#15 Gas fees explained, ConstitutionDAO, ENS and Web3

The news cycle has given us a break so we've gone educational again. Still, we found room to talk about NFTs and regulation.

Any comments? Write us at team@carbono.com or find us on Twitter: we are @carbono_com, @raulmarcosl and @miguelatcarbono.

Ethereum, why so expensive?

Let's say you want to take a picture from your holidays and crop it, add some filters, whatever. You download the picture, you open it on Photoshop, you proceed, you save the image. Your machine is using computing power for all those processes.

Well, when you operate on Ethereum (sending a transaction, minting an NFT...), you are consuming power too, only you're consuming it from a swarm of computers around the world. That's what the EVM is. The Ethereum Virtual Machine is like an operative system running simultaneously on thousands of machines that anybody can access to execute the programs available on Ethereum, like using a DeFi protocol or buying an NTF. Only, instead of speaking of programs, we talk of smart contracts. And when you execute a smart contract on the Ethereum Virtual Machine, you are consuming computer power for that, just like you do with your computer at home. And just like you do with your computer at home, you pay for that. That is the reason behind gas fees.

If you've done (or attempted) a transaction on Ethereum lately, you've probably had to stop for a moment to decide whether the transaction was worth the fee you were going to pay. So for those of you who still don't understand where these fees come from and why and how they vary so much, here's our explanation. And, as always, we will be using a metaphor.

In a beautiful mountain location, travelers use a cable car to go from point A to Point B. The cable car is operated by a machinist, who stands in front of the entrance. And, in front of that entrance, people form a queue.

Now, cable cars are, well, cars suspended on a cable. They can't carry an infinite amount of weight. There is a limit, and the machinist knows this. For each car, he needs to decide how many people will fit, depending on whether they travel alone or in groups, they carry heavy luggage or nothing at all. In this peculiar mountain place, passengers will pay depending on that weight. Let's say it's $1 per kg (weird combination of dollars and kilograms, but this is crypto, we're global). The petite old lady with the bird will pay less than the backpacker carrying all his belongings.

Also, the old lady with the bird, or any other traveler for that matter, will pay more now than what they would've spent a few hours before when the queue was less crowded. As the line gets longer and the demand for a place in the car increases, the machinist might decide to increase the amount he charges per kilogram.

There's one more thing to take into account. Not all people are in the same hurry. For example, Old-lady-with-bird is going to visit her granddaughter. And it's ok if she catches the next cable car, but it's ok if she hops on the next one too. She doesn't mind. But for Executive-with-suitcase, getting on this car is vital because he's late for a meeting. So he will wave some dollar bills in the air offering a tip.

Both the ticket fees per weight and the tips end up in the machinist's pocket. And that is why he will try to optimize the space in the car to increase his revenue. He will try to fit as many people with as much luggage as possible. The heavier, the better. And if you have a tip for him, you skip the line.

Some things in this story probably feel weird. Queues don't work like this. In queues, the order is sacrosanct. It's first-come, first-serve. And the tip the executive is paying to move ahead of the old lady sounds unfair. But remember, this was a metaphor, and what's behind is a blockchain. The machinist, you've probably guessed it, is the miner. Miners are the actors in the blockchain game who manage and validate transactions and secure the network. Cashing in the fees and tips is the way users pay for their invaluable contribution.*

Each cable car in our story was a block in a blockchain. And the weight is the computing power every block can manage. That computing power in the Ethereum blockchain is called gas, and the amount of gas a block can handle is limited. So that is why people have to pay for it.

Also, not all operations on the Ethereum EVM involve the same amount of gas. For example, checking your balance costs a certain amount, sending a transaction costs some more, minting and NFT costs even more... The weight and luggage of passengers represent that. Each of them pays differently because they require a different amount of resources from the block.

The tip offered by the executive is precisely the same thing on Ethereum; a tip. Any user can add an extra to the amount they are willing to pay a miner to add their transaction earlier if they are in a hurry and want to make sure their operation gets on a block.

