End of the Chain: Recent Episodes
Samuel
Privacy is a key component of cryptographic networks that is typically misunderstood. Anish Mohammed, Chief Scientist for Panther Protocol, joins the podcast to discuss how transparent networks fall prey to MEV attacks and other negative actions such as collusion.
Anish is an accomplished multi disciplinarian who has worked as medical doctor, bioinformatician, strategy consultant and cryptographer. As one of the founding members of UK Digital Currency Association, he has also been an advisor to Adjoint, Arteia, Collider-X, Privacy Shell, Ripple Labs, Hyperloop Transport Technologies , EA Ventures, IEET and Chain of Things.
Panther is an interoperable, decentralised custodian and smart contract platform that enables privacy of digital assets on peer blockchains. At the core of Panther’s design are Panther Pools, on-demand dark pools for Decentralized Finance (DeFi) which enable institutional and retail Users to securely store, obfuscate and transact compliantly on peerchains using Panther Assets (“zAssets''). zAssets are created by issuing 1:1 collateralized, zero knowledge digital tokens on peerchains.
Anish's LinksTwitter | Linkedin | Website
Panther Protocol: Website | Telegram | Twitter | Litepaper
Where to find usiTunes | Spotify | Stitcher | Youtube | RSS Feed
Jesse Proudman comes onto the podcast to discuss Makara Digital and its launch to the retail market. Now anyone can access the active strategies of Strix and build wealth with a SEC registered investment company.
This podcast was recorded in the depths of the bear market that started back in May.
This has been one of the most interesting periods in crypto since 2018. I really enjoyed this podcast with Jesse. Make sure to subscribe and follow the End of the Chain to get new episodes right to your device as soon as they are released.
Website: www.makaradigital.com
Twitter: https://twitter.com/jesseproudman
Where to find usiTunes | Spotify | Stitcher | Youtube | RSS Feed
I love Liquidityfolio.com. It's one of the most powerful trackers for liquidity across multiple chains. It's key for tracking LP in your portfolio. Federico joins the podcast to discuss how liquidity provision is changing with the launch of Uniswap V3 and how it will affect trading into the future.
Website: www.Liquidityfolio.com
Twitter: https://twitter.com/federiconitidi
Where to find usiTunes | Spotify | Stitcher | Youtube | RSS Feed
The godfather of algorithmic stablecoins dives deep into Seniorage Shares and its lasting legacy on the crypto ecosystem. He is the CEO of Clearmatics and is a long standing member of the Bitcoin and crypto community.
Robert Sams is a hedge fund manager and macro specialist, focused on central bank policy. Over 11-years experience in the industry. I have helped to launch two hedge funds, and successfully ran short-term interest rate strategies in G10 markets, with a focus on interest rate policy actions of the Federal Reserve, Bank of England, European Central Bank, Swiss National Bank, and the Bank of Canada.
Clearmatics
In this episode, fellow St. Andrews alumni Nic Carter joins to discuss the current state of Bitcoin. Nic answers some of the burning questions that host Samuel McCulloch has been exploring for a couple of years:
- Where does Bitcoin stand in the surveillance economy?
- Effects of FinCEN’s proposed wallet rules on Bitcoin markets.
- China’s use of the great firewall to potentially preference Bitcoin transactions.
- Biden’s incoming war administration.
- How stablecoins invalidate the utility token hypothesis.
- Potential effects of currency debasement and inflation on Bitcoin and broader economy.
- Gold and Bitcoin and their benefits as a portfolio asset.
- The eternal energy debt Bitcoin has and how it will grow in the future.
- Bitcoin’s volatility is due to a lack of a proper valuation model.
- The crypto credit markets and the growth of HyperBitcoinization.
- How offshore crypto exchanges will evolve in the next decade and their benefit to the Bitcoin market.
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Why are NFT's so damn cool and how have they exploded into popularity in the past 2 years? Alex Salnikov sits down with host Samuel McCulloch to discuss all the amazing things NFT's can do and how he is building Rarible to bring NFT's to the entire world.
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Bitcoin: USE THIS LINK FOR ADDRESS REUSE
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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Dave Collum is back for the third year to unpack his yearly mega post on all the crazy events of the last 365 days.
Over the course of 3.5 hours he and host Samuel McCulloch breakdown a few of the key topics in his report, from valuations, college wokeism, to Covid and more.
This is the perfect way to wrap up 2020 and bring in the new year. Enjoy.
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Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
Make a Tip - Send me an email after so I can mention you on the show.
Bitcoin: USE THIS LINK FOR ADDRESS REUSE
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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A short update from Sam and a recap of 2020. Plus some thoughts on what's to come for 2021.
*About this episode*What is transactional privacy and how does it affect you every day? Sebastian Buergel from HOPR joins to discuss current vulnerabilities in crypto and how HOPR is addressing them.
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
Support the showIf you like End of the Chain you can help support the show by doing one of the following:
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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*About this episode*Sam K comes back for another episode to talk about stablecoins and the release of his new project Frax.
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
Support the showIf you like End of the Chain you can help support the show by doing one of the following:
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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*About this episode*Time is unknown to a computer. Information travels at the speed of electricity or light, so how can time be a part of a computer network? Anatoly, co-founder of Solana, has solved how to bring time to a distributed network with Solana, an incredibly powerful and fast proof-of-stake network.
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
*What to listen for*Support the showIf you like End of the Chain you can help support the show by doing one of the following:
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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Show notes
*About this episode*Serge is a degen of gambler and knows everything about online gaming. We break down the latest defi trend, the perils of crypto gaming, Bitcoin's lack of development and more.
Serge Ravitch is a former lawyer, professional poker player and product/project manager turned angel investor. Serge has been skeptical of crypto since 2011, which didn't stop him from making big bets during 2017. He currently lives in Puerto Rico.
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
*What to listen for*Support the showIf you like End of the Chain you can help support the show by doing one of the following:
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
- *Leave a Review on iTunes*
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Show notes
*About this episode*Gas prices are out of control and Layer 2 networks seem poised to offer a low cost solution for smaller transactions. Dr. Arthur Gervais joins this episode to discuss the various types of L2 networks and how Liquidity Network has built a functioning platform to meet the needs of ETH users.
Arthur's linksHomepage | Linkedin | Twitter
Liquidity network
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*What to listen for*Support the showIf you like End of the Chain you can help support the show by doing one of the following:
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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Show notesThe liquidity network team asked End of the Chain to include the following disclaimer:
DISCLAIMER: Timelines and roadmap details mentioned are subject to change. Please look for our official communication on liquidity.network and subscribe to our update emails. There is a lag on uploads. This message is not an endorsement or recommendation for Liquidity Network, any cryptocurrency, or investment product. Neither the information nor any opinion contained in this message constitutes a solicitation or offer by the creators or participants to buy or sell any securities or other financial instruments or provide any investment advice or service.
*About this episode*SBF joins this episode to discuss how crypto markets have evolved in the last year and what effects Defi and his future platform Serum will have on the larger ecosystem. Plus we get into detail on a few trade products and how they were built into FTX.
Sam's LinksLinkedin | Twitter
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*What to listen for*SUPPORT THE SHOW**If you like End of the Chain you can help support the show by doing one of the following:
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Bitcoin: USE THIS LINK FOR ADDRESS REUSE
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SHOW NOTESShow Notes
*About this episode*Leemon jumps into a discussion of his past service in the US Air Force and how it led him to creating the Hashgraph protocol. Both Leemon and host Samuel McCulloch lived for some time in Colorado Springs and discuss military life.
