 does Ethereum need to exist in the American regulatory framework? That's the wrong question. Ethereum is self-sovereign. Earlier this month, the US ban on tornado cash cast a shadow on the future of Web 3. Some say Ethereum validators could start censoring transactions in order to comply with government sanctions. But how real is the threat of sanctions on the Ethereum's base layer? Is a proof-of-stake system more vulnerable to censorship than a proof-of-work and what can the Ethereum community do in order to preserve the Ethereum network as open and trustless as possible? To figure it out, we sit down with Ryan Bergman's investor and Ethereum community member. But before we start, don't forget to like the video and subscribe to our channel. I am Giovanni, your host, and this is a Cointelegraph interview. People are concerned that Ethereum validators could start censoring transactions on the Ethereum network in order to comply with sanctions like the ones imposed on tornado cash. So that would deprive Ethereum of one of its main characteristics and properties, which is censorship resistance. So do you think this is a real threat? Certainly. I think it is a threat, Giovanni, and I would separate the short-term consequences from the potential long-term consequences. And in my view, over the short run, there will not be a large proportion of validators censoring tornado cash transactions or other transactions. And a user who's at risk of an Ethereum user that's at risk of having their transactions censored will simply have to wait a bit longer until they land on one of the many validators that are not doing the censoring. So over the short run, I don't see base layer censorship being a realistic outcome for Ethereum's users. And that's very important because Ethereum's open access as a level playing field and global public utility is its highest purpose. So base layer censorship resistance is very important. And I think we're going to get that over both the short run and the long run. However, over the short run, there may be some important consequences for US-based validators who are interested to enjoy the 6% real yield, real staking yield, expected the day of the merge. So day of the merge, staking yield jumps to 6% because now transaction fees and MEV fees flow to validators. In addition, of course, mining having stopped, issuance will decline. We're expecting about a quarter percent inflation the day of the merge annual run rate. And so these are very attractive yield conditions for validators. And so I think over the short run, when we look at the potential for validators to potentially have to comply with OFAC sanctions and censor transactions that interact with tornado or other future services, I think that really speaks more to the loss for those validators for US institutional and retail capital than it does for Ethereum's users who are unlikely to be successfully censored at the base layer. Now, over the long term, I think it's much more interesting and optimistic, which is to say that there is an important strong case to be made that Ethereum is inherently aligned with America's interest. Ethereum is about permissionless innovation, free enterprise, property rights, globalization, and on an emergent basis, the entire Ethereum community has decided to dramatically grow US dollar stablecoins. It could have been euros, it could have been whatever currency, but we have organically chosen to focus on the US dollar. And that means that Ethereum holds the potential to get the US dollar in more backpockets and more capital accounts than ever before all across the world. So I don't think that Americans will want to use the OFAC list to sanction Ethereum functionality. Some people in the industry, like for example, Kevin O'Leary, was in favor of the Tornado Cash ban and these people say that crypto in order to become mainstream needs to exist within the regulatory framework. So basically they welcome moves like that one because they kick out these sort of actors that just kind of thrive in a sort of wild west environment. What do you think about this statement? Does Ethereum need to exist in the American regulatory framework? That's the wrong question. Ethereum is self sovereign. As a credibly neutral, maximally decentralized public chain, we should think of Ethereum as a separate country. I believe that America will eventually decide that it just doesn't make any sense at all. It is ineffective and illegitimate to put Ethereum applications on the OFAC list. This is a temporary misunderstanding among certain American authorities that in the coming years will play out politically. At the end of this process, America is going to say, you know what, we want to live in a world where we don't put Ethereum applications on our own OFAC list. They're not going to want to because it's not better for America to do so. What I'm saying is they're mistaken. They misunderstand what they are going to want. Large entities like Lidofinance, Coinbase, Kraken and a few others are actually holding the majority of Ethereum staked in the Ethereum beacon chain, which means that if those entities would decide to comply with those sanctions then they may definitely have the power to sanctions transactions. So that would make the DeFi space essentially the same as the traditional financial system where there are big players that comply with regulations and censor transactions of normal users. So don't you think it's a problem and what is the Ethereum community doing to prevent something like that from happening? Right. This