“In the venture capital ecosystem, moving massive amounts of energy to capture and create value for a large population are considered especially impactful in making the world a better place. In New York City and Austin, the dedicated business leaders who invest in cutting edge technology that support the frontiers of western technology are members of an elite squad known as the Scout Ventures. These are their stories.”
You may recognize the above paragraph. It is similar to the opening narration of Law and Order SVU, now on its 24th season. This was done intentionally and I hope we’ve captured your attention. 🎭
Like the detectives 🕵️ on the show, at Scout Ventures, we are here to make the world 🌎 a place for ALL people to thrive. The “how” we do this differs drastically. As professional business leaders we are capturing and creating value by moving massive amounts of energy into a problem set with a solution that has the potential to reach the largest surface area of people. In order to accomplish this feat, it all starts with relationships. We believe that relationships lie at the heart of fulfillment and joy 💞. These include the relationships we have with the world, with others, and with ourselves. It is where we start our conversation and our keen interest around the disruptive impact of the crypto space and our relationships within the sector.
Meet Cameron Armstrong. We’ve gotten to know Cameron over the past several years through our common connections as military veterans 🪖. Cameron served as an Infantry Officer in the U.S. Army where he deployed as a platoon leader to Kuwait & Afghanistan as well as taught at the U.S. Army Officer Candidate School. After his time of service, he earned an MBA from Harvard Business School and co-founded and sold an e-commerce software startup after previously working at Amazon Finance. As we were getting to know Cameron, he was at an inflection point studying the crypto/web3 space intensely to find the best business case for this technology. He had been working independently to develop an MVP for a zero fee payments network all built on crypto rails with the first product being peer-to-peer NFT sales dapp and with plans to build out a number of other features including an NFT Escrow.
Cameron and his vision and understanding of the space inspired us to get more involved. This idea around strength in numbers, in latin referred to “vires in numeris” captured our intent of nobelized 🧠 founder support through proactive engagement in a greater community. As investors, though, we didn’t just want to throw in a bunch of capital and watch. We wanted to be “a part of the stack.” What do we mean by this? The stack refers to a military tactic when attempting to make a door 🚪 entry in close quarters combat. It is a technique for fast entry into a building, providing less gaps, and when executed properly allows a 5 person team, the stack, to “respond” to the actions of others before any other action can take full effect. In other words, we wanted playing time, we weren’t going to sit on the sidelines and keep the bench warm. If we were going to invest in Cameron’s vision, we were going to roll up our sleeves and build alongside.
We first wanted to understand the landscape, which starts with an obsession for learning, reading, and synthesizing 📚. It also is complemented by engaging with the community and talking to other people building in the space. We began to focus on specific areas we believe have the greatest potential to generationally alter society. We began targeting blockchain and its infrastructure, which lies at the foundation of the technology🧑💻 fueling many of the crypto and web3 companies being created today. Specifically, targeting the layer 0s, Proof of Work(PoW) and Proof of Stake (PoS). More broadly, they are consensus mechanisms, which is just a fancy word for a system that cryptocurrencies use to validate the authenticity of transactions and maintain security of the underlying blockchain, whether its Bitcoin, ETH etc.
PoW actually existed long before bitcoin and was originally published back in 1993. The term later coined in 1999 was the leading idea in Satoshi Nakamoto’s Bitcoin white paper📃 published in 2008. It is trustless and distributed consensus meaning that if you want to send and receive money, you don’t need a third party service like Visa, Mastercard, banks 🏦 to authorize because it’s all available to view on the public blockchain. What creates these new groups of trustless transactions on the blockchain is done through mining ⛏️. Mining verifies the legitimacy of the transaction and creates the digital currency. Transactions are bundled together in a block, miners verify that these transactions are legit by solving a mathematical puzzle 🧩 known as the PoW problem and a reward (in the former of the digital currency) is given to the first miner who solves each block’s problem. The verified transactions are then stored in the public blockchain. The competitive nature of the PoW requires: 1. Increased computing power (one bitcoin transaction in 2015 required the same amount of electricity as powering 1.57 American households for one day) and 2. Greater cost of block creation, making it less than ideal in terms of scalability. The PoS, however, is completely virtual. Although the overall process remains the same, instead of miners solving for cryptographically hard puzzles using their computational resources, there are validators that lock up some of their Ether as a stake in the ecosystem. The validators bet on the blocks they feel will be added next to the chain ⛓️. When the block gets added, the validators receive a block reward in proportion to what they stake. PoS remains secure because of the Casper protocol, which is an algorithm that requires validators to submit deposits to participate. PoS is similar to the way banks require pools 🎱 of their customer’s money to turn around and lend money 💰 out because it allows the ecosystem to circulate crypto that was already mined once.
