Legitimacy as the World’s Most Powerful Force:
Vitalik Buterin, co-founder of Ethereum, argues that legitimacy is one of the world’s most powerful forces, yet it is rarely discussed. Legitimacy bestows trust and acceptance on various aspects of society, including institutions, individuals, and ideas. In the cryptocurrency space, legitimacy plays a crucial role in determining the value and success of projects.

Legitimacy and Cryptocurrency:
Legitimacy is the answer to many fundamental questions in the cryptocurrency space, such as: Why has cryptocurrency grown to a $2 trillion market capitalization? Why are NFTs valuable? Why is there only one Bitcoin? Why do we have confidence in Ethereum’s monetary policy? Legitimacy is the underlying force that drives the success and adoption of cryptocurrencies.

Historical Examples of Legitimacy:
Legitimacy has been a key factor in shaping human coordination and social organization throughout history. Examples include the acceptance of certain outcomes as legitimate, leading to the formation of social organizations. Legitimacy gains strength over time as it is accepted and reinforced by society.

Legitimacy and Social Issues:
Legitimacy plays a role in addressing modern-day social issues, such as political strife and distrust in institutions. Understanding legitimacy can help explain why certain social and political phenomena occur.

Ethereum and Bitcoin Security vs. Research and Development:
Vitalik highlights the significant difference in security budgets between Ethereum and Bitcoin compared to their research and development expenditures. Ethereum and Bitcoin spend millions of dollars daily on security, while research and development budgets are relatively low. This discrepancy is due to the risks associated with redirecting security funds to human salaries for research and development.

Institutionalized Funding Decisions and Political Chaos:
Vitalik argues that regular institutionalized decisions to redirect funding for specific purposes can lead to political chaos and capture. The Ethereum and Bitcoin ecosystems can summon billions of dollars in capital but face restrictions on how that capital can be allocated.

Legitimacy as a Powerful Social Force:
Legitimacy is a social force that allows groups to summon up resources beyond their physical means. It enables the direction of resources toward specific tasks, often surpassing individual abilities.

The Steam Project Example:
Justin Sun’s attempt to consolidate power and control over the Steam network through the purchase of esteem tokens failed due to the community’s rejection. This demonstrated that ownership of coins is controlled by social contracts and not solely by private keys.

The Concept of Legitimacy:
Legitimacy refers to shared expectations and patterns of behavior that are accepted and enacted by society. It involves a high cost of disrupting consensus, leading individuals to comply with agreed-upon norms.

Examples of Legitimacy in Blockchain:
The DAO fork: Individuals chose to download the client implementing the fork or continue running the original client based on their perception of legitimacy. Bitcoin Segwit: Its legitimacy led to its acceptance and implementation by the community.

Positive vs. Normative Legitimacy:
Legitimacy can exist even if individuals disagree with it, as seen with the government of North Korea. Vitalik Buterin uses the term “legitimate” in a positive sense, acknowledging that something can be legitimate without being desirable.

Legitimacy’s Role in Shaping Outcomes:
Legitimacy, as a social force, determines the outcome of events or situations where opposing sides are vying for support. The direction legitimacy sways in, either towards one side or the other, significantly influences the final result.

Legitimacy and the Ethereum Hard Fork:
In 2016, a hard fork occurred in Ethereum, known as the DAO fork, which resulted in the creation of Ethereum Classic. The question of legitimacy arose, as both chains claimed to be the real Ethereum. Various factors, such as market cap, DeFi economy, and community support, contributed to the legitimacy of Ethereum, while Ethereum Classic faced difficulties in gaining traction.

Legitimacy and the Steam Blockchain:
A similar situation occurred with the Steam blockchain, where Justin Sun possessed the private keys to the address holding the Steam tokens but did not have legitimate control over the blockchain. The community’s recognition of the Steam blockchain as a legitimate entity, separate from Justin Sun, led to him losing control over the ecosystem.

Legitimacy as an Invisible Force:
Legitimacy is an intangible, hidden force that exists in the social landscape, influencing outcomes and shaping perceptions. It can be observed in retrospect, as in the cases of the Ethereum hard fork and the Steam blockchain, where the outcome was determined by the community’s recognition of legitimacy.

Legitimacy’s Role in Crypto’s Value:
Legitimacy is a hidden force that significantly influences our lives in both the physical and crypto worlds. The crypto space, in particular, relies heavily on legitimacy to derive value because it controls no physical resources, legal rights, or coercive force. Bitcoin’s and Ethereum’s values are largely attributed to their legitimacy and the community’s perception of their value.

