcoin is doing today. But this is still today's Bitcoin block reward is $32 million. Even if it was completely replaced, if Bitcoin got the Solana levels of fee revenue, it's still a massive reduction in the security budget compared to today. And beyond that, you can actually see that the yellow and the green is basically the priority fees and the tips, the MEV tips, 95 plus percent of Solana fee revenue is coming from MEV related revenue rather than actual payments revenue. And Bitcoin is an app chain, right? It's a payments app chain. There's not as many opportunities for MEV revenue for Bitcoin as there is in Solana. And you know, without going too much into it, I think that this is also going to decrease for Solana as apps, as apps start to capture their own mev. So, you know, increasing the block size and increasing the number of payments, it's going to come at the con of decreasing the decentralization of Bitcoin. But it's also just not going to be enough to keep the security budget that we're looking for. So the most common solution to this problem that's usually brought up is tail issuance of what if we actually effectively remove that 21 million cap of Bitcoin and say, hey, let's make sure the block rewards don't actually go to zero. Let's keep the block rewards going forever, right? This is actually effectively what Ethereum does as well. Ethereum, they don't have a fixed hard cap. They have, they go on forever. Same thing with Solana. Most networks today, they have some level of tail issuance. The thing is this is never going to happen in Bitcoin. Never, ever, ever. Unlike all these other networks, you know, Ethereum is a computation network, it's a global computer. Bitcoin is first and foremost a monetary asset. Digital Gold 21 million is the what of Bitcoin, right? Everything else is the how. Proof of stake, one megabyte blocks. Everything is a how. Everything else is negotiable. The 21 million is not negotiable. Right? That is never, ever, ever going to change. So, you know, despite people talking about this tail issuance, we know it's not going to happen. So the only my book, I believe that the solution here is proof of stake. So. Well, why does proof of stake help? In proof of work, the cost for block production is the same of whether you're making a valid block or an invalid block. Invalid block here means you're, you know, you're working on a, a fork, you're working to do a double sign. And so meanwhile, in proof of stake we have this concept of finality. If you voted on one block, you can't vote on a conflicting block. And so what this does is with the power of slashing, we make it so the cost of producing an invalid block is much higher than, than producing a valid block. And so what's nice about this is in proof of stake. You know, everyone here is at staking summit. I know this is, you know, probably, you know, you all know how proof of stake works. But we only have to compensate stakers for their capital lockup opportunity cost, right? You need to get, they need to get some certain number of percentage of yield on their capital, right? Whether they're looking for a 5% yield or 3% yield, whatever. Unlike proof of work, where their total capital expenditures, which is their hardware cost and energy cost, you need the block reward to be greater than their total cost, right? We're talking about a factor of like 20x, right? If you're giving 5% yield on someone's capital that they're locking up versus needing to compensate 100% of the capital that they're burning in a proof of work system. So with proof of stake, we can actually massively reduce these expenditures needed by the network or the revenue needed that the block producers need to earn. And you know, transaction fees will probably suffice for this, right? We saw the transaction fees probably, you know, 32 million is what the block subsidy is today. 500,000 is what the transaction fees are today. You know, we can continue to increase the transaction fees and we can pop. Transaction fees alone will give us a sufficient rate of return to justify the get people to lock their Bitcoin, but not enough to continue the proof of work regime today. And the beautiful thing about proof of stake is you still get the total value of staked capital as economic security against double spends. Once again, coming from the fact that slashing gives you this dichotomy where you're getting more economic stake and the cost of producing an invalid block is, is higher than that of producing a valid block. And we see this, you know, happen in practice with the Ethereum merge. During the Ethereum merge, they were able to simultaneously decrease block issuance while increasing economic security, right? The economic security of the network increased massively and they were able to cut down the inflation rate. Now one of the most common things that people say is like, oh, this will never happen. The miners will never ever go for this. You know, why are they gonna, why would the miners agree to this? Well, I actually think that this is probably my contrarian hot take is that we keep proof of work for distribution. I think proof of work is the way I think of it is it's the most fair ICO ever. It's lasted, you know, the buy period is 120 years. Unlike those ICOs where you have to get in in the first 30 minutes, right? Everyone has a really long time period to participate. It still rewards the early participants. That's what the happening has built in. If you get in in the first four years, it's cheaper than if you get in later and later and later. And you buy in using the most neutral currency, which is energy. Right? Unlike, you know, you don't have to if you had an ICO that you could only buy in with US dollars that massively disadvantages large portions of the world. And if you think about it, most ICOs are actually bootstrapped from this initial distribution, right? Even the Ethereum ico, the only way to purchase it was by purchasing with Bitcoin, which was produced via energy. Most Ethereum ICOs were done by Ethereum, which is either coming from that initial Ethereum ICO from Bitcoin or via Ethereum proof of work. Energy is the only currency that's truly credibly neutral as a distribution system. And so in this world, we can keep proof of work for the coin minting while only using proof of stake for consensus. And you'll have it. So the miners are still the ones earning the block rewards, but the stakers get the transaction fees. So as the block rewards go down over time, the amount of mining will go down, but it's fine, the system will remain secure because stakers are still getting the transaction fees and providing economic security for consensus. So, you know the path, you know, for how we do this. Some steps have already been completed and I'll talk about some of the steps that are yet to come. So, you know, some of the things I've worked on Cosmos, it was important to show that proof of stake works. Like I mentioned, you know, Cosmos, our