Vitalik's New Book "Proof of Stake" In-Depth Analysis (4)
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Vitalik's New Book "Proof of Stake" In-Depth Analysis (4)
Part One—Pre-mining.
Navigating Web3 tides with focused insightsOriginal Chapter
Part One of the book — Pre-mining
Second paper: Ethereum — A Next-Generation Cryptocurrency and Decentralized Application Platform, published on the Ethereum blog, January 23, 2014.
Summary
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To address Bitcoin's limitations in scalability and functionality, Ethereum is positioned as a general-purpose cryptocurrency network designed to allow anyone to build specialized applications for nearly any conceivable purpose. The goal is to become a superior foundational protocol, enabling other decentralized applications to be built on top of Ethereum rather than Bitcoin, providing developers with more tools and full access to Ethereum’s scalability and efficiency.
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Financial applications only scratch the surface of what Ethereum and its cryptographic protocols can achieve. While financial use cases may initially excite the crypto community, the long-term vision should focus on how Ethereum can integrate with non-financial peer-to-peer protocols.
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Ethereum still has certain flaws, primarily related to its own scalability.
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As our slogan for money itself goes: the only limit is our imagination.
Translator’s Perspective
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An objective view of BTC. Although Bitcoin's limitations are mentioned, Vitalik Buterin does not intend to disparage BTC but rather recognizes that different blockchains have distinct specialties. Using Occam’s razor as an analogy is fitting—BTC is designed solely for currency and accounting functions, nothing more. Its simplicity and elegance give it higher robustness; for instance, unlike Ethereum and other public chains that frequently suffer from security breaches such as bridge hacks, the Bitcoin blockchain has never experienced such incidents.
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Among all current cryptocurrencies, BTC has the highest consensus and degree of decentralization. This was demonstrated during the Russia-Ukraine war, where national-level actors acknowledged the real-world utility of cryptocurrencies. Meanwhile, at the time of writing, the Federal Reserve's liabilities exceed $31 trillion. BTC's value is being rediscovered by the world, and broader adoption is just a matter of time. When that happens, BTC will face new challenges such as price volatility and high energy consumption.
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Layered network architecture, modular development, and concurrent processing are programming paradigms not invented by blockchain technology—they have long existed in traditional IT and internet systems. All major public blockchains including Ethereum, Polygon, Polkadot, and Solana face ongoing scalability challenges and are improving through technologies like ZK rollups and WASM. It is expected that over time these platforms will learn from each other, innovate continuously, including newer entrants like Aptos and Sui. Therefore, key differences will increasingly lie in soft power aspects such as leadership, vision, team culture, and community ethos. Compared to many current project teams and VCs, Vitalik Buterin stands out significantly in these areas. Imagine two models of product development and operations: one based on mutual support and collaboration among diverse ideas, the other driven by hierarchical employer-employee relationships under a single directive.
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We should look forward to the emergence of things we've never seen before. Looking back at past industrial and technological revolutions, products once unimaginable eventually emerged. In the 1990s, when the internet first entered daily life, no one could have imagined that within a decade e-commerce platforms like Taobao, social apps like WeChat, ride-hailing services like Didi, or short-video platforms like TikTok would dramatically boost economic growth. The new products enabled by blockchain will not simply be Web2 applications ported onto public chains, nor mere profile-picture NFTs. What groundbreaking innovations Web3 or the metaverse will bring remains to be evolved through continuous experimentation, requiring countless innovators to contribute brick by brick. Yet if a paradigm-shifting innovation does occur, its returns cannot be measured in mere thousands or tens of thousands of times.
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In the short term, promising sectors include decentralized social networks (including content creation), decentralized stablecoins, and decentralized gaming, along with related applications and infrastructure (including public blockchains). The emphasis should be on fundamental, ground-up innovation rather than incremental imitation and optimization.
Condensed Translation (Order Adjusted, Content Edited)
In 2013, discussions around so-called Bitcoin 2.0 protocols grew increasingly prominent—alternative cryptographic networks inspired by Bitcoin but aiming to use the underlying technology for purposes beyond just money. The earliest realization of this idea was Namecoin, a Bitcoin-like currency created in 2010 for decentralized domain name registration. More recently, colored coins emerged, allowing users to create their own currencies on the Bitcoin network, followed by more advanced protocols such as Mastercoin, BitShares, and Counterparty, which aimed to provide financial derivatives, savings wallets, and decentralized exchanges. However, up to that point, all invented protocols were vertically focused, attempting to deliver detailed feature sets for specific industries or applications, usually financial in nature. Now, a group of developers including myself proposed a counter-project: a cryptocurrency network designed to be as general-purpose as possible, enabling anyone to build specialized applications for almost any imaginable purpose. The project: Ethereum.
