Grid stability and why you shouldn't couple unstable systems
The paradox of renewable energy is that the more sources there are, the more unstable the grid becomes.
The grid is responsible for transporting electrons from where they are produced to where they are consumed.
Energy is produced and distributed close to instantly to where it’s needed. Due to the lack of large-scale storage solutions, it is produced in a continuously adjusting flow based on projected supply and demand. This process of adjusting supply to demand is what people mean by balancing the load.
This leads to two important grid properties:
1) It’s architected for peak load, i.e. that hot day when everyone turns their AC on, or when everyone is cooking dinner and charging their Tesla.
2) It’s premised on being a predictable and controllable system. Grid operators forecast demand, and adjust supply as needed.
Over the past few years, two important changes have occurred that jeopardise grid predictability: the shift towards renewable energy sources and electrification. While both trends are positive for the environment, they introduce volatility and unpredictability in a system premised on its consistency.
On the supply side, renewable energy sources increase volatility because their output can’t be controlled or predicted. You can’t crank up the sun’s intensity to boost a solar panel’s output, and it’s hard to predict weather and solar intensity. Weather forecasting is difficult.
This is different from traditional energy sources like gas, coal, or oil plants, which can be turned on and off.
Electrifying everything on the demand side creates unpredictability by increasing the peak load and adding variability. When cars go electric, you have to account for the fact that there are times when many people will charge them - that will create spikes in demand.
Increased volatility leads to wasted energy. Excess demand is more problematic because it leads to blackouts with consequences ranging from mild inconvenience to large-scale economic damage (e.g. in South Africa) or even fatal harm.
There are no easy solutions. Right now, utility providers use temporary fixes. They pay ‘capacity payments’ to generation facilities not to shut down, even if they are not producing power, in case they are needed. These, however, are mostly based on fossil fuels.
There are other alternatives, like batteries, and we’ll explore that in another post.
Bitcoin’s market cap is $1.24 trillion, but most of it is idle because there’s no easy way for holders to use their assets without giving up custody.
Faced with that choice, most abide by the rule ‘not your key, not your coin’. But not all do. Blockfi and Celsius, two centralised lender services, managed respectively $10b and $3b, offering 5-7% on Bitcoin before collapsing in the FTX aftermath.
It’s a cautionary tale of the worst, but also a market signal that there is demand for productive uses of bitcoin. This has led to the creation of an ecosystem of 90+ blockchains built on top of the main bitcoin blockchain, offering ways to make it productive, while trying to reduce the risks and maintaining self-custody.
It’s a worthwhile effort, but most are recreating what already exists on Ethereum, with a technology that’s worse.
Market economies thrive on specialisation. Ethereum specialises precisely on what’s needed for a successful decentralised finance ecosystem. Bitcoin focuses on making its asset a type of asset that is resistant to inflation and censorship. Bitcoin for storage, Ethereum for usage.
Finding use cases where verifications are too high
ZK applications enable use cases constrained by verification costs. My mental model for thinking about promising ZK app is to look for places where people are likely to lie because verification is too expensive or unpractical.
Technology and marginal costs
To make sense of new technology, you need to understand the costs they decrease, which leads to understanding the new design space it opens.
For instance, the internet brings marginal costs to zero. It costs nothing for Google to serve one more user, and it makes no difference to an author whether their blog is read by 27 people or a billion. The internet is infinitely scalable on the backend. This property upended industries, created products we use daily, and generated billions in shareholder value.
The key to creating new internet businesses was to capitalise on the absence of marginal costs. Media is a prime example. Before the internet, media companies had non-negligible marginal costs for each additional customer, involving printing and delivery. Within these parameters, your advantage lies in local implementation, and printing/distribution economies of scale, more so than the content itself.
On the other hand, online media like blogging has zero marginal costs. An author can become a leading voice in a niche and attract readers worldwide. The absence of marginal costs leads to both a radically changed cost structure and a massively expanded market. One-man businesses making millions in revenue like
Grid stability and why you shouldn't couple unstable systems
The paradox of renewable energy is that the more sources there are, the more unstable the grid becomes.
The grid is responsible for transporting electrons from where they are produced to where they are consumed.
Energy is produced and distributed close to instantly to where it’s needed. Due to the lack of large-scale storage solutions, it is produced in a continuously adjusting flow based on projected supply and demand. This process of adjusting supply to demand is what people mean by balancing the load.
This leads to two important grid properties:
1) It’s architected for peak load, i.e. that hot day when everyone turns their AC on, or when everyone is cooking dinner and charging their Tesla.
2) It’s premised on being a predictable and controllable system. Grid operators forecast demand, and adjust supply as needed.