As our understanding of this layer within blockchain infrastructure continued to evolve, we began to better understand the value behind the layer 1s and 2s. Particularly, we started diving into Ethereum (ETH), a layer 1 and its merge. So what was the merge? Originally called ETH2, now Ethereum Merge combined PoW (Mainnet Ethereum) and PoS (Beacon Chain) under one blockchain. The merge’s main goals are to speed up processing, offer greater security, and reduce energy consumption by 98%. Also, the merge is not meant to affect the current value of any ETH you currently hold. Later in 2023, shard chain will expand ETH’s capacity to process transactions and store data. These chains will break down large data into smaller pieces to allow the networks to process at faster speeds 💨 without congesting the network. There has been reported about $31B worth of ETH deposited into this new model.
One of the important parts of staking comes back to this philosophy around the Triple Halvening Effect coined by @SquishChaos and first read on @Montana_Wang's twitter post. Halvening refers to the bitcoin algorithm that automatically reduces the amount of bitcoin rewarded to miners by half. What this does is reduces the issuance rate of BTC over time and creates deflationary pressure. This also reduces the BTC sell pressure from miners selling their BTC rewards. Historically Bitcoin halving events have correlated directly with the start of the crypto bull 🐂 cycles. ETH issues under PoW works differently because instead of algorithmically reducing the miner ETH read, it’s done through software updates agreed by the community. About 6500 blocks are mined per day, 13K in ETH issued, increasing about 4.3 per year. Issuance rate is high as to incentivize miners, and the more miners the network has, the more secure it is because it’s more expensive to try the 51% attack. PoS switches from a miner to a validator secured networks and reduces energy consumption by 99.9% Instead of using special hardware and energy, validators use game theory involving capital and punishment.
Part 1: Exponential reduction in issuance, since validators consume less energy to run, network can pay smaller block rewards to incentivize people to run them. ETH will drop from 4.3% to .4% post merge. There will be a 10x reduction in daily sell pressure on ETH miners meaning sell pressure causing prices to go up. This change will signal a transition from a mine and dump economy to a stake and re-stake economy.
Part 2: EIP-1559, burn after sending, its a software update to ETH that burns 🔥 a portion of each transaction’s fees.
Part 3: Lock up 🔒 period, Staking ETH with a validator and helping secure the network you will be given block rewards. Right now 23,263,160,847 worth of ETH is being staked which is 10% of the entire market 📈 cap. ETH staking withdrawals will not be available right away which locks up a large supply of ETH that cannot be sold.
Overall, this meant that Ethereum would be an exceptionally scarcer asset to hold post merge.
All this to say that at Scout, we recognized this incredible opportunity to become good denisons ourselves of the web3 community by contributing to the community at the foundation of the entire ecosystem, aligning closely with our first principles of supporting founders, like Cameron, and their vision of generational impact through frontier technologies.
So what did we do?
We built our own Ethereum Validator node with the intent to memorialize our efforts and encourage other activists in the space to become part of the community. Let’s humanize how we build so other people can learn and build with us.
So what is a Validator Node?
Most simply, it’s defined by ethereum.org, as a node in a PoS system responsible for storing data, processing transactions, and adding new blocks to the blockchain. “Nodes” are the “boots 🥾 on the ground” of the blockchain network. They are physical computer hardware that runs their respective platform’s software. They act as the endpoints to enable users to interact on the network. In order to activate the validator software, one needs to be able to stake 32ETH ~50K +/-. Not only does one need to know how to set up the node from a technical perspective, but one has to be financially capable to set aside a significant amount of capital to do so, which makes the barrier to entry simply unattainable by the average joe 🦘. We will get back to this point in a minute, but first we will cover how exactly we built a Validator Node.