Cryptographic Protocols Are Like Onions
A common design philosophy among many Bitcoin 2.0 protocols is that, like the internet, cryptographic design is most effective when protocols are divided into layers. Under this model, Bitcoin is seen as the TCP/IP of the cryptocurrency ecosystem—a foundational data layer upon which next-generation protocols can be built, much like SMTP for email, HTTP for web pages, and XMPP for chat—all operating atop TCP. So far, three main protocols following this model are Colored Coins, Mastercoin, and Counterparty. The way Colored Coins works is simple: to create a colored coin, users mark specific bitcoins as having special meaning.
Mastercoin and Counterparty are more abstract; they use the Bitcoin blockchain to store data, so Mastercoin or Counterparty transactions are actually Bitcoin transactions, but interpreted in a completely different way by their respective protocols.
However, after about two months of research and involvement, Vitalik Buterin ultimately realized that while the basic idea of building higher-level protocols atop lower-level ones is commendable, there are fundamental flaws in this particular implementation that could prevent these projects from gaining wider traction. The issue is not that the ideas behind the protocols are bad—the enthusiastic community response proves they’re addressing something deeply needed. Rather, the problem lies in trying to build advanced protocols on top of Bitcoin, whose base layer is fundamentally unsuited for the task. This is not to say Bitcoin is flawed or not revolutionary—in fact, as a protocol for storing and transferring value, Bitcoin excels.
However, as an effective low-level protocol, Bitcoin performs poorly. Bitcoin is less like TCP, upon which you can build HTTP, and more like SMTP—a protocol excellent at its intended purpose (email in SMTP’s case, money in Bitcoin’s), but not particularly suitable as a foundation for anything else.
Bitcoin’s specific failure centers on one area: scalability. Bitcoin itself is scalable in the same way as any cryptocurrency—its whitepaper describes a protocol called “Simplified Payment Verification” that allows "light clients" with only a few megabytes of bandwidth and storage to securely verify whether they’ve received a transaction, even if the blockchain grows beyond terabytes in size.
This is precisely the problem Ethereum aims to solve. Ethereum does not aim to be a Swiss Army knife protocol with hundreds of features catering to every need. Instead, Ethereum aims to be a superior foundational protocol, enabling other decentralized applications to be built on top of it rather than on Bitcoin, giving them more usable tools and full access to Ethereum’s scalability and efficiency.
Contracts About More Than Just Price Differences
At the time Ethereum was being developed, there was great interest in implementing financial contracts on top of cryptocurrencies. The basic type of contract was the “contract for difference.” In such a contract, two parties agree to deposit a certain amount of funds, then withdraw amounts proportionally based on changes in the value of some underlying asset.
For example, a contract for difference might allow Alice to deposit $1,000 and Bob to deposit $1,000, then after 30 days, the blockchain automatically returns $1,000 to Alice plus $100 for every dollar LTC/USD increases in price during that period, sending the remainder to Bob.
These contracts allow people to speculate on assets with high leverage or hedge against cryptocurrency volatility without relying on centralized exchanges.
Yet it became clear that contracts for difference are merely a special case of a much more general concept: formula-based contracts. If a contract takes $x from Alice and $y from Bob, then returns to Alice $x plus $z for every dollar increase in a given stock price, why not let the contract return to Alice an amount determined by any mathematical formula, enabling contracts of arbitrary complexity? If formulas can accept random data as input, these generalized contracts could even implement forms of peer-to-peer gambling.
Ethereum took this idea one step further. Contracts in Ethereum are not just agreements between two parties that start and end; they are autonomous agents simulated on the blockchain. Each Ethereum contract has its own internal script code, which activates whenever a transaction is sent to it. The scripting language can access inputs such as the transaction value, sender, optional data fields, block data, and its own internal storage, and can send transactions.