is a very good question. I think it ultimately will not be a problem and here's why. First of all, Brian Armstrong, the Coinbase CEO, suggested that if that were to happen, if the government were to insist that Coinbase does that, their most likely course of action would be to shut down their staking business. And on the other hand, the percentage of total staked Ether in Coinbase is going to collapse in the coming years and that's with or without tornado sanctions because right now Coinbase has a huge head start because they have all these customers who are able to easily stake their Ether and right now there are no withdrawals from staking which means that users who want to leave Coinbase staking cannot. However, in about six to nine months, six to 12 months, withdrawals will be enabled potentially even sooner than six months and users are going to vote with their capital and with their feet. And if Coinbase is giving them a reduced yield because of censorship or a risk of slashing due to either social slashing or because Coinbase validators equivocate on they try to skip over a block that has a tornado cash transaction that blocks been confirmed, they try to skip over it and proof of stake, this can be a slashable offense. We don't see how Coinbase can maintain their market share because staking, institutional staking has very low barriers to entry. In the coming decade, dozens of banks, technology companies, all kinds of actors are going to get involved in staking because the cost for them to do so is going to continue to drop because of the maturity of pardon me, open source tools and industry expertise as well as the just generally reduced risk profile from the maturity of staking. And so the idea that Coinbase or any US staking operator or for that matter, personal validators run in US cloud services like AWS in Virginia, the idea that these these will be able to somehow sustainably censor user transactions or affect the fork choice in Ethereum, it's just not a credible idea. They're going to continue to lose market share to all kinds of new entrants in the staking game as well as in addition to this natural loss of market share, they have these powerful forces resisting censorship such as the threat of Coinbase exiting the staking business. There are a lot of people that are saying that the transition to a proof of stake system will make Ethereum more vulnerable to censorship. Would you agree with this statement? Definitely not. And the reason is that the censorship landscape in the application layer is effectively the same in proof of stake versus proof of work. But the proof of stake validator population is much, much more significantly inherently censorship resistant than proof of work miners. And the argument's very, very simple, Giovanni. In mining, you spend like millions of dollars to set up a data center of customized hardware that you buy and ship and set up and power. And your electricity comes from a relationship with some kind of local electricity authority where they have agreed that you're going to consume very large quantities of local electricity. And this creates an investment structure of mining that is inherently less portable than validating. And so in a censorship situation, the miners really struggle to move their operations and to react quickly and fluidly and inexpensively to censorship risk. Whereas with proof of stake validators, you can run like 20 million dollars of staking on a $1,000 computer that is in your closet on a VPN. And if there were censorship risk, you could simply relocate that computer to a new jurisdiction or a new closet. Vitalik Buterin came into the discussion and he said that in case one entity, one validator on the Ethereum blockchain will decide to censor a transaction, then the method to solve the issue would be through slashing. So basically through a punishment of that validator that decided to comply with the sanctions, basically it would mean destroying partly or entirely the staked ether belonging to this validator. What do you think about this solution to this problem? I think that's broadly correct. And social slashing, which is when the community decides to slash i.e. destroy staked ether instead of the system deciding it because of the protocol rules is the nuclear option. And it has very good parallels to nuclear warfare because from the Ethereum's community perspective, it's very important that those involved understand this is a realistic option and it could be done and they can't stop us from doing it and that if we developed enough community alignment with enough of a legitimate and large reason to do so, the success of this is virtually guaranteed. We will win the social slashing battle. That being said, we have no wish to drop the nuke of social slashing. It would have all kinds of negative follow-on effects. It's very much a win-lose situation when as a community we always aspire for win-win situations. But if it were to happen, I would very loudly and strongly advocate that we not social slash right away. I would say, let's wait. Let's wait and see what happens. Let's allow the market mechanisms to run their course. I saw that other Ethereum community members have expressed a high caution about this nuclear option, as you called it, because it could create more problems and potentially more harm than what it was supposed to fix. It was a very interesting conversation. Ryan, thanks a lot for coming to our show. Giovanni, thank you for having me and everybody enjoy the merge just a little over three weeks away.