*Bear in mind that this is a generic description of how gas fees work and is not factoring in EIP-1559. I wish I'd had this metaphor handy when I wrote about EIP-1559 because it would've probably made my life easier... But, long story short, our dear machinist, after EIP-1559, stopped bagging the ticket fee and now mainly makes money from tips.

The Ethereum blockchain is currently going through a peak in block space demand. The queue is long and crowded. The price in $/kg is high now, and tips are flying. And last but not least, fees on the Ethereum blockchain are not paid in dollars but ETH. Therefore, if ETH increases its price relative to the dollar, an identical transaction can be more expensive in two different moments in time.

Hopefully, you now understand a little better how gas fees work. Whenever you see your wallet suggesting three different possible fees, their software factored in all these variables. They know about the block usage (=length of the queue), they know about the gas cost of your transaction (=weight), and they suggest fee prices with increasing amounts in tips.

Did you like the cable car metaphor? It can be a good starting point for further explanations about other concepts such as scalability, sidechains. I might come back to it later.

⬡ Six Angles

We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.

1. DAOs | ConstitutionDAO

On November 12th, someone realized Sotheby's would auction a rare copy of the US Constitution. In a matter of hours, a group of crypto enthusiasts went full Nicholas Cage and decided they would try and buy that Constitution because of reasons.

Fast forward to six days later, the day before the auction, and ConstitutionDAO has managed to raise over $47M, and the world was waiting for the funniest thing to happen.

When the gavel went down at Sotheby's, the winning bid had gone as high as $43,7M, but they were not the DAO's. Speakers from the project explained that the DAO stopped bidding once it was impossible to guarantee transport, insurance, and care for the Constitution with the raised amount.

Many skeptics pointed out the flaws in the DAO's logic, especially regarding taxes. But while there's probably a lot of people disappointed with the outcome, ConstitutionDAO has become the biggest PR stunt for crypto in recent times, comparable only to FTX buying stadium names.

2 Web 3 | The Web 3 Three

Discord is gamer's favorite chat app and currently is the home of 130 million users. Twitter has had many ups and downs, but lately, it has increased its userbase, and now there are 211 million users on the platform. Reddit remains "the front page of the internet" with 430 million users.

Neither of them has GAFA-sized leading status, but they are desirable actors in a supporting role, aren't they_ and they have one thing in common: the three of them are seriously flirting with crypto.

Discord CEO created a tweetstorm when he teased with a screenshot of a work in progress showing the possibility of adding Metamask as an identity validator and opening the doors of Ethereum transactions for millions of users. Discord users were not happy, though, and took it against NFTs.

Twitter's commitment is well known. They added Bitcoin tipping functionalities, and they are cooking some much-awaited features. But they also recently announced the formation of a brand new crypto team commanded with the task of exploring "what's possible with identity, community, ownership, and more."

Reddit recently announced bold steps in incorporating blockchain technologies and ethos, even hinting at the possibility of turning their karma points into tokens.

3. Regulation | Infrastructure bill turns into law

So the US has finally signed the infamous infrastructure bill. The same bill that in August sent the crypto community in the US to a public opinion war. In August, the main point of concern was the definition of the term "broker" The initial drafts imposed crypto "brokers" the obligation of reporting transactions...but gave the term an extensive definition. As per the initial drafts, developers or miners would be considered brokers. The law would impose a responsibility that was too difficult to comply with because they do not necessarily participate in transactions. It would do something like asking gas stations to report on highway traffic. It's not their business; it could put them out of business.

In its current formulation, the infrastructure bill requires the recipients of $10k transactions to report on the name, address, and taxpayer identification number, of both the payer and the beneficiary (usually the recipient) of the transaction.

All is not lost yet. There's still room for education and lobbying because implementing the law might bring nuance to the written words.