Beyond the contract-for-difference model, the whitepaper also outlines how many other types of transactions become feasible via Ethereum scripts, including multi-signature escrow, savings wallets, peer-to-peer gambling, and issuing personal currencies. This is Ethereum’s strength: because the scripting language is designed to be virtually unrestricted (aside from fee mechanisms), any set of rules can be encoded.
It’s even possible to implement a corporate savings account on the blockchain via a smart contract requiring 60% shareholder approval to move funds, or allowing movement of 1% of total assets per day with 30% approval. Additionally, reducing traditional capitalist structures is feasible—for instance, a democratic organization could be coded such that only with 2/3 approval from existing members can a new member be invited.
Beyond Finance
Financial applications only scratch the surface of what Ethereum and its cryptographic protocols can enable. While financial use cases may initially excite the cryptocurrency community, the long-term vision should focus on Ethereum’s integration with non-financial peer-to-peer protocols.
One major challenge facing non-financial peer-to-peer protocols to date has been the lack of incentives—that is, unlike centralized profit-driven platforms, decentralized platforms offer no economic reason to participate. In some cases, participation itself is rewarding in a sense; this is why people continue to write open-source software, contribute to Wikipedia, post comments on forums, and write blog articles.
However, in the context of peer-to-peer protocols, participation often ceases to be an “enjoyable” activity. Instead, it requires significant resource investment—running daemons in the background, consuming CPU and battery power.
For a long time, data protocols like Freenet have existed, offering essentially decentralized, censorship-resistant static content hosting for everyone. Yet in practice, Freenet is very slow, and few people contribute resources.
File-sharing protocols face the same issue: while altruism may suffice to distribute popular commercial movies, it clearly diminishes for content outside mainstream preferences. Thus paradoxically, the peer-to-peer nature of file sharing might actually exacerbate centralization in entertainment and media production.
All these issues could potentially be solved by introducing incentives—enabling people not only to build nonprofit projects but also to run businesses and sustain livelihoods through network participation. Incentivized data storage, Bitmessage and onion routing, identity and reputation systems—beyond the core feature of a Turing-complete scripting language, Ethereum also introduces many other improvements over existing cryptocurrencies: fee mechanisms, mining algorithms, and the GHOST block propagation protocol.
Once you can register your name on the blockchain, the next logical step becomes clear: building a trust network on the blockchain. Trust networks are a critical component of effective peer-to-peer communication infrastructure—you don’t just want to know that a given public key belongs to a person; you also want to know whether that person is trustworthy. The solution lies in social networks: if you trust A, A trusts B, and B trusts C, then you are likely to trust C at least to some extent.
Ethereum can serve as the data layer for a fully decentralized reputation system—and ultimately, perhaps, a fully decentralized marketplace. Many of the above applications involve actual peer-to-peer protocols and projects already under development. In such cases, we intend to partner with as many of these projects as possible, helping fund them in exchange for bringing their value into the Ethereum ecosystem. Our mission extends beyond assisting the cryptocurrency community—we aim to support the entire peer-to-peer ecosystem, including file sharing, seeding, data storage, and mesh networks. We believe many projects, especially in non-financial domains, could bring immense value to communities but remain underfunded due to a lack of viable financial integration. Perhaps Ethereum can propel dozens of such projects into their next phase.
Because Ethereum includes a Turing-complete scripting language, it can mathematically do everything any Bitcoin-based blockchain cryptocurrency can possibly do. However, with the current protocol, certain problems remain unresolved.
For example, Ethereum does not yet solve the fundamental scalability challenge faced by all blockchain-based cryptocurrencies—the fact that every full node must store the entire ledger and validate every transaction. Concepts borrowed from Ripple, such as separate “state trees” and “transaction lists,” alleviate this to some degree, but still fall short of a fundamental breakthrough. For true progress, technologies like Eli Ben-Sasson’s zk-STARKs and secure computation (SCIP) currently in development will be required.
Additionally, Ethereum does not improve upon traditional proof-of-work mining, nor does it eliminate all its flaws, nor explore alternatives like proof-of-stake or Ripple-style consensus. If proof-of-stake or another alternative proves superior, future cryptocurrencies may adopt PoS algorithms like MC2 and Slasher. If Ethereum 2.0 has room to evolve, improvements will come in these areas.
Ultimately, Ethereum is an open project. If sufficient funding is secured, we might even release Ethereum 2.0 ourselves, migrating original account balances to a further improved network. In the end, as our slogan for money itself goes: the only limit is our imagination.
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