Leemon is the inventor of the hashgraph distributed consensus algorithm, and is the Co-Founder and Chief Scientist of Hedera. With over 20 years of technology and startup experience, he has held positions as a Professor of Computer Science at the US Air Force Academy and as a senior scientist in several labs. He has been the Co-Founder of several startups, including two identity-related startups, both of which were acquired. Leemon received his PhD in Computer Science from Carnegie Mellon University and has multiple patents and publications in peer-reviewed journals and conferences in computer security, machine learning, and mathematics.
Leemon's LinksLinkedin | Twitter | Forbes
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
*What to listen for*SUPPORT THE SHOW**If you like End of the Chain you can help support the show by doing one of the following:
- *Help keep this show going by* sending a donation
Bitcoin: USE THIS LINK FOR ADDRESS REUSE
Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
- *Leave a Review on iTunes*
- *Share an episode with family and friends*
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- If you are interested in sponsoring the show please *send me an email.*
SHOW NOTESShow Notes
*About this episode*What is neutrality and how is information to be recorded for generations to become? Sam Kazemian of Everpedia joins this episode of End of the Chain to discuss the current political climate and how Everpedia is designed to be an inclusive platform.
Sam Kazemian (b. February 12, 1993) is an Iranian-American software engineer, entrepreneur, and cryptocurrency enthusiast. He is the Co-Founder and President of Everipedia, the first decentralized online encyclopedia on the blockchain. He founded the company with Theodor Forselius, Mahbod Moghadam, and Travis Moore in 2015. [5] He is also cofounder and CEO of frax.finance, an algorithmic stablecoin project.
Sam's LinksWikipedia | Twitter | Everpedia
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
*What to listen for** Why the goal of both Everipedia and Wikipedia is to just present everyone’s story and not their narrative. * Why objective journalism no longer exists in the USA due to the polarisation and the cultural divisions we see playing out. * Why neutrality bias exists in Wikipedia because you decide what should and shouldn’t be included depending on its reputable source and this conservative status quo approach limits pages. * Why if you make everyone mad or unhappy, you are doing something right because you are giving everyone space to present their viewpoint. * Why Everipedia as a for-profit company is building DeFi related products that have direct relevance to knowledge like prediction markets. * How their IQ token built on EOS incentivizes content creation and editing for the future. * Why Everipedia’s mission was always to be on-chain and to build an economically sound cross-chain platform. * Why everything is becoming a political question in 2020 and how this makes it difficult to remain apolitical or neutral, especially in the US. * Why how you control information is how you gain power; and why this polarization is limiting constructive dialogue in the US today.
*SUPPORT THE SHOW*If you like End of the Chain you can help support the show by doing one of the following:
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- *Leave a Review on iTunes*
- *Share an episode with family and friends*
- *Follow me on Twitter | Youtube*
- If you are interested in sponsoring the show please *send me an email.*
SHOW NOTESShow Notes
Sam M: I brought you on because I have been interested in the idea of what Wikipedia does and the growing divisions that you see in Wikipedia and how the platform has evolved to be where it is, and just really to get your thoughts on how its growth has kind of spurred you to create a competitor to it, or maybe not even a competitor, but another type of information gathering portal that shares different views than Wikipedia.
Sam K: Yeah. I think what is really interesting is in the past few years, so we started, building blockchain Wikipedia, cause that's kind of what they see it as the landscape in our society is actually changed a lot the past few years as well about people's view on knowledge and where things are coming from what are reliable sources, what are not what people previously thought were reliable.
I think we're in a really interesting time, and actually, when it comes to blockchain-related software and things like that, with the emergence of DeFi and some of the newer kinds of financial products and protocols on-chain, I think we have a lot of really exciting things coming forever, but would it make sense to go over a quick history first for the audience?
Sam M: Yeah. You've been working on Everipedia for a while now. Haven't you?
Sam K: Yeah. So we actually started Everipedia just as kind of alternative to Wikipedia or, like an expansion pack or a redesign since 2015, it wasn't until kind of the ICO and the big blockchain death. A boom that we thought, well we think the next generation of web services and technologies are going to be blockchain-based.
If we're really building a new knowledge base, it would be irresponsible to not include a leverage blockchain technology. Since 2017, Everipedia has been fully an on-chain product, so to speak.
Sam M: But what was the reason in 2014 for creating this Wikipedia alternative?
Sam K: Teddy and I, so we started it together and then, quickly grew to four co-founders together, we thought that Wikipedia is restrictions and they're kind of deletionism rules made it so that the concept of an online knowledge base on the internet was too restrictive.
You had to essentially be encyclopedic in terms of a topic to have a page back then, and even a lot still today. You can't have a page about your startup or something or your cryptocurrency project or things like that because, that's not what Wikipedia sees itself as; it just sees itself as a digital version of Britannica, so to speak, and way more so in 2015, and because of that, you've had all of these huge sites like Crunchbase, trying to fill the gap for knowledge on startups, because you couldn't have it on Wikipedia. You'd have, for example, a Wikia which now rebranded defend them have knowledge bases for animation or TV shows and things like that, or even YouTube, celebrities and stuff like that because they couldn't have a Wikipedia page. We thought why is that actually a big deal? It's not like space is like a constraining factor anymore in the digital age, and if there are sources, you're going to be able to find sources and create an encyclopedia entry for a startup. Maybe it's not as big as Uber or Facebook or something. Why can't it be in an entire encyclopedia of everything, right? And so that's where it got its name too.
Sam M: What are some of the restrictions, just for people that don't know on Wikipedia about, about creating and maintaining entries?
Sam K: Yeah. So on Wikipedia, actually, we ran into this a lot when we're pitching it to two different people. A lot of people really think anyone can have a Wikipedia page or any company or anything at all, and the only reason they don't have a page is that they haven't gone in and made one for themselves.
Obviously, they couldn't be more wrong. It's a huge process. You have to find a reputable source that Wikipedia claims is very reputable, which there's a lot of discussion about mainstream news sources actually as reliable as people used to think are nuts, and then after you create a page, it has to go through this approval process, but higher ranking or status editors have to vet it and then it'll become a page. Then it can always be put up for deletion if it's deemed not to meet those standards at any time.
It's actually something that's pretty difficult if it was super easy; you have a lot more pages for Everipedia. We actually started out as a fork of the English Wikipedia because their content is free. So as Everipedia has content, so we just thought, why don't we fork it? And then, just build our own knowledge based on top of it. We quickly got over a million, plus pages of unique entries in the English Everipedia section. So we actually had almost like a little bit over a million of people, companies, things that were not on Wikipedia because people wanted to put that stuff up.
Sam M: Because there's a certain type, how would you describe some of the editors that are at least the senior ones that have been at Wikipedia for a long time?
Sam K: I mean, there's a wide breadth of editors, some of them aren't in the deletionist camps. So there are two camps. There are inclusionists and deletionists. The deletionists, they don't think everything or even everything that could be cited needs to be on a Wikipedia or an encyclopedia only encyclopedic content should be. And then there's the inclusionists—a lot of them which actually edit Everipedia. We have long time Wikipedia administrators/stewards or whatever the actual exact title is, but there's a lot of great editors that edit both.
Sam M: Yeah, I've actually had on one of the senior Wikipedia editors in David Gerard, he actually came on to talk about his book attack at the 50-foot blockchain, but it's funny that he is one of the most vocal opponents of cryptocurrency, blockchain, opponents. That, that you could find yet he's in charge of maintaining a lot of the pages that goes up. He's notorious for editing the Ethereum page, the Bitcoin page.
