Vitalik's New Book "Proof of Stake" In-Depth Analysis (1)
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Vitalik's New Book "Proof of Stake" In-Depth Analysis (1)
Part One of the book—Pre-mining.
Navigating Web3 tides with focused insightsAuthor: Oak-Magic Cloud Labs
Original Book Chapter
Part One of the Book — Pre-mining
First Paper: Markets, Institutions and Money — A New Approach to Social Incentives, published in Bitcoin Magazine, January 10, 2014.
Summary
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In incentivizing productive activities, cryptocurrency-based incentives represent an emerging method with significant complementary value alongside market and institutional incentives, benefiting from both internet support and decentralization.
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Assessing token value through seigniorage, using four positive examples—Bitcoin (BTC), Dogecoin (DOGE), Primecoin (XPM), and Ven (VEN)—the article explains how these tokens generate corresponding value and ideals. BTC serves as a medium of exchange and store of value; DOGE taps into internet meme culture and creates fun; XPM incentivizes research into optimizing arithmetic circuits; VEN rewards individuals creating value for public good causes. XRP, while technically superior to BTC as a payment system, lacks sufficient appeal due to its limited decentralization.
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A new and promising blueprint for a "democratic economy": it is possible to create a currency or issuance whose seigniorage can be used within commercial activities to reward those supporting such activities. Even individuals not directly involved in business operations could participate in marketing and lobbying other enterprises to adopt the currency. In the future, currencies could be created to incentivize medical research, space exploration, or even art. Indeed, today some artists, podcasters, and musicians are already considering launching their own currencies. For specific public goods like computational research, we could go even further by making the distribution process fully automated.
Translator’s Perspective
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One of the core values of tokens lies in incentivizing diverse groups to co-create public value, especially in areas of public benefit that are not driven by institutions—carbon emissions reduction being a typical example mentioned earlier.
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Tokens are a crucial component of the decentralized world. Although many tokens lack real value or are tools for scams, this should not lead to blanket dismissal of all tokens. Across various production and creative activities, tokens objectively quantify and track contributions made by different people across time and regions. They serve as direct foundations for fair and transparent incentives, enabling objective record-keeping, timely feedback, goal tracking, and equitable distribution. This is precisely what makes games so engaging—people invest great passion and effort toward goals. Consider World of Warcraft, which was one of the inspirations behind Vitalik Buterin's vision.
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Decentralization is often overlooked but critically important—it is the key factor enabling Ethereum to outcompete rivals. The renowned Austrian psychologist Alfred Adler, in his seminal work "The Science of Living," argued that individual values and moral judgments should be measured by whether they benefit the majority of society. Values and ideologies rooted in the interests of the majority constitute the most powerful force on Earth—not weapons, power, or profit. Decentralization represents respect for rules ("Code is law") rather than centralized individuals.
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Vitalik Buterin's invention—Ethereum is not merely an innovation in technology, currency, or organizational management, but a groundbreaking attempt to reconstruct productive activities at the foundational logic level, comparable in significance to operating systems, smartphones, or e-commerce platforms.
Condensed Translation (Order Adjusted, Content Edited)
(BTC launched in 2009; this paper was written in 2014)
There are two main approaches to incentivizing production: markets and institutions.Pure markets are fully decentralized, composed of nearly infinite agents engaging in peer-to-peer interactions, each mutually beneficial. In contrast, institutions are inherently top-down: they have governance structures that determine which activities are most useful at any given time and allocate rewards accordingly.
An institution's centralization allows it to incentivize the creation of public goods benefiting millions—even when individual benefits are small. However, as widely known, centralization also carries inherent risks.
For the past ten thousand years, these two options were essentially all we had. But with the rise of Bitcoin and its derivatives, this may now change. We may be witnessing the dawn of a third form of incentive: cryptocurrency.