Legitimacy in Ethereum’s Governance:
Ethereum’s governance mechanisms emphasize the importance of legitimacy. Proposals, such as EIP 2025, that deviate from the Ethereum social contract or lack legitimacy are unlikely to gain support and implementation.

Example of Legitimacy’s Impact:
During the 2019 bear market, Ethereum faced challenges and uncertainty about its future. EIP 2025 was proposed to secure funding for Ethereum client development, but it lacked legitimacy and community support. The proposal’s title, “Block Rewards Proposal for Funding ETH 1.X,” implied a departure from Ethereum’s core principles, leading to its rejection.

Legitimacy:
Legitimacy is essential for the successful operation of any system. Legitimacy can be derived from various sources, including: Brute force: A powerful entity imposes its will on others. Fairness: A system is perceived as fair and just. Process: A system is perceived as fair and transparent. Performance: A system delivers good results. Participation: A system allows for broad participation.

EIP-2208 and Legitimacy:
EIP-2208 proposed redirecting a portion of block rewards to a specific group of developers. This proposal raised concerns about legitimacy, as it would have benefited a particular group of people. The proposal also highlighted the need for a clear and fair process for funding public goods.

Public Goods Funding:
Public goods funding is essential for the development and maintenance of the Ethereum ecosystem. Current methods of public goods funding are limited and often rely on donations. New mechanisms are needed to ensure sustainable and fair funding of public goods.

Legitimacy and Funding:
The legitimacy of a funding mechanism is crucial for its acceptance by the community. Mechanisms that are perceived as fair, transparent, and beneficial to the entire community are more likely to be accepted. Mechanisms that benefit specific groups or individuals are less likely to be accepted.

Conclusion:
Legitimacy is a complex and multifaceted concept that plays a vital role in the governance and funding of the Ethereum ecosystem. There is a need for further discussion and exploration of the sources of legitimacy and how they can be applied to public goods funding. Mechanisms that are perceived as fair, transparent, and beneficial to the entire community are more likely to be accepted and successful.

Legitimacy by Performance:
Legitimacy by performance refers to gaining legitimacy through successful outcomes and performance. Some dictatorships achieve legitimacy by delivering consistent economic growth over time. In the crypto space, short-term legitimacy can be gained when the price of a coin increases, creating the perception of a good asset and a decentralized chain.

Legitimacy by Participation:
Legitimacy by participation involves gaining legitimacy through broad participation and accessibility. In the context of crypto, the open nature of blockchain technology enables anyone to participate and interact with the system. Anyone with an internet connection can open an Ethereum address, and anyone with the necessary stake can spin up an Ethereum node or validator node.

Legitimacy by Continuity:
Legitimacy by continuity relates to gaining legitimacy through the system’s longevity and sustained existence. Long-standing institutions and systems tend to acquire legitimacy over time, as they become familiar and trusted by society. In the crypto space, older and more established cryptocurrencies may enjoy legitimacy due to their longevity and proven track record.

Legitimacy by Participation:
Legitimacy by participation refers to the acceptance of a process due to the ability of its participants to influence the outcome. Participation is not just about fairness, but also about psychological factors such as self-consistency. Running a node in a blockchain network is an example of legitimacy by participation. Self-verification is an important concept in blockchain systems, contributing to their legitimacy. Gitcoin grants is another example of legitimacy by participation, where individuals can influence the distribution of funds.

Legitimacy by Fairness:
Fair systems that exclude participation may not achieve legitimacy. Intellectual arguments may justify exclusion, but they do not provide legitimacy by participation. Youth political movements and civic engagement efforts aim to address the lack of participation among certain groups.

Legitimacy of Decentralized Systems:
Decentralized systems offer full participation opportunities for all individuals. The ability to read the chain, send transactions, and participate in consensus contributes to the legitimacy of public chains. More fully decentralized systems like Ethereum and Bitcoin may have greater legitimacy than semi-centralized chains with limited participation opportunities.

Legitimacy as a Foundation for Institutions:
Legitimacy is essential for traditional institutions, providing a foundation for their authority and stability. Ethereum, as a public blockchain, cannot rely on legitimacy through brute force or violence.

Sources of Legitimacy in Crypto:
Legitimacy in crypto can be derived from various sources, including: Legitimacy by Complexity: The complexity of the system makes it difficult for individuals to challenge its legitimacy. Legitimacy by Modularity: The system is composed of smaller, independent modules, making it more adaptable and robust. Legitimacy by Conformity: The majority of participants in the system believe in its legitimacy.