I know there was some stuff he's been at the centre of a lot of these deletion edits that you've been talking about. I enjoy speaking with David. I think he has a great viewpoint and he was probably one of the only people in 2017/2018 who was trying to throw water onto the ICO bubble, or maybe one of the few when everybody else was just flinging money at things. At the same time, I think there is substantial information that should be published. When it comes towards the political, so crypto is one thing. Right. But especially when it moves towards the political, would you say that there's bias in some of the edits that go up?
Sam K: I would say humans are editing these things, right? So it's always going to have the flavour of the interpretation of the person, and hopefully, the idea with Wikipedia is there are multiple viewpoints. Actually one of the interesting things is Larry Sanger was our CIO, one of the co-founders of Wikipedia with Jimmy, early on, he actually was our CIO from, late 17 to late last year-ish. He actually was in charge of devising Wikipedia's original neutrality guidelines. If you haven't read Larry's view on neutrality, it's actually one of the most thorough and elegant pieces. He actually helped us devise the foundations from neutrality on Everipedia. I think the idea here is neutrality is all about viewpoints, right? As long as you don't, you're not supposed to take a position you're just supposed to present a neutral article or a neutral piece or a neutral encyclopedia entry or whatever is supposed to be; you just present a multitude of viewpoints and interpretations of the content. It's not supposed to tell you what anything actually is. That's a very subtle distinction, but it's extremely important, right? Like if you're talking about either political things or if you're talking about a cryptocurrency, so you're supposed to say proponents of cryptocurrencies say that a new way to settle value outside of the classical banking or Swift system is valuable. Well, they're supposed to then talk about the people who don't think it's actually important, right.
Then you're supposed to talk about money laundering concerns or all of these other things, and you're not supposed to actually try to build a story about it. You're supposed to just present everyone else's story. That's the whole goal of both Wikipedia and Everipedia, and I think Larry was actually the person that kind of set those foundations. I think some of that is changing at Wikipedia recently and that's kind of unfortunately not a good path in my opinion. A lot of things in Wikipedia where things that they call reputable sources or things like that are heavily skewed to mainstream sources, and when you do that, you basically get to decide what is a viewpoint that you can include or what is a viewpoint you shouldn't even include, which is absolutely not the point of neutrality.
Sam M: Right. The way that I would think about that is that you grow up reading all these textbooks and this is really pressing for what's happening now in the United States, as you grew up reading all these textbooks about American history, but then you get to 2020, and we start to have deep conversations about racial justice and about what it means to educate people in America and what should be included, what shouldn't be included. If anything Wikipedia really represents the status quo of what information is acceptable, because if it wasn't acceptable or if it was on the fringe, then it wouldn't be included. I would just assume that Wikipedia tries to maintain the line of acceptable ideas that are not controversial.
Sam K: Yeah. I would agree with that, and honestly, as a founder of someone building either an alternative new knowledge base, that platform, the whole reason I was interested in this space is cause I actually like Wikipedia. I'm not here to even try to be a salesman for Everipedia and be like my thing is better. Wikipedia is great actually. Wikipedia is definitely now a pillar of the internet. People who are in charge of making the rules kind of set it up for becoming what it is, or hopefully staying as good as it was.
So the issue is right now with the whole kind of political polarization in the USA, and people finding, for example, news media, even like ones like that they thought were objective or neutral, so to speak, maybe like the New York Times, but now it's laughable. Right? I mentioned the New York Times, but now people are probably listening to this, later are going to laugh at me.
But there was a time where the New York Times was the standard for objective journalism. Right but now half of the country thinks it's kind of like a liberal mouthpiece or whatever. Then the other half thinks, for example, Fox News is like a propaganda outlet and the issue is, with these evolving attitudes, all of the people that are making the rules on Wikipedia right now have a lot of power to change what Wikipedia is going to be.
Sam M: I think, concerning the news, you're probably right on both points because news in 2020 is different. I mean, it's the same as it was back in the 1920s, right? Where you have a series of organizations that are trying to write facts mixed with a little bit of opinion, to garner eyeballs or clicks to come to their site and the more eyeballs or clicks that they get, the more money than they make from their advertisers, and so they have this strange relationship where, because they're profit-driven, they are driven towards making money from their advertisers, rather than presenting something, which should be a neutral record. If they wrote a neutral record, then it would not gather the same attention that a bombastic outlet like Fox News where they have their talking points.
They allow people to come on and have their own talking points about what they want to speak about. You really are catering towards a hyper select group of people that already agrees with most of what you're talking about. You're just presenting it in a way to them, which matches their political leanings.
You look at the New York Times and its subscriber base. It's new Yorkers, right, and other East coast, West coast, big city people who use that as their general newspaper and the online newspaper as well too, but when it comes to Wikipedia, it becomes harder.
Because if you're trying to be like the history of the status quo, there's bound to be political clashes and continuing political conflicts. I'm sure I could without even knowing about what the topic would be, I could probably bring up five things right now, which are very contentious on Wikipedia and that's not even bringing in like stuff like China and their relationship with some countries in the world or anything. Wikipedia is a global repository for information that I use it every day probably to go and check out things and read stuff.
It's amazing. You're right. It's a great portal but at the same time the polarizing effect that's been happening in the United States of this movement away from centrist ideas and Central's policies to extreme populism or this cultural Marxism and then the other effect of countries like China and other places where free speech may not be as open and more limited. I wonder if that has a detrimental effect on Wikipedia itself and its ability to maintain itself as the status quo history,
Sam K: Yeah. I think that what you said is since a hundred years ago when newspapers were huge, then in the fifties in the USA, television became a big and kind of the market effects of advertising and things like that really played a role.
I think that things have been getting more and more polarized since then, because like you said, there's been advertising and stuff, but there's been a move away from the centrist view. The issue now is that all of the people who are basically editing Wikipedia or making all of the rules now are in this political climate of these, these kinds of cultural Wars and things like that, so the actual discussions get more heated. They get more polarized. There's a wider range of possible opinions and viewpoints that people want to include it. There's a lot of places where issues can come up. Now, one of the things I wanted to kind of point out is just from a technological perspective, Wikipedia is global, but it's actually kind of a band, but you can get to it through proxies and stuff in China it was banned for a while from Turkey. One of the cool things with, Everipedia is that because it uses IPFS and a lot of blockchain technology we've actually had people in, China hosts some of the content more easily instead of being required to use things to bypass China firewall and stuff like that.
So that's actually one thing where blockchain or peer to peer technology does allow Everipedia to be more global and accessible as well as, people editing it to be able to earn tokens and actual value. That's one of the actual differences other than content that I wanted to highlight in terms of the global reach of using blockchain technology. That's one of the things that really excites me.
Sam M: When it comes to these more like sensitive issues, if you want to call them that, like when it comes to race, gender, what are other like disabilities or,
Sam K: Politics, right?
Sam M: yeah, Geopolitics. I think there's a modern theory that every single one of these subjects, which defines people, whether it's their gender, race, nationality, everything, everything is political, that every single part of any sort of speech connect to it is political.
When you have an entry on Wikipedia or really anywhere, it could be anywhere on the internet, it then becomes a political form of speech. So even though you have Wikipedia, who's trying to be very well unbiased.
Sam K: Neutral.
Sam M: yeah, neutral, right? They would say that there is no neutral and there are people who would say that there is no neutral bias by publishing alone things that may be considered facts.
You're already moving in one direction or the other, or not even one direction, or the other, because maybe something is multifaceted, but you're already taking a political stance by publishing certain things, and maybe not including other things that in itself would be a political act.