The Other Side of Money
Standard accounts recognize three basic functions of money in society:
- As a medium of exchange, allowing people to buy and sell goods without needing to find someone who simultaneously wants what they have and has what they want (barter);
- As a store of value, enabling people to produce and consume at different times;
- And as a unit of account, or measure, allowing people to quantify a consistent "amount of production."
However, many fail to realize that money plays a fourth role—one historically obscured: seigniorage.
Seigniorage can be formally defined as the difference between a currency's market value and its intrinsic value—that is, its value if no one used it as money. For ancient currencies like grain, seigniorage was essentially zero.
Yet, as economies and currencies grow more complex, this seemingly "illusory" value grows larger—eventually reaching modern currencies like the dollar or Bitcoin. In fact, seigniorage represents the entire value of modern money.
But where does seigniorage go?
For resource-backed currencies like gold, most of this value is effectively lost. Each gram of gold is mined by laborers. Initially, miners earn profits, but in an efficient market, all easy opportunities are quickly taken, and production costs approach returns. There are clever ways to extract seigniorage from gold—for example, in ancient societies, kings minted coins perceived as more valuable than raw gold due to implicit guarantees against counterfeiting. Yet overall, value doesn't flow specifically to anyone.
With the US dollar, we see slight improvement: a portion of seigniorage goes to the US government. This is a major step forward in many ways, yet also an incomplete revolution—the currency gains centralized seigniorage benefits while embedding the largest centralization risk in human history at its core.
Enter Bitcoin
Like the dollar, 100% of Bitcoin’s monetary value is seigniorage—Bitcoin has no intrinsic value.
But where does the seigniorage go?
The answer: some enters miners' hands as profit, the rest funds expenses—specifically, securing the Bitcoin network. Thus, here we have a currency whose seigniorage directly funds a public good: the security of the Bitcoin network itself. This point is vastly underestimated. Here is an incentive mechanism that is simultaneously decentralized, requires no authority or control, and produces a public good—all stemming from people using Bitcoin as a medium of exchange and store of value.
Primecoin (XPM) was the first currency attempting to direct its seigniorage toward an external useful purpose: instead of having miners compute ultimately useless SHA256 hashes, XPM requires miners to find Cunningham chains of prime numbers—supporting a narrow class of scientific computation and incentivizing hardware manufacturers to optimize arithmetic circuit design. Its value rose rapidly and it remains the 11th most popular currency today—despite its primary practical benefit (60-second block time) being shared by many less prominent currencies.
Dogecoin (DOGE)'s success is even stranger and more surprising—DOGE is technically almost identical to Litecoin; the only difference is a maximum supply of 100 billion instead of 84 million. Yet, its market cap peaked above $14 million. What makes DOGE special? Essentially, just internet meme culture (MEME).
Outside the cryptocurrency space, Ven (VEN) is a more traditional centralized currency backed by a basket of assets including commodities, currencies, and futures. Recently, VEN added carbon futures to its basket, making it the first currency somehow “linked to the environment.” This is a clever economic hack: since carbon futures are embedded in VEN, as society shifts away from high-CO₂ production and emission permits become less profitable, the currency’s value increases. Thus, VEN holders are economically incentivized to support eco-friendly lifestyles—an appealing feature driving interest in VEN.
Overall, these examples show that altcoins rely almost entirely on grassroots marketing for adoption—no one pays door-to-door salesmen or marketers to convince merchants to accept BTC, XPM, DOGE, or VEN. Their appeal depends not just on technical superiority, but equally on ideals. It was Bitcoin’s ideals that convinced WordPress, Mega, and later Overstock to accept it—likely for similar reasons.
Ripple, despite being technically superior to Bitcoin as a payment method (e.g., 5-second confirmations), has failed to gain significant traction—its semi-centralized nature, backed by a single company issuing 100% of the supply, makes it unattractive to crypto enthusiasts who value fairness and decentralization.