Legitimacy by Continuity:
Legitimacy by continuity refers to the idea that a system’s legitimacy increases over time as it continues to function effectively. This concept is similar to the Lindy effect, which suggests that the longer something has existed, the more likely it is to continue existing. The longer a system lasts, the more it acquires legitimacy, making it more appealing to newcomers seeking a stable and credible system.

Legitimacy as a Bottom-Up Phenomenon:
Legitimacy in crypto is often seen as a bottom-up force, driven by the choices and preferences of individual participants. Legitimacy arises when a majority of people find the system psychologically appealing and worthwhile. This bottom-up approach contrasts with traditional institutions, where legitimacy is often imposed from above.

Legitimacy and Social Forces:
Legitimacy in crypto is shaped by various social forces, such as: Perceived Fairness: Participants believe the system treats them fairly and equitably. Transparency: The system is transparent and accessible to all participants. Inclusivity: The system is open to participation from a diverse range of individuals. Shared Values: Participants share common values and goals that align with the system’s purpose.

Legitimacy: A Double-Edged Sword:
Legitimacy is derived from people’s acceptance, but it can be centralized and wielded by a single entity or figure. Centralized figures can gain legitimacy through various means, including brute force.

The Fragility of Centralized Control:
Even in dictatorships, legitimacy stems from the collective recognition of power, making it a bottom-up force. Shifts in legitimacy can occur when people question top-down control, leading to populist uprisings.

Stable Equilibria and Gradual Shifts:
Stable equilibria in legitimacy are often maintained for extended periods, with shifts occurring gradually. Shifts in legitimacy can start slowly and then accelerate rapidly once a critical point is reached.

The Importance of Decentralization:
Decentralization helps mitigate the risks associated with centralized legitimacy by distributing power among a broader group of actors. Decentralization makes it more challenging for a single entity to manipulate or control the system.

Conclusion:
Legitimacy is a complex phenomenon that can be both empowering and fragile. Decentralization can help stabilize legitimacy and protect against the risks associated with centralized authority.

Legitimacy and Equilibrium Shifts:
Legitimacy refers to the widely held belief in the appropriateness or rightness of a concept or idea. When a conception of legitimacy is stable, people tend to conform to it out of fear of social consequences. However, legitimacy can shift over time when individuals begin questioning the concept publicly. This process can lead to a sudden flip from resistance to an old equilibrium to resistance to the new equilibrium.

Identifying Shifts in Legitimacy:
Shifts in legitimacy are often gradual at first and then sudden. People may sense these shifts intuitively, especially with recent examples in crypto and the world. The challenge lies in identifying when a big shift is about to happen.

The Case of Alexei Navalny:
Alexei Navalny’s case in Russia illustrates the power of legitimacy. Navalny’s questioning of Vladimir Putin’s legitimacy has emboldened others to do the same. This could lead to a snowball effect, potentially resulting in concessions or a change in power.

Legitimacy by Performance and Brute Force:
Putin’s legitimacy initially stemmed from his performance and perceived ability to deliver results. However, recent events may shift his legitimacy towards brute force, which could have long-term consequences.

The General and Social Coordination:
In ancient armies, the commander’s role was primarily social coordination. Maintaining troop morale and preventing a break in ranks was crucial to avoid slaughter. This example highlights the importance of social coordination in maintaining legitimacy.

Legitimacy Emerges in Human Behavior:
Vitalik Buterin discusses the natural emergence of patterns in human behavior, especially collective behavior. It’s easier for individuals to repeat familiar habits than to change them, leading to the continuation of habits and making it difficult to switch group behavior. Ancient armies provide an example of this phenomenon, where the equilibrium flip from one army routing to the other can lead to significant casualties.

Intellectual Legitimacy and Barrier Troops:
Intellectual legitimacy is a type of low legitimacy where people outwardly express strong belief and commitment to a cause. Maximalists and ardent maximalists act as barrier troops, preventing their own army from fleeing by showing that a group is willing to fight till the end. This creates a sense of safety and encourages others to continue participating in the cause.

Acknowledge Flaws Can Hasten Demise:
There can be rational reasons for not acknowledging flaws in a system or belief. Admitting a flaw in Bitcoin’s fixed cap model could contribute to the delegitimization of Bitcoin and hasten its demise. This highlights the complex interplay between legitimacy and logical reasoning.