Sam K: Yeah. I think going back to the whole idea of neutrality, being a thing that you're supposed to say all viewpoints and, and describe them, you then run into this situation where how do you decide which viewpoints are valid and which ones are conspiracy or too fringe to include? Do you weigh it by its popularity? Do you weigh it by its news coverage? Do you waive viewpoints based on the number of people that ascribed to it? It's not easy. Right. And it's actually political, right? It's a political choice, right? Politics, by definition, is the stuff that affects people, right?
Decisions on how to run things and the rules around them are always political, even if you're trying to come up with the rules of neutrality.
Sam M: How do you manage that then? What's the best way to manage that neutrality?
Sam K: I think what's really important is maintaining a diverse group of people that actually, can engage in both intellectual and honest discussion about what is appropriate and relevant. Cause it's all at the end of the day, these tools are all used by people, right? The people who upkeep them are the people who need to actually keep the system running, need to keep the content up to date.
We try to make sure that there's actually a wide group of people that, and it's not always tilting to one side or the other. Actually, it's not easy, to be honest, it almost feels like, some people say, if you make everyone mad or if you make everyone unhappy, it's kind of like, you're doing something right. You're giving the other side enough space and enough coverage, and it makes the other end, the opponents angry, but then you give the opponents or the opposing viewpoints coverage as well. It's against what you just said, where people want to in news organizations, these days wants to just tell people what they want to hear so that they make more money.
But this is exactly the opposite of that. It's almost like if you make everyone kind of a little bit dissatisfied. You're doing the whole topic of justice. Cause there's a wide range of, viewpoints on it, right? Like if you give people everything they want to hear, you're probably leaving out, some things that they don't want to hear obviously.
Right. So that's what we try to do. We try to not care if it makes some people, discontent sometimes and others angry at another time, we just try to have a very neutral point of view.
Sam M: So, is there any difference in, in the relationship between the editors at Everipedia versus how they would be at Wikipedia?
Sam K: I think just based off of historically like a year or two ago, we just have a wider range of people editing. We have more women, we have more people across the world, even just editing the English version of Everipedia and then we just have a lot of people interested in different things. We have people editing, modern up and coming, things even like Instagram influencers means all of these things, as well as politics and history. And the reason for that is these things are all relevant even if some of them are modern and have like a younger audience and things like that.
We just want a very diverse set of not just content or coverage, but diverse set of people that actually, upkeep this kind of topics. Wikipedia has been this ground where very political or scientific oriented and interested editors keep the information, and they don't really have too much interest in internet culture or these kinds of newer things, but we try to make sure everything is included. It's a different demographic. There's also a lot of blockchain technology and futurists people that just kind of what Everipedia is built on excites them with tokenization as well as blockchain technology that Wikipedia sometimes or it's high-level editors are sometimes antagonistic to, and everyone on Everipedia feels really excited about this kind of technology. There's a different vibe, and I think that it's actually more diversified.
Sam M: One of the big differences between you and Wikipedia would be that you are a for-profit company, so how does that work in trying to maintain this record, but still turning a profit? Does it skew your relationship between the information or the editors and the company itself at the end of the day through your operations?
Sam K: Yeah. That is actually an interesting thing because we don't put advertising, we don't plan on in any way monetizing this kind of stuff at least the content or anything in that regard, so even though it's Everipedia international, the company is a for-profit entity. We actually just build open-source software. We build the IQ token smart contracts. It is open-source, the Everipedia protocol and everything. You can build different front ends that actually view the content. You can run IPFS nodes that host the actual content and IPFS is open source. So it's actually unique in the sense on paper it's for profit, but we actually don't control any part of the protocol in any way.
So actually, I actually think we're even less profit or even monetary driven then than Wikipedia, right? Like if Wikipedia saw that saying certain things increase the number of donations that they would receive, that could actually affect how they, how they run the entire foundation and things like that.
We actually don't even have that luxury, right. We produce open-source code. If people really don't like what's going on, they can fork it. They can fork the IQ token. They can fork the entire database where free creative commons, the same way Wikipedia is and so actually I'd like to think that, we actually have even less exposure to monetary incentives then than even competing, obviously Wikipedia doesn't run ads, but they ask for donations, which is a certain kind of advertising, right?
It's actually kind of like reverse advertising instead of putting up a banner and charging the advertising agency per click or something, they put up an ad, which is a donation ad, and then they hope that the viewer is the one that ends up paying or donating. So, I think that because of the distributed nature, both in terms of hosting, editing, earning IQ tokens, we're actually, really different.
We're actually separated from the monetary aspect. It's not like we earn a piece of the token when people edit. We obviously have a decent amount of the IQ tokens in circulation as a company. Imagine if a company had created. The Bitcoin protocol and they had some of the early Bitcoins, but that's about it.
We can't do anything else about anything afterwards, right? The software is open-source, and people upkeep the core client and stuff. It's free to build wallets, front ends or interfaces.
Sam M: So, how do you have enough money to pay for server costs and other things too, or it's all an IPFS, right? So you don't have to pay for server costs.
Sam K: Yeah. I mean, there's a small amount of server cost, and upkeep and a lot of people ask us, how do you actually keep the lights on and stuff? We're actually building a lot of interesting products and new protocols around the IQ token. That's a knowledge base. So we actually released a prediction market called predict that's powered by the same token, it's a user within Everipedia. The interface of that there's creation fees and, for markets and trading fees and things like that. We have a lot of interesting stuff coming that we've announced some we haven't. The idea with that is to really leverage that blockchain technology that Everipedia is built on to create a sustainable global market around the IQ token around knowledge around all of these things.
We don't actually need to monetize any of the knowledge portion or anything of Everipedia. It's unique, right? Like Wikipedia can't build, something like that and basically make it a decentralized financial ecosystem around and all right, because of, the type of software infrastructure that they have.
Sam M: Yeah. I mean, they're pretty fixed in what they have to do, and I'm sure as one of the most visited sites on the internet, they have to pay extremely high server costs that come along with it. So maybe, I see where you're coming from about how the model works.
Sam K: Yeah, we're actually in a really, interesting and unique place because, in the blockchain space right now, DeFi and all of these financial products are really huge. And for the first time, unlike the ICO era, where everyone just printed a token, and somehow it had an inflated price, and then everything crashed down to the reality basically these DeFi products have sustainable economics.
The things we're doing at Everipedia is building DeFi related products that have direct relevance to knowledge. Right? So prediction markets are market dynamics around the crowd's view of future events, right? It's about predicting the outcome of actual knowledge. We actually have an Oracle product also coming where, instead of just kind of citing these news sources or something on an Everipedia article, we're hoping to be able to get a lot of news organizations and just real-world sources to sign with public keys, their claims about what they're writing, right? Like what they say, the election results are, what they're saying the coronavirus situation is and stuff like that. When they sign that with private keys, you can actually just bring those claims are those pieces of information on the blockchain.
And that's actually not only helpful for Everipedia in terms of the articles, but it actually is a solution to the Oracle problem, which is a fundamental blockchain problem. We're actually building a very vibrant, ecosystem around knowledge market dynamics around knowledge, and it's all powered with the IQ token.
Because of how Everipedia is built, we have a unique way of being able to make the PR on the protocol level, and as well, a little bit on the company level make, money that isn't relevant to either readers or advertisers actually paying to keep the lights on, which is unique.
It's for the first time, I think in the history of the internet, where a product can actually make money or monetize without needing to sell out in any way, or bother readers to ask for donations to keep the lights on and things like that.