4. NFTs | Sotheby's gmi

If you spend fifteen minutes on crypto Twitter, you will probably encounter a few dozen weird expressions and insider jokes. NGMI is one of them. It's the thing you say when someone, for example, shows hesitation about the success of, let's say, Ethereum. It stands for "never gonna make it."

Well, Sotheby's, on the other hand, looks like they're gmi. They have been everything but slow at adopting NFT technology. The latest innovation was the news that this auction house, 277 years old, don't forget that, will accept live bids in Ethereum during the latest Banksy auction.

Not so long ago, we read about Sotheby's plans to build an NFT marketplace. Furthermore, in the past, they have been the home for some of the most iconic auctions on crypto, although their competitor Christie's is who that can brag about the most expensive sale: Beeple's $69M jpeg auction took place on their premises.

And, in the words of Steve Jobs, "one more thing" You read the piece above about ConstutionDAO, well Sotheby's had an important role, accepting the ETH balance raised by the DAO as proof of funds.

Web 3 | Ethereum Name Service

Let's climb the analogy ladder!

Step 1: When you want to find your way to a restaurant, the most precise and unambiguous way to express a location are coordinates. But can you imagine hopping on a taxi and saying, "take me to 40.413899520193354, -3.692396684884101!". Instead, humans came up with names for places and streets. Numbers are great, but they are hard to remember and communicate.

Step 2. The same thing happens on the Internet. Every website you want to open has an address expressed in a numeric code, called the IP. the IP is the unique identifier of a computer on the Internet. When that computer is the place where a website is hosted, the IP is what you could type in your browser to access that site. But imagine trying to tell a friend, "come read my blog; just open".

DNS, or the Domain Name System, translates human-readable domain names to machine-readable IP addresses. So, for example, tell your computer to open www.amazon.com, and it will know to look up the correct IP address.

Step 3. ENS has been one of the hottest topics of the week because of their airdrop. Ethereum Name Services is a service that, analogous to DNSs and street names, assigns human-readable, easy to memorize combinations of words and letters to more extended alphanumeric codes. Mostly ETH public addresses, but, given the need, many other blockchain entities, like a transaction number or a smart contract. If you wanted to, you could already send ETH to carbono.eth, for example.

ENSs is a significant UX improvement for crypto, as it makes crypto identification convenient. Its decentralized nature makes it interoperable. Soon enough, these digital identifiers could replace usernames and passwords for Web 3 services, thanks to the inherent security of blockchains.

6. Regulation | SEC Rejects Van Eck's spot Bitcoin ETF

It doesn't come as a surprise. It's more like the confirmation of the intentions expressed in the past. The SEC rejected Van Eck's proposal of a spot Bitcoin ETF recently. Gary Gensler, SEC chair, had told his preference in the past: Bitcoin futures ETFs had more chances of being approved because the current regulatory framework around futures was more solid and precise. And thus, Proshares, Valkyrie, and Van Eck launched their futures ETFs.

The Bitcoin futures market is regulated and can be surveilled, while the spot market for Bitcoin is globalized, decentralized, and unregulated, making it far more vulnerable to manipulation and much tougher for surveillance. Barron’s

The approval of the first Bitcoin Futures ETF, and the subsequent approval of more like it, were the spark that lit the latest Bitcoin price run and led it to the last ATHs. The first future-based ETF, BITO y Proshares, made the highest first-day organic volume seen in ETF history.

These are also victories with a symbolic value. They were the proof that there can be an investment vehicle that is both exposed to crypto and safely regulated.

The coming of a spot ETF, which would offer investors direct exposure to the asset, seems a little far yet. Van Eck's rejection was founded on reasons not specific to this fund manager but the general Bitcoin ecosystem.

If you enjoyed this issue, don’t forget to share. Carbono Insights is also available in Spanish. Share your thoughts and comments with Carbono at team@carbono.com, or through Twitter: @carbono_com, @raulmarcosl and @mrubio

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