Over the past few years, two important changes have occurred that jeopardise grid predictability: the shift towards renewable energy sources and electrification. While both trends are positive for the environment, they introduce volatility and unpredictability in a system premised on its consistency.
On the supply side, renewable energy sources increase volatility because their output can’t be controlled or predicted. You can’t crank up the sun’s intensity to boost a solar panel’s output, and it’s hard to predict weather and solar intensity. Weather forecasting is difficult.
This is different from traditional energy sources like gas, coal, or oil plants, which can be turned on and off.
Electrifying everything on the demand side creates unpredictability by increasing the peak load and adding variability. When cars go electric, you have to account for the fact that there are times when many people will charge them - that will create spikes in demand.
Increased volatility leads to wasted energy. Excess demand is more problematic because it leads to blackouts with consequences ranging from mild inconvenience to large-scale economic damage (e.g. in South Africa) or even fatal harm.
There are no easy solutions. Right now, utility providers use temporary fixes. They pay ‘capacity payments’ to generation facilities not to shut down, even if they are not producing power, in case they are needed. These, however, are mostly based on fossil fuels.
There are other alternatives, like batteries, and we’ll explore that in another post.
Bitcoin’s market cap is $1.24 trillion, but most of it is idle because there’s no easy way for holders to use their assets without giving up custody.
Faced with that choice, most abide by the rule ‘not your key, not your coin’. But not all do. Blockfi and Celsius, two centralised lender services, managed respectively $10b and $3b, offering 5-7% on Bitcoin before collapsing in the FTX aftermath.
It’s a cautionary tale of the worst, but also a market signal that there is demand for productive uses of bitcoin. This has led to the creation of an ecosystem of 90+ blockchains built on top of the main bitcoin blockchain, offering ways to make it productive, while trying to reduce the risks and maintaining self-custody.
It’s a worthwhile effort, but most are recreating what already exists on Ethereum, with a technology that’s worse.
Market economies thrive on specialisation. Ethereum specialises precisely on what’s needed for a successful decentralised finance ecosystem. Bitcoin focuses on making its asset a type of asset that is resistant to inflation and censorship. Bitcoin for storage, Ethereum for usage.
Finding use cases where verifications are too high
ZK applications enable use cases constrained by verification costs. My mental model for thinking about promising ZK app is to look for places where people are likely to lie because verification is too expensive or unpractical.
Technology and marginal costs
To make sense of new technology, you need to understand the costs they decrease, which leads to understanding the new design space it opens.
For instance, the internet brings marginal costs to zero. It costs nothing for Google to serve one more user, and it makes no difference to an author whether their blog is read by 27 people or a billion. The internet is infinitely scalable on the backend. This property upended industries, created products we use daily, and generated billions in shareholder value.
The key to creating new internet businesses was to capitalise on the absence of marginal costs. Media is a prime example. Before the internet, media companies had non-negligible marginal costs for each additional customer, involving printing and delivery. Within these parameters, your advantage lies in local implementation, and printing/distribution economies of scale, more so than the content itself.
On the other hand, online media like blogging has zero marginal costs. An author can become a leading voice in a niche and attract readers worldwide. The absence of marginal costs leads to both a radically changed cost structure and a massively expanded market. One-man businesses making millions in revenue like
The point is, for most financial products using Bitcoin, you can build a faster to market, more scalable, and easier-to-use version on Ethereum rather than on a Bitcoin L2. Ethereum is the best place to build bitcoin defi because it has the most primitives, assets, and liquidity.
The major DeFi building blocks and primitives are already on Ethereum. You can create a trading pair with bitcoin on Uniswap. The simplest method to create a money market using Bitcoin as collateral is to create a market on Morpho, a decentralized lending platform, using any asset as borrowed and your preferred oracle.
As a consequence, Ethereum hosts the most liquid DeFi ecosystem. Technical fitness is just one factor for the success of a financial rails. Liquidity is more crucial.
Traditional financial rails demonstrate the inertia of liquidity impeding technological change. Players who innovate too much move away from the liquidity flows and isolate themselves. Indeed, most innovation in finance over the past decade has been in improving frontends and customer service.
With over $50b in TVL in Ethereum L1, the Bitcoin ecosystem needs to 10x - twice - before catching up. This is while dealing with a slower rate of development due to the protocol not being designed for the use case, and not particularly developer-friendly.
On scalability, it is not an issue if you’re building directly on Bitcoin, but for most intents and purposes, it’s not possible because Bitcoin script is just not expressive enough and the chain not meant for high throughput. The alternative is building on one of the numerous L2s, but since the ecosystem is early, it’s a gamble on their longevity.
Bridging the gap
Going back to the first line, my expectation is for this ratio to widen. For this to happen, the main thing needed is a low-friction, high security option to bridge assets from Bitcoin to Ethereum.