Sam M: So contributors are given IQ tokens for the work that they do?
Sam K: Yeah. So right now, when you edit you have to stake IQ tokens, and when you edit or create content or propose a content, then other IQ token holders can stake and vote on whether your edit gets approved or revert it. It's kind of a proof of stake model that currently the majority of stakers decide on the canonical state of the content, just like how the majority of stakers in a proof of stake system decide on the next block or the next order of transactions for the canonical chain. If your content is in that canonical history, you get some IQ tokens as rewards, and you can continue to edit.
You don't actually need to keep buying IQ tokens to edit. If you do a good job, you'll keep earning more IQ tokens, then you'll be able to actually edit for free, and you keep earning actually more value. It's a pretty unique system. And so far it's worked pretty well for about two years, it's running, and the number of editors is growing, and it's actually a way for people to get into crypto without having to have a Fiat on-ramp right. One of the main issues is when you first want to get into crypto, how do you get it?
Well, you need the cash, or you need to set up an account on an exchange that allows banking, wires, or something like that. But with a PTA, you can actually earn cryptocurrency and then use that cryptocurrency that you've earned to either continue to edit or trade for Bitcoin or anything else. It's an on-ramp into crypto through knowledge, and without having to connect a bank account or anything.
Sam M: Yeah. I mean, it allows for essentially micropayments to happen for edits.
Sam K: Yeah. But it allows you to monetize your actual knowledge or your work. With our new products, like predict, which is the prediction market, people can even earn more and more IQ by being correct about the prediction of events with the Oracle product that we have in the works, even larger organizations or entities can actually earn, IQ tokens for signing, what they publish in the real world, signing it on-chain with their own public key. People can use that data, how they see fit on-chain for either financial contracts or other Oracle resolutions and things like that. Yeah.
Sam M: So. Was there a shift in how users use the platform before and after the token?
Sam K: I'm honestly of the belief that if the only reason people are editing a platform or using it because they're earning, money or value, it's not going to be quality. One of the main things you can look at is Wikipedia, right? It's volunteer-maintained.
For most of its life, it's been pretty good, I mean, you use it every day. So do I. I think that with proper incentives and people that actually like to use Everipedia it just makes usage by, by editors and curators and stuff like that sweeter, not the fact that they're just doing it to earn wards or anything, but it actually just makes it better. If you're someone that's thinking, should I edit Wikipedia or should you earn tokens. It's kind of a clear decision, right?
It's kind of a clear decision in that respect, which one you'll edit first, but it's not just because you came to repeat it to her and tokens because you were thinking of, you want it to edit an encyclopedia, you want it to add knowledge, you want it to create a page about yourself or some topic or company or something like that.
But then, it just makes it a little bit sweeter, right? When you compare, editing Wikipedia or I've repeated.
Sam M: Was there an uptick in users, in people that came to the platform? I mean, has it been because I've been part of the reason why people would want to maybe be attracted to using it repeated in the first place would be the token, the comfort of the token, and then they stay because they liked the environment. So has it worked as a good marketing tool?
Sam K: Yeah. We had a pretty vibrant community before, and it actually did grow a lot. And to be honest, we did have some problems of people trying to game the system or trying to create bots that created frivolous edits and things like that. Thankfully the entire protocol and the way that the voting works and staging works, it actually becomes infeasible to have these kinds of sock puppet accounts on Everipedia versus, something on like Wikipedia, because if you are, creating frivolous edits and people are reverting them, you actually get your IQ token slashed. You actually lose monetary value. So, when there was a really big uptake at the beginning, it was very easy for curators to actually weed out low-quality users or people trying to abuse the system because it actually becomes really expensive, really quickly.
It's only free to edit if you're earning IQ and you're continuing to stake your IQ. But if you are trying to gain the system, or if you're trying to create these sock puppet accounts, which are these fake or automated accounts that create frivolous content, it actually becomes monetarily expensive on Everipedia versus with Wikipedia.
If you get, then you can just create a new account within UIP and, and try to, keep going again, which is actually a really big problem that they're having.
Sam M: Well, can't you just create a new wallet address and then use that.
Sam K: Yeah. Yeah, you can, but then you need to go get IQ tokens. So it actually becomes not just expensive in terms of time, but in terms of value. You'll get IQ tokens and stake them. If you don't create quality, you'll lose it, and then you won't be able to edit again unless you go get more.
Sam M: Because they have to go purchase on the open market.
Sam K: Yeah. So it becomes, expensive, not just in terms of a time and resource, type of, allocation, but in terms of a monetary way as well. The way that it's designed is if you're doing good work and curating good stuff, then you don't have to go buy more. Cause you're actually earning IQ so you can continue to stay there.
Sam M: So whose idea was it for to include the token?
Sam K: I mean, so I've personally been in the blockchain space since 2013 before we even started Everipedia. But the thing is that this kind of stuff, dApps and decentralized finance applications and stuff, wasn't even a thing as you probably know until Ethereum really matured after a year or two of its release.
So I remember it was first announced and actually was in the cryptocurrency space since counterparty and all of those kinds of pre-Ethereum things, coloured coins on a Bitcoin and things like that. So, it was kind of my idea to think about bringing Everipedia to the blockchain space, and it really wasn't possible until early 2017. So that's why actually we started working on it, right, when the vision for this was actually technologically feasible.
Sam M: I mean, why couldn't you, so you're on yours, right?
Sam K: Yes.
Sam M: So what are the limitations that prevent you from signing some transactions on Bitcoin? Is it just too expensive? And then you also wanted a token.
Sam K: Well, there is some actual backend logic that it's not just about the incentivization layer. It's about the whole logic of the backend. When you vote when you stake IQ, and you vote on an edit, what you're voting on is the new hash, which is the representation of the new state of an article.
All of these hashes are stored on the Everipedia smart contract. So for example, if you run an IPFS node, you can query the hashes on the EOS blockchain inside that have repeated smart contract and hosts the most up to date, content. And so it's not just about signing a transaction to earn tokens.
It's about the entire logic of these transactions voting for an edit, creating an edit, creating a page. All of these things are actually all done on-chain. If you go to everipedia.org, everything right now is on-chain. We have leader boards, which are basically the most edits made in the most IQ, like querying historical transactions from wallets that are to that repeated smart contract.
All of these things are fairly sophisticated blockchain transactions. It's not just about the token, so we definitely need a smart contract platform to run it on. We were the first project to commit to building on EOS because it had a lot of advantages to Ethereum back when this was announced that you could actually run many of these transactions, fairly cheaply in comparison.
If you had to propose an edit and it costs 50 cents of gas costs, and that edit would earn you 40 cents of IQ, then you'd actually be paying, it wouldn't even be free. It wouldn't even be a net positive. It would be a net negative to, Do anything, right? So it'd be even kind of worse off that a Wikipedia itself.
So that's kind of the decision to build on, it's not the blockchain landscape has changed since 2017, obviously. One of the things we've announced recently is we want to make the IQ token cross-chain, we're actually going to issue an ERC 20 token, hopefully, sometime this year, as well as kind of have a lot of our products and back in Smart contracts code on any chain actually that can support it. There's a lot of good projects coming out with like algorithm, polka dot, East 2.0, which I'm a huge fan of we're just like how the content is supposed to be neutral. We're actually blockchain neutral as well, or prep platform, agnostic, or that's kind of the plan for the whole thing.
Sam M: This was this originally how it was when you picked you. Or was it just a matter of market forces and the fact that there's so much more liquidity on Ethereum was a driving factor as well?