Today, it is precisely the ideals behind XPM and DOGE—supporting science and fun, respectively—that keep these currencies alive.
Cryptocurrency as Democratic Economy
These four examples, together with the concept of seigniorage value, outline a new and promising blueprint for a “democratic economy”: a currency or issuance could be created whose seigniorage is used in commercial activities to reward those supporting them. Individuals not engaged in direct business could still contribute via marketing or lobbying other businesses to accept the currency. People could create social tokens distributing a thousand units monthly to every person on Earth—if enough people like the idea and start accepting it, the world would now have a citizen dividend program without centralized funding.
We could also create currencies to incentivize medical research, space exploration, or even art; indeed, today some artists, podcasters, and musicians are already considering launching their own currencies.
For a specific public good—computational research—we could go even further by automating the distribution process. Computational research could be incentivized via a mechanism not yet seen in practice: “Proof-of-Excellence,” theorized by Sunny King, inventor of Peercoin and Primecoin. The idea behind Proof-of-Excellence is that a participant’s stake size and reward in a decentralized voting pool are not based on computing power or coin holdings, but on their ability to solve complex mathematical or algorithmic challenges that benefit all humanity.
For example, to incentivize number theory research, one could embed the RSA integer factorization challenge into the currency, automatically awarding 50,000 coins and voting rights in block validation to the first solver. In theory, this could become a standard component in any currency issuance model. Of course, the idea of using currency this way isn’t new—“social currencies” operating within local communities have existed for over a century.
However, in recent decades, the social currency movement has declined from its early 20th-century peak, mainly because such currencies offered no value beyond face-to-face interaction and lacked the efficiency of mature banking systems like those supporting the US dollar. Yet, for cryptocurrencies, these objections vanish—cryptocurrencies are inherently global and benefit from a highly robust digital banking system embedded directly in their source code.
Thus, now may be the ideal moment for a strong technological resurgence of the social currency movement—potentially surpassing its 19th and 20th-century roles to become a powerful mainstream force in the global economy.
Where do we go from here?
Dogecoin has already shown the public how easy it is to create your own currency. In fact, Bitcoin developer Matt Corallo recently launched coingen.io—a website solely designed to let users quickly create clones of Bitcoin or Litecoin by adjusting parameters. Despite limited options and a 0.05 BTC fee, the site proved extremely popular, spawning hundreds of new currencies. Once Coingen enables features like Proof-of-Excellence mining, issuance to specific organizations or funds, and custom branding, we’re likely to see thousands of cryptocurrencies actively circulating online.
Can cryptocurrency, as described, truly emerge as a more decentralized and democratic way to pool our resources and support the social projects and activities we wish to see? Perhaps yes, perhaps no. But with a new cryptocurrency launching almost daily, we are very close to finding out.
Background Information
What is Primecoin?
Primecoin (abbreviation: XPM; symbol: Ψ) is a cryptocurrency implementing a proof-of-work system focused on searching for chains of prime numbers, launched in 2013 by Sunny King, who also founded Peercoin.
Unlike other cryptocurrencies that mine using algorithms solving math problems with no external value, mining Primecoin involves producing prime number chains (Cunningham and twin chains). These are useful to scientists and mathematicians and satisfy the requirements of a proof-of-work system—difficult to compute but easy to verify, with adjustable difficulty. Primecoin has a one-minute block time, adjusts difficulty with each block, and features block rewards as a function of difficulty.
Shortly after Primecoin's launch, several industry publications reported over 18,000 new users flooding into Primecoin mining, overwhelming dedicated server providers.
What is a Meme?
A meme (/miːm/) is an idea, behavior, or style that spreads culturally from person to person through imitation, often carrying symbolic meaning representing a specific phenomenon or theme. Proponents view memes as cultural analogs to genes—they self-replicate, mutate, and respond to selective pressures. In popular usage, a meme typically refers to an internet meme, usually an image remixed, copied, and shared across online cultural experiences.
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