Shelling Points and Legitimacy:
Legitimacy and shelling points are related concepts. Shelling points refer to people choosing the course of action that seems intuitive to the largest group, even if they personally disagree or if it’s not logical. Legitimacy is a similar phenomenon applied to long-term processes. Both concepts highlight the importance of shared understanding and coordination in human behavior.

Shelling Fences and Slippery Slopes:
Vitalik Buterin discusses the concept of shelling fences, which are agreed-upon boundaries that prevent people from going beyond a certain point. Shelling fences are important because they prevent slippery slopes, where once a small concession is made, it becomes easier to make further concessions. A common example of a shelling fence is the zero tolerance policy for certain actions, such as not allowing any issuance of new coins beyond a certain limit.

Legitimacy and Social Contracts:
Legitimacy is a powerful force that influences a wide range of behavior. Social contracts are agreements among members of a community that define what is acceptable and unacceptable behavior. Legitimacy is derived from a combination of factors, including shared values, history, and institutional structures.

The Role of Legitimacy in Property Rights:
Property rights are a form of legitimacy that allows individuals to securely own and control their property. The concept of legitimacy helps to maintain order and stability in society by preventing people from arbitrarily taking or damaging the property of others.

Harnessing Legitimacy for Positive Change:
Harnessing legitimacy can be a powerful tool for positive change. By understanding the factors that contribute to legitimacy, communities can work to strengthen and expand the reach of legitimate institutions. This can lead to increased trust, cooperation, and collaboration, which can ultimately benefit everyone.

Legitimacy and Property Rights:
Property rights often emerge due to new technologies. Antarctica is an example of a place where property rights may become necessary in the future due to global warming making it more habitable. Establishing property rights in Antarctica could involve creating a global body to manage harbor taxes and distribute the revenue as a global basic income.

Legitimacy and Social Coordination:
Legitimacy enables better social coordination and playing of cooperative games. Legitimacy increases the chance of reaching an equilibrium that benefits humanity. Examples of the role of legitimacy in social coordination include: The stability of multiple cryptocurrencies with varying levels of legitimacy. The emphasis on social scalability and legitimacy in Ethereum killers, rather than purely technical advantages. The preference for DAI over Tether in DeFi apps due to DAI’s perceived legitimacy.

Legitimacy in NFTs:
Legitimacy is crucial in the context of NFTs as it directly influences their value and desirability among buyers. NFTs gain legitimacy from various sources, including the reputation of the creator, the continuity of the underlying meme or concept, and connections to reputable organizations or causes. Legitimacy is particularly important for NFTs because their value is heavily influenced by the perception and acceptance of their worth by others. Factors like scarcity, social bragging rights, and the potential for resale all contribute to the value of NFTs, but these factors are closely tied to the legitimacy of the NFT in the eyes of the community.

NFTs and Legitimacy:
Legitimacy in NFTs is influenced by several factors, including the reputation and legitimacy of the creator, the continuity and popularity of the underlying meme or concept, and any connections to reputable organizations or causes. NFTs with strong legitimacy are more likely to be purchased, held, and resold, leading to higher prices and a more vibrant market. NFTs with weak legitimacy, on the other hand, may struggle to find buyers and may have limited resale value. Artists and creators can enhance the legitimacy of their NFTs by collaborating with reputable organizations, donating a portion of proceeds to charity, or creating NFTs that align with popular trends or cultural phenomena.

NFTs as a Force for Good:
NFTs have the potential to be used as a force for good by directing resources and funding to valuable causes and organizations. By creating NFTs with a portion of the proceeds going to charity or other worthy causes, artists and creators can leverage the legitimacy of NFTs to attract buyers and generate donations. Platforms and marketplaces can play a role in promoting NFTs that are associated with charitable causes or organizations, making it easier for buyers to identify and support these NFTs. The combination of legitimacy and charitable giving can create a virtuous cycle, where the legitimacy of the NFT attracts buyers, leading to increased donations and further enhancing the legitimacy of the NFT.

Shifting Legitimacy of ETH as Money:
Historically, ETH was seen primarily as a means of paying for gas, not as an asset. Over time, the Ethereum community has increasingly viewed ETH as an asset, conferring inherent legitimacy to it as such.

Ultrasound Money Meme and Proof of Stake:
The ultrasound money meme and discussions around proof of stake and EIP 1559 signal a commitment to making ETH ultrasound money. A community that wants an asset to be ultrasound money makes it more likely that supportive measures will be implemented and opposing measures will be avoided.