Sam K: Well, when we originally, built on EOS and EOS has been fairly good; obviously every chain has certain problems and certain advantages, but EOS was the only blockchain we could actually build the entire Everipedia platform on with a lot of scaling solutions and new platforms that have unique value propositions, we can build the entire vision of, Everipedia with decentralized knowledge, decentralized prediction markets, Oracles and on-chain facts and stuff on multiple platforms. The whole idea for us always was, like I said, both in terms of content neutrality, and then also technological neutrality it's not like EOS or certain chain or tribalism. There was no other show in town that we could build this off then; now there is.
Sam M: Again, you're coming back to neutrality again. I mean, it shouldn't really matter where you go, it's more about how can the data be secured in the right way and how can it be done at a low cost?
Sam K: Exactly. Now there's many, new and very high quality options, obviously. We want to basically make sure that, we're on all of these platforms that can legitimately secure both the value of the IQ token and host the actual backend logic. We're actually thinking of, our near term is Ethereum 2.0, so an ERC 20 token, as well as, we're looking at potentially polka dot, and those are even one or two steps after Ethereum.
Sam M: I guess, what are some of the challenges that you're facing going forward?
Sam K: Yeah, I think, actually the stuff that we're focusing on right now is kind of expanding Everipedia's mission on-chain, which has always been knowledge and facts on the blockchain. When we started building it, how can we bring this knowledge base to a more decentralized infrastructure?
So with the advent of DeFi protocols, as well as that advent of more sophisticated ways of bringing on-chain data, with chain link and, and all of these things, we're actually our main goal right now is to continue to expand the encyclopedia, a service, as well as build out this ecosystem of prediction markets, Oracles, and things like that that make it a very robust and economically sound cross-chain platform. Our main challenge is making sure all of these pieces come together in one unified, Everipedia platform with one token. Bringing marketplace dynamics to knowledge upkeep and things like that without actually bringing perverse incentives, right?
Like we just talked about the kind of corrupting power of advertising or money, but designing these things in a way that actually helps when, when the value in market forces are brought into it is. Probably the most challenging thing, right? I was previously saying it's harder to game Everipedia because it costs something and that's because it's well designed. It's actually profitable to edit, but it's prohibitively expensive to do things that that would cost you things to kind of attack the network and knowledge base. Right? So the biggest challenge is to build these systems and have them make sense and difficult to attack.
Sam M: Yeah, asymmetric returns
Sam K: Exactly. Crypto is so exciting because it's very defender centric, right? It's one of the only places and realms, so to speak in cyberspace, for example, where a state actor still can break a public/private key set even though they're a state actor, you have your own cryptography is an asymmetric technology.
Sam M: Very cool. How does your own core beliefs tie into what you're building at Everipedia? Was it always there to want to build this open platform? Or, I mean, was there something that you came about to during your time at UCLA that pushed you down this path?
Sam K: I was a neuroscience and philosophy major. I think Philosophy was, believe it or not, the more important formative part of my personal identity. It's actually interesting Larry, the other Wikipedia co-founder, was a philosophy PhD.
But like I said earlier, I always liked Wikipedia. I mean, I'm still a fan, as well. That's why I went into this area and then I've always been a huge cryptocurrency and blockchain proponent because of the asymmetric nature of cryptography. So it's interesting that it, kind of came full circle. But actually, as I said, design it in such a way where it adds value. It makes it more resilient and makes it harder to censor. It brings proper incentivization. And so it's kind of the merging of both of my interests brought it here. And I think that's why I'll continue to work in like the cryptocurrency and knowledge space and things like that. I'll find myself in the actual space, probably for most of my career.
Sam M: Yeah, I mean, I have a philosophy degree as well too, and I'm probably should have taken neuroscience as well.
Sam K: What's your favourite, topic and area and philosophy?
Sam M: I like creativity. I like the philosophy of creativity and art because I like exploring where the spark of imagination and creativity comes from and how we're able to capture it into designing new ideas and new platforms. I think that really matches my own personality style as well, too. I'm always pushing for like new ideas, new ways of doing things. And so it really resonated with me when I was doing my philosophy studies. I like a lot of logic as well too, but art and creativity were much more interesting.
Sam K: Yeah. I mean, I took a lot of classes on either objectivity versus subjectivity and what is creativity and where intuition comes from. That's actually one of the most interesting parts of philosophy. You're trying to talk about these logical systems, and then there's also the intuitive realm of what is actually objective versus what is kind of art essentially.
Sam M: Yeah, I think I'm more in the conservative camp, and I think I've come about this in a long path, right? Where in the beginning, you think that art can be anything and that modern art has really come on to something in the ability to speak ideas through objects or even titles and names or through words, which it does in many cases, I mean, a guy like stuck a banana on a wall, duct-taped a banana on a wall and it's sold for a hundred and hundreds of thousands of dollars. Right. And then the guy came and ate it. Right. And that, and both of these there. It just doesn't sit right with me that, it's a novel idea and yes, it says something, but it doesn't mean that it's beautiful. And I think that this element of beauty that's been stripped away in modern art really is detracting in modern society.
One of my philosophy lectures was Roger Scruton at a university of St. Andrews, and he wrote a lot about this. He passed away recently from cancer. He wrote some great books about beauty and about conservatives and what it actually means to preserve things. They're beautiful. His explorations were co-mingled because when he spoke a lot about architecture was one of the things that he really focused on and he pointed to modern architecture as this garish temporary forms that wouldn't last more than a couple of decades
Sam K: Kind of utilitarian.
Sam M: Yes. Utilitarianism like surging purely for utilitarianism and functionalism within the buildings themselves detracted from and stripping away their beauty detracted from the buildings, having any lasting purpose or desire within us as a society to preserve them. And you see this a lot in the buildings that were created in the sixties and seventies, especially in Britain, and especially in, in Eastern Europe as well too, these just garish concrete structures. I don't know if you've ever been to Romania.
Sam K: No, I haven't actually, I love to visit that, that area in Eastern Europe.
Sam M: So Bucharest has this strange juxtaposition of buildings where there's many from the 18th century and 19th century, which have been preserved even to modern-day, but they're fitted in between these 1950s and 1960s Soviet concrete apartments. That just it's. So there's just such differences of architectural styles in buildings that are directly next to each other. You can have a building that's 200 years old next to a building that was some concrete slabs that were slapped together during the 1960s. It just shows the need to build things that are beautiful and not just things that are functional or provide utility and that without focusing on beauty and focusing on things that you want to preserve, then there really has no lasting purpose and you're just building something that's cheap and, and will be forgotten.
Something beautiful is something that should be preserved. You can then move into other spheres of how you live your life and about how you base your political beliefs to provide value and meaning.
Sam K: Yeah. I'm really glad you said that because I totally agree about the architecture stuff. I wonder if during each actual era, if people, what they thought about their own architectural style versus, the one previous to them. I have never really met anyone today that says isn't our architecture so much better than 200 years ago, or even more, no one even says that. Right. It's almost like everyone universally agrees that it's kind of devoid of beauty. And like you say, you say that you see that everywhere. Here, in UCLA campus and stuff like that, you see the buildings that were. Built even in the early 19 hundreds, UCLA has original buildings like Powell, Kirkoff, these really nice buildings with beautiful architecture that are now the prestige and life of the campus. They're just brick, squares and rectangles. And I wonder if in another hundred years or something, if people will actually be like, well, the early two thousand are, or at least much better than what we have now in 3000 or whatever.