It first started with research. There are plenty of websites, youtube videos, blogs, and reddit threads that cover this topic. Frankly, many of the surface level searches could actually mislead you to believe that you don’t need to be too technically proficient to tackle this feat. However, as we started to uncover the process of building a node, we realized this was going to be more than just a weekend project.
We found these guides to be most helpful in understanding the mechanics and requirements of building a validator node.
https://someresat.medium.com/guide-to-staking-on-ethereum-ubuntu-lighthouse-773f5d982e03 (a subset of the eth staking guide in the url above and most effective when opting for ubuntu and lighthouse)
We also had to decide what hardware we were going to use to build the node. We took a bike ride over to our local electronics store, which if you live in NYC🏙️, naturally it was B & H Photo Video, next to Penn Station (they are closed on Saturdays fyi).
The hardware we chose:
- Intel NUC version 11
- 32 GB of RAM
- 2 TB NVMe SSD
- Uninterrupted power supply
Now in following the step-by-step instructions, from the above guide (from github), we successfully tested the node and verified our node on the Goerli network. Some lessons we learned along the way...
-Most misrepresented was the variance and download timing and how long it took to download the lighthouse beacon chain and the ethereum node. There were a number of bandwidth constraints ie peer counts. All of the items needed to be in synced prior to start time.🏁
On the hardware front:
-Throughout the process of installing the software services to make a validator node work, we were constantly monitoring the computer’s resources. We had a few key observations:
- The cpu demand, while simultaneously syncing the beacon chain and eth node, was highly volatile as the downloading and validating of blocks can be spicy.
- The memory demand was much more consistent but certainly creeped steadily as the services loaded larger pieces of the chain for processing. While the memory was more consistent on the whole, we did see a couple anomalous spikes that caused the besu process to over-consume memory based on the initial 2GB limit. It makes sense to give 2-3X the breathing room here.
- Disk writes: it turned out that downloading and syncing the different services was extremely write heavy to start... eventually downloaded a few hundred gigabytes of block data
-Gaining an understanding of how the lighthouse validator, beacon, and eth node ⚡ all sync and communicate helped grasp the architecture of validators. It’s a well coordinated concert 🎵 of local JSON exchanges for all the services to talk and accomplish validation.
Back to the point earlier about the barrier to entry. In building our validator node we did in fact verify the reality of these barriers, which included accessibility to technical expertise, $$$, and time ⌚. We hope that over time, we can help to break down these accessibility barriers 🚧. Our next step in identifying how to solve these challenges will be to build an ethereum validator node in Uganda. We anticipate that as we continue to build, we will gain a better understanding of potential solutions. To us, at Scout, these are the problems we want to help solution through Venture Capital funding 💸. To us, VC isn’t just a bunch of privileged individuals sitting at a round table discussing trends that could lead to the next billion dollar company. It’s taking a proactive approach to support founders with an incredible vision that want to tackle broken constructs of our society and create real change and impact for all people. This comes with an understanding that the technology meets people where they are at today so that these barriers of entry don’t in fact exist.
Many people don’t understand web3 because it seems complicated and out of reach. What people don’t realize is that much of the same concepts we consider to be web2 are still used in web3, we’ve just decided on alternative naming conventions. The underlying blockchain technology and network, yes, is much different, but that is what has evolved. By removing this barrier between what is web3 and web2, more people will actively play a part in this technology evolution.
So what’s next for us at Scout? We have a running list of projects which include building within farcaster.xyz, creating NFT collections, and helping out our incubation companies VF Protocol and Paar.ai. We are shakers, we are movers, we are doers and we will continue to help evolve technology in a digestible way for society to adopt. 🫀
Highly recommend looking for the Bitcoin Jumbo Roll next time you grab some local sushi!