Cultural Differences in Legitimacy:
Legitimacy varies across different communities. Ethereum people tend to value Ethereum based on its future potential, while Bitcoin people value Bitcoin based on its current state.

Ethereum’s Social Contract:
The Ethereum social contract is based on intent and direction rather than a permanent state. It defines a clear path towards proof of stake, sharding, and functionality escape velocity. Over time, the social contract will shift from being directional to one of maintenance.

Bitcoin’s Social Contract:
Bitcoin’s social contract is more rigid and focused on stability. It is less comfortable with directional changes and prefers a permanent state. Bitcoin may need to revert to its social contract to decide a future direction regarding issuance policy and security.

Social Contracts and Adaptability:
Social contracts should be loose when a blockchain is new and rapidly growing. They should naturally evolve to become more rigid over time as the blockchain discovers its purpose. This allows for adaptability to changing circumstances and technology.

The Unavoidability of Social Contracts:
Social contracts are unavoidable, even in systems that aim to be ruled by math. The best way to avoid a social contract is to have a social contract that aims to not have one. Extreme situations, such as quantum computing or 51% miner attacks, will require directed action by the community.

Ethereum and Bitcoin’s Monetary Use Cases:
Ethereum’s social contract allows it to be a monetary use case if the community decides so. Bitcoin could take on the monetary use cases of blockchains, while Ethereum focuses on other applications. The “ETH is money” meme reflects a growing belief in Ether’s potential as a compelling monetary asset.

ETH as Money:
A core group of Ethereum community members believe that ETH is legitimate money. The narrative and fundamentals supporting ETH as money have matured over the past year and a half.

EIP 1559 and Proof-of-Stake Merge:
The implementation of EIP 1559 and the upcoming proof-of-stake merge are crucial for ETH’s acceptance as a macro store value asset. Completing these milestones will demonstrate the stability and legitimacy of the Ethereum system.

Environmental Benefits of Proof-of-Stake:
Proof-of-stake addresses environmental concerns associated with proof-of-work mining. It eliminates electricity waste, hardware manufacturing issues, and displacement of productive work.

Ethereum’s Credibility and Roadmap:
The progress towards the merge, including the running beacon chain and the Berlin hard fork, increases Ethereum’s credibility. The upcoming merge hackathon and the approaching completion of EIP 1559 add to the momentum.

Growing Interest in ETH as an Alternative:
People recognize Ethereum’s shift towards proof-of-stake as a significant change. The “do or die” nature of the transition adds to the interest in Ethereum.

Impact on Public Consciousness:
As the merge approaches, the legitimacy of ETH as a macro store value asset will become more apparent. The event itself will be a major turning point in Ethereum’s journey.

Ethereum’s Legitimacy:
Legitimacy for public blockchains and store value assets is a gradual process that takes years to develop. The sudden adoption of these assets as store value assets overnight would be unhealthy for the ecosystem.

Ethereum’s Era of Maturity:
Ethereum is entering a phase of maturity, marked by the completion of its technical roadmap and the emergence of scalability solutions. Applications of serious value to both the crypto community and the mainstream are starting to emerge. The NFT phenomenon has given Ethereum legitimacy in its own right, separate from Bitcoin.

Other Signs of Ethereum’s Growth:
More people are experimenting with ETH as a payment mechanism, with major companies accepting it alongside Bitcoin and other cryptocurrencies. The holdover legitimacy of Bitcoin Cash and Litecoin allows them to be accepted alongside Bitcoin, demonstrating the growing acceptance of cryptocurrencies. Once scalability is achieved, applications will further mature and go into overdrive. The completion of EIP-5059 and proof of stake, including the merge, will bring about the “ultrasound money” concept and further legitimize the ecosystem.

Vitalik Buterin’s Insights:
Vitalik Buterin’s blog post, “The Most Important Scarce Resource is Legitimacy,” provides detailed insights into the discussion on legitimacy. His Reddit thread on proof of stake versus proof of work offers valuable insights into the topic.

Recommended Reading and Resources:
Vitalik Buterin’s blog post: “The Most Important Scarce Resource is Legitimacy” Vitalik Buterin’s Reddit thread on proof of stake versus proof of work Bankless episodes featuring Vitalik Buterin: “Why Proof of Stake?” “Designing Ethereum” “Reflections on 2020 and Crypto and Beyond”