But I don't think so. I think everyone seems like they universally agree on that beauty is kind of becoming sucked out and, and leaving man's creations in terms of, both for the preference of functionalism and utilitarianism. So I totally agree. And I think it's actually universally agreed upon, right?
Like I've never met anyone that's been saying isn't modernist architecture, so great to compare it to the olden days? I'd love to meet someone that would argue that, but I really haven't. I think you're totally right.
Sam M: Yeah, but I don't think it's framed that way because it's more about like here we have space which meets all the needs of the person. I mean, the functionalist utilitarian would say here's a building that meets the purpose of what needs to happen inside.
That building will last as long as it's needed. As soon as it's no longer needed, it will be replaced by something else. It's also a powerful argument, bu. I think it forgets the lasting legacy that that will happen throughout generation to generation because part of what we have to do as a culture is we have this spoken cultural history, which has passed down and it grows and is modified and become something new. It evolves as its past. As the kind of living right now, we have a requirement to ensure that what we're passing down is valuable and worth something, and not just something that's cheap and should be thrown away.
Sam K: It's almost like the function of architecture had changed from purely what needs to happen inside versus, before where, as you said, there was a clear mental goal of passing this down to generations and kind of coming back to the whole knowledge thing.
It's almost like we also have a responsibility to write our own history and document it, in a way that is kind of a reflection of us or future generations. The way that we write our own history or create our own monuments and stuff is totally changed.
Sam M: It's hard because the common themes and ideas shift from generation to generation. All these statues being torn down now, and when they were built, it was completely fine. I mean, there may have been some descent, but on the whole, if you're going to have a statue of yourself be built in Washington DC or a major city, there's probably a general consensus among the population that you're deserving of it, and then it only takes what like three or four generations to have that totally flip. People want to rewrite history about that person, or the actions come into a new light, and they're no longer, morally acceptable or, sorry, not morally acceptable, but they're no longer acceptable within society and that they're cast away.
But I think this is different; there's a difference between how you act and how you as a person because everybody has their black spots. I think that that becomes clear as we proceed into 2020 is that it doesn't matter who you were in the past, and it doesn't matter how good of a person you were is that shifting cultural norms can eventually lead towards black spots on your legacy, and almost everyone has them now. It's difficult with human lives, right? Because there is no black and white, it's just grey. There are many multifaceted ways of looking at a person and the same with history as well, too. Capturing it in its right form, I think it is important, and it's a difficult task. But I think it's more difficult with words than it is with physical objects. You have an easier time with art because you can say something with words, you can say something as beautiful, but those ideas can always be changed, but with a physical object, like a building or a piece of art, the physical properties of it stay the same while the idea can shift from generation to generation.
Sam K: Yeah, exactly.
Sam M: I've been really reflective in 2020 for a lot of reasons. I don't like to join movements. I don't like to be political if that's the thing, right. If you can be apolitical, because if you, if you join factions, if you take a side, you remove a portion of your impartiality that should exist and you cannot have substantial difficult conversations when you're taking a biased view of something.
Sam K: I totally agree. It's also just becoming a little bit harder to remain apolitical or even just neutral these days, since everything is kind of becoming a political question, like how respond to a biological pandemic, right or things like that. I think that's kind of what we were talking about before the hyper-politicization of the things that usually were not before, but they are today.
Sam M: Yeah. I see it as the people who stand on both sides or at least the people who stand in the Jordan and the people who stand standing minority, all of these of holding them at certain beliefs. They pushed to take away any ground where you could step aside and not take aside.
You're forced to take a side forced to proclaim your belief, or you're part of a certain team while denouncing the other team. It's not healthy towards building a place where different ideas and arguments and other conversations can be had.
Because if you come from a place of the other person is wrong, without exploring why they're wrong in the first place, then there's no change that can take place, right? So, But the problem, at the same time these people that push towards a radicalization of extremes instruction of the centre also understand the importance of power and how it relates to the speech that they have. When they push for these, and they pushed for the destruction of the centre. It's more about how can we assume control of the people around us through, through speech and through the ability to control the ideas of what they have.
Sam K: Yeah. But everything that seems to be going on today. It's almost like every action you take voluntarily or involuntarily ends up having a political statement, whether you intentionally mean it or not. In the USA, it almost feels like if I go somewhere and I don't wear a mask, it's a political statement. Or if I do wear a mask, it's almost like it is a political statement and it's not just actually a free choice, but almost like identification of your political leaning. It actually just makes it hard to discuss the merits or the advantages or disadvantages of certain views, and so, it just seems like even just unintentional actions now are labelled as political stances.
Sam M: Yeah, especially with COVID, you've seen political bias come out, even in like scientific studies that that then are used as ammunition for legitimate news sources to discredit people.
Sam K: Roxy chloroquine.
Sam M: yeah. Hydroxychloroquine he took that for like a week or something. Every single newspaper came out and used this Lancet study that showed the ineffectiveness of hydroxychloroquine but then almost two to three weeks later that Lancet study, the same study was disproven and it had to be retracted, but it had given enough ammunition in that one moment for the national news and all the pundits to jump on the president for something which they believed they could attack them with, and this isn't just against Trump, it pretty much happens to every public figure out there. How you control information is how you gain power today in our culture.
Sam K: Yeah. There are no more wars where you take the land. It's all Headspace information and beliefs, right? I mean, there's no more conventional, warfare, it's all information warfare.
Sam M: Exactly right. Because warfare is just dead or relegated to non-Western developed countries, so you're Iranian. Right? How do you view our coverage of us around race relations in the United States?
Sam K: Yeah. It's kind of a portrayal of perspective or narrative of each individual news organization itself. News organizations that are heavily against diplomacy or pro-diplomacy coverage. I think the news, it's not even just about Iran, but it's more about kind of anything, whether it's to discredit the current president or even the former president or something like that. That's also why the mistrust in news organizations has been so prevalent.
Coverage is a tool for making ends meet, right? The actual end goal is not about recording something as it is in the real world, but, how to just continue a certain type of narrative, whether it's from Iran or anything else actually.
Sam M: Yeah. I understand. Did your family immigrate over here?
Sam K: Yeah. So I came here as a kid when I was about five or six. I grew up here. I grew up in Southern California and stayed around here ever since in terms of a West coast, and I actually have only briefly been to the East coast. I've travelled for crypto and business to Asia. I've been to Singapore, Hong Kong, Korea. I haven't been to the East coast much compared to the West coast of the US, so I've been around the world now, and there's a lot of interesting stuff going on in Asia, especially with cryptocurrency and the importance of that region in this century.
Sam M: Yeah, it's nice in Southern California. I don't know why you'd want to leave.
Sam K: Oh, the weather's nice. Although no one can really enjoy it these days because of a COVID, things are getting back to normal, hopefully in Florida where you are right now. I assume the weather's this time of year. Maybe it's a little hot.
Sam M: Oh, it's hot. I've been living in Europe for the past ten years, so I have a hard time converting to Fahrenheit. So it's like 91 today, but it feels like 106. And so in Fahrenheit, that's like 31, but it feels like 35 or something.
Sam K: Yeah, especially because of the humidity, huh?
Sam M: Yeah, it's like 70 or 80% humidity every single day, plus 90-degree heat. It's not fun, but in the wintertime, it's great because all it's like 70 degrees every day, and it's great.
Sam K: That's also one of the things with the US; it's such a huge country with a diverse landscape, diverse demographics, diverse politics. It's actually, one of the things that I was recently reading on is that there maybe there didn't need to be a national response or maybe the lack of national response for such a huge country is what made controlling the pandemic difficult.
If Oregon, for example, locked down at the same time, New York lockdown down, it's the equivalent of like Ireland blocking down because in Moscow, and there was a huge outbreak or something, that's how big the U S is.
So there's this huge divided how to actually respond to this pandemic, and in the actual bickering and discussion, you give more time for the virus to actually get around, which is what makes the pandemic even more difficult to control in such a huge country.
Sam M: I think, the national response put people in masks, and it put them on alert on that they should change their behaviours. Suppose you didn't have that you wouldn't have the tepid response that you've had so far. I think a lot of it was directed at seniors and how we can protect them and make sure that they're not dying.
Sam K: Hopefully, the death rate as it's going down looks very promising. I just keep thinking if the death rate for COVID-19 can approach the flu levels, that it'll actually be a good outcome that we've managed to bring this down to something like that. But then you have other countries that have completely eradicated, and you think, okay, well, why couldn't we actually bring it much lower than flu levels, right?
*About this episode*Nick Cowan, head of GSX group joins the podcast to discuss the evolution of crypto-securities in Gibraltar and how the island is adapting to 2020 and Brexit.
Nick Cowan is the CEO and founder of the Global Blockchain Exchange and the Gibraltar Stock Exchange Group. He has 34 years of experience in capital markets, serving as Head of Equities and Board Member at ING Barings, managing up to 2,500 employees in 43 countries, including 40 stock exchange memberships.
Nick's LinksLinkedin
GSX Group
GBX Homepage
*Where to find the show*iTunes | Spotify | Stitcher | Youtube | RSS Feed
*What to listen for** Why GSX originally wanted to create an institutional-grade digital asset exchange and ended up building a digital securities exchange in Estonia. * Why a digital securities market in Europe would address the liquidity challenges in smaller securities markets like SMEs and private equity offerings to accredited investors. * Why regulators are only just catching up to the digital asset revolution and how innovation could make T-instant settlement a reality. * Why Nick thinks that there will be several parallel universes between the world of DeFi, decentralized exchanges and the traditional T-plus-two day traditional settlement networks in banking today. * How regulators looking at digital assets in Gibraltar, across Europe and in Asia encourage innovation through principle-based regulation that works. * Why GSX is building a European securities exchange in Estonia and why this is not because of ‘Brexit’ but an opportunity to build on it. * Why regulations within jurisdictions can either promote innovation in digital assets or stifle it and why this matter post-Brexit and passporting.
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SHOW NOTESSamuel: Today, I'm joined by Nick Cowan from the GSX group. He's the Head of the GSX Group. And Nick, welcome to the podcast first and foremost.
Nick: Thank you very much for having me. It's an absolute pleasure.
Samuel: I've been thoroughly interested in what GSX has been doing since really 2017. When you guys kicked everything off, it's been a journey for you guys to see the development of your group, the GSX, and then also the GBX as well too which has gone under significant changes since it started.
Nick: Yes, it has. I think we probably around the back end of 2017, we made a couple of decisions and I think number one was really to try to focus on digital securities in Gibraltar as a jurisdiction was, you know, we got involved back in 2015 and structuring an asset-backed security backed by Bitcoin.
That was opened our eyes and then Gibraltar, the government regulators started to focus on a framework for legislation for distributed ledger technology, which came into law in 2018. We were at the point as an exchange where we were thinking, okay, we need to spend a lot of money on traditional matching engine technology from a licensing from another exchange, et cetera, for a lot of money, I call it T plus two-day settlement, traditional architecture and, you know, a small exchange in a small jurisdiction. Is that really going to change the world? Probably not.
Maybe we should try and do something quite interesting and look at laying out really a roadmap for digital securities to understand if there are inefficiencies, what those inefficiencies are? Can we look at technology to find solutions to those problems? So that was really the journey went on. We also raised funding through the issue of our own token in February 2018, and that was to also create a GPX. I'd like to talk a little bit about that later, but the idea very much was to have an institutional-grade digital asset exchange as well as then getting on the road to building a digital securities exchange.
We felt that there'd be convergence over three to five years between, number one, I guess investors. Institutions are perhaps becoming more minded to invest in digital assets, digital asset investors becoming more minded to invest in digital securities. If they get access with them without having to go through, for example, the banking network, and I think thirdly, which is where we've really tried to drive and focus on is, you know, issuers slash corporates, trying to really embrace both sectors because when you think about an issuer today or just any corporate that has customers and shareholders, and you can think of numerous issues, any supermarket normally has reward points or airlines, et cetera.
There's actually not much connectivity between a customer and a shareholder. Actually, if you think about the rebel programs, they're not much more than a utility token. You know, we really believe that the investment concept, if you can turn a customer into a shareholder, you've really created brand loyalty and stickiness, and therefore, you know, if you can converge the ability for a token holder to be able to redeem into securities legally and regulatory and compliantly, then that has to be just a fantastic development. That was really always part of our vision was to say, look, we see the convergence between issue as investors. We see the convergence between crypto and securities.
If we can create a framework and a marketplace, I can capture those different stakeholders. Then you know, something that GSX can explore and hopefully add value to people that want to play in that marketplace. That was really the thinking behind it.
Samuel: So if you could go back three years and kind of look back upon yourself, what would you think of your idea looking back today? Would it be something that is like fully formed back then?
Nick: Yeah. You're absolutely right. No, it was not fully formed. I think you're absolutely right. It's been totally a journey of learning. People tend to look at technology first, and then they suddenly realize that perhaps the legal framework or the law doesn't necessarily support the technology.
We had our ambition, we knew what we wanted to do, but we obviously had to really understand the legislative framework that would allow you to number one issue digital securities, but number two, the key is to try to build a framework that allows you to address a lot of those inefficiencies.
I was from a traditional investment banking background, and I was a global head of trading and the head of equities for a large investment bank. We had numerous stock exchange memberships globally about 40 plus and some of the challenges we had at that time, which were still very much is unchanged is (number one) the cost of the lifecycle of a trade which never seems to go down because of the regulatory reporting, the endless reconciliation. It's quite an expensive proposition. Secondly, you obviously have to post capital with a central counterparty, which is always a fight when you're an investment bank because capital is king and you have what's called risk-weighted assets where the more counterparty risk you have, the more assets you have to post.
Fails are pretty big; you have about 6% of nominal equities fail in European equities, with 3% of debt and that's all set the change this September with new laws coming in where the margins which are always being squeezed up are going to get squeezed further.
We kind of knew the inefficiencies of cost of capital, perhaps interoperability between jurisdictions and fails, but we also recognized and this is where probably we had to really get stuck into a understand our model is when we talk about inefficiencies and capital markets, you know, in a T-plus-two model, the count that the stakeholders, the financial markets, infrastructure players, they have an incredibly important role. It's vital to make that T -plus-two world go round, particularly when you've got fails, et cetera, that are happening. However, if you move to what we call T-instant, then you can address the enormous amount of inefficiencies. That's been absolutely our goal go because whether you're T-plus-two days or T-plus-two minutes, as long as there is anything above T-naught, you have to have, in my view, stakeholders because you have that momentary window where you have counterparty risk, and therefore you have the ability to fail. If you have T-instance in a pre-funded environment, then a lot of those issues fall away. A lot of those efficiencies can be extrapolated.
A lot of the technology that we were looking at wasn't necessarily compatible with T-instance because a lot of technologies, you know, it's consensus-driven. To actually try to do stuff physically on the blockchain, where you make a trade and then seven seconds later, it's verified, you've missed the ability to do T-instant.
We had to kind of play around with those things and said, okay, we actually have learned a huge amount from the digital asset environment. If you look