team, we were the ones who invented the concept of slashing. We kind of put the first byzantine fault tolerant proof of state network into the wild. We showed that it works. Then Ethereum came along and showed that you can in fact switch a. You know, there's always this question, can you change the wheels of a moving car? Right? And Ethereum showed that, yes, we can actually go from a proof of work network to a proof of stake network. Another big thing that's important that's happening right now is the Bitcoin Renaissance. There's a cultural shift happening in Bitcoin. I don't know how many people are paying attention to Bitcoin world, but ever since ordinals came, there's been this massive cultural shift. There's new excitement, there's new soft forks happening, new protocol development happening. This whole Bitcoin is this stagnant thing that will never change. That culture, that segment of the bitcoin community is slowly fading into irrelevance. And this new generation of bitcoin developers is coming along things with ordinals, runes, Bitcoin L2s and importantly Bitcoin staking. So you know, like I mentioned, I was one of the people who helped come up with Babylon. And you know, I have two secret reasons for why I did this. One is it helps introduce proof of stake to bitcoiners, right? We need to get them comfortable with the concept of staking. And it might not be on the bitcoin layer one consensus yet, right? But at least it introduces them to the concept of hey, there's this bitcoin capital asset that can be staked to provide economic security to things and eventually it'll come back to the Bitcoin L1. The other cool thing that Babylon esque systems will give you is we can accelerate bitcoin protocol development via a soft fork marketplace. So what do I mean by this? You can start to pay mining pools to enforce additional conditions. As an example, a zero conf network, right? For faster inclusion guarantees. Personally for me, one of the biggest problems with bitcoin today that's probably going to hinder its development is the 10 minute block times. This is too slow for any practical thing. I don't know if any of you ever tried to like perhaps purchase an ordinal or something. It's a crazy experience. You have to wait 10 minutes before you're sure if your trade went through or not. So what you could do is you could have mining pools provide signed commitments that they will include your transaction in the next block that they mine. And if they don't, they can be slashed for equivocation. And what this is cool is this, you know, there's this concept in bitcoin world called user activated soft forks. It came about in 2017 during the block size wars. They weren't ever real. You know, there was never really a way. It was just a theoretical thing that didn't actually make any sense. The thing is here we actually can do user activated soft forks, right? For the first time ever, users can choose what conditions they want miners to enforce. And they can pay for it, right? They can say, hey, we want miners to start enforcing this zero conf network. We will pay additional transaction fees for it, make it slashable and you know, we can. This will basically accelerate the rate of bitcoin core development because it puts the users back in charge. You know, I Talked to Justin Drake. I think this is the real vision of restaking. You know, I know all this AVS stuff is cool and whatnot, but I think the real cool thing about restaking systems is that users can take control of the network and, you know, make protocol development be an open marketplace. You know, I talked to Justin Drake a bunch about this and this is what scares him. But the thing is, you know, he's coming from this like point of privilege of like, you know, he works at the Ethereum Foundation. If you look, if you're working in Bitcoin world, Bitcoin core development is, is admittedly somewhat stagnated. And this is how the users take back control of the network. They by paying for the upgrades that they want to see. And this is how we will eventually pay the miners to soft fork in proof of stake. I'm not going to go too much into it, but you can do this. You can do a gradual shift to proof of stake via a soft fork. Finally, the last step in this whole process in my grand master plan is working on Dogecoin proof of stake. I'll be speaking at Dogecon on Wednesday talking about this idea. But this is gonna be our opportunity, the next step. We wanna show the world how to do a decentralized transition from proof of work to proof of stake. Once again, huge kudos to Ethereum for successfully showing the world that we can go from proof of work to proof of stake. But admittedly it was done in a very centralized fashion, right? The Ethereum foundation said, hey, we are doing this and everyone is kind of forced to go along with it. Dogecoin actually does have a foundation. They're very on board with this plan, but they don't have any real power. Dogecoin foundation is, you know, they got some funding from Elon Musk and stuff, but like, you know, really they don't have any political power in the ecosystem. And this is our opportunity to show how can we have a decentralized community, how can we convince the miners to go along with this, make this incentive compatible? And why Dogecoin, right? It's Bitcoin, like, right? It's based off of a very similar code base to Bitcoin. It's already gone through a consensus transition once. Right. Originally, Dogecoin had its own mining system and then I forgot how long ago, many years ago, it actually shifted from being its own proof of work system to actually being merge mined with litecoin. So Dogecoin actually has already gone through consensus transformation and they can do it Again, it's the most open minded proof of work community. Right. If you look at the remaining communities that are proof of work based, right, you have Bitcoin, Litecoin, Monero, they're all relatively close minded communities at this point. Ethereum Classic Dogecoin is a very open minded community that will be open to exploring this transition. And like I mentioned, there's a lot of people in the Dogecoin community, such as the foundation, such as some of the core developers who are very open to this idea. So in conclusion, if you're here at Staking Summit, it's because you clearly care about proof of stake, right? And my pitch to you is bitcoin is the most important asset in this entire industry and so we must be doing everything in our power to make it successful. It is hard. There's a lot of work left to do. But it can be done. It must be done. You know, there's this quote I love, from zero to one. My favorite book. In the 1950s, Americans thought big plans for the future were too important to be left to experts. Right? We can't wait for someone to go fix bitcoin. It's up to us in this room to work together. We can save bitcoin, make big plans. Bitcoin will become proof of stake if we want it to happen. Thank you. Wow.