The current offering isn’t good enough because it’s too centralised and managed by institutions reminiscent of the past cycle’s centralised lenders.
With all the DeFi building blocks ready to use Bitcoin as an asset & collateral, what’s needed is a mechanism that allows bitcoins to be moved to Ethereum with low trust assumptions. One key element is retaining self-custody of the asset. Another is the segregation of risks from one user to the other. The third element will be the smooth bridging to Ethereum.
There is progress in the space, with products like dlcBTC and Hemi, but I expect more in the coming months.
are great examples of ventures that were previously impossible.
The cost of verification
Building trust online is challenging. Trust is based on understanding, and physical interactions provide more signals than online. These signals are also easier to verify.
Claims are easier to verify in person because of the additional context. This allows for a quick assessment of trustworthiness by evaluating the coherence of the claims taken as a whole. Age, jobs, income, and sports performance can be easily referenced in person, but not online.
My mental model for where zero-knowledge proofs (ZKPs) make sense is in online services with high costs of verification i.e. that require personal information, where individuals are likely to lie. For example, dating apps where people lie about gender, age, salary, or height.
If you wanted to do this in a dating app right now, you would need to use a third-party verification provider, essentially asking your users to KYC, which is not only a catastrophe for conversion, but also a significant additional cost per user. By contrast, very simple ZK products like proof of passport or zkpassport, can verify a use age with a quick passport chip scan, without revealing any other information, and without having to rely on a costly trusted third-party.
There are many such cases where information is valuable but the cost of verification narrows the design space. ZK makes sense for these applications where you want to keep private information hidden but verified.
The point is, for most financial products using Bitcoin, you can build a faster to market, more scalable, and easier-to-use version on Ethereum rather than on a Bitcoin L2. Ethereum is the best place to build bitcoin defi because it has the most primitives, assets, and liquidity.
The major DeFi building blocks and primitives are already on Ethereum. You can create a trading pair with bitcoin on Uniswap. The simplest method to create a money market using Bitcoin as collateral is to create a market on Morpho, a decentralized lending platform, using any asset as borrowed and your preferred oracle.
As a consequence, Ethereum hosts the most liquid DeFi ecosystem. Technical fitness is just one factor for the success of a financial rails. Liquidity is more crucial.
Traditional financial rails demonstrate the inertia of liquidity impeding technological change. Players who innovate too much move away from the liquidity flows and isolate themselves. Indeed, most innovation in finance over the past decade has been in improving frontends and customer service.
With over $50b in TVL in Ethereum L1, the Bitcoin ecosystem needs to 10x - twice - before catching up. This is while dealing with a slower rate of development due to the protocol not being designed for the use case, and not particularly developer-friendly.
On scalability, it is not an issue if you’re building directly on Bitcoin, but for most intents and purposes, it’s not possible because Bitcoin script is just not expressive enough and the chain not meant for high throughput. The alternative is building on one of the numerous L2s, but since the ecosystem is early, it’s a gamble on their longevity.
Bridging the gap
Going back to the first line, my expectation is for this ratio to widen. For this to happen, the main thing needed is a low-friction, high security option to bridge assets from Bitcoin to Ethereum.
The current offering isn’t good enough because it’s too centralised and managed by institutions reminiscent of the past cycle’s centralised lenders.
With all the DeFi building blocks ready to use Bitcoin as an asset & collateral, what’s needed is a mechanism that allows bitcoins to be moved to Ethereum with low trust assumptions. One key element is retaining self-custody of the asset. Another is the segregation of risks from one user to the other. The third element will be the smooth bridging to Ethereum.
There is progress in the space, with products like dlcBTC and Hemi, but I expect more in the coming months.
are great examples of ventures that were previously impossible.
The cost of verification
Building trust online is challenging. Trust is based on understanding, and physical interactions provide more signals than online. These signals are also easier to verify.
Claims are easier to verify in person because of the additional context. This allows for a quick assessment of trustworthiness by evaluating the coherence of the claims taken as a whole. Age, jobs, income, and sports performance can be easily referenced in person, but not online.
My mental model for where zero-knowledge proofs (ZKPs) make sense is in online services with high costs of verification i.e. that require personal information, where individuals are likely to lie. For example, dating apps where people lie about gender, age, salary, or height.
If you wanted to do this in a dating app right now, you would need to use a third-party verification provider, essentially asking your users to KYC, which is not only a catastrophe for conversion, but also a significant additional cost per user. By contrast, very simple ZK products like proof of passport or zkpassport, can verify a use age with a quick passport chip scan, without revealing any other information, and without having to rely on a costly trusted third-party.
There are many such cases where information is valuable but the cost of verification narrows the design space. ZK makes sense for these applications where you want to keep private information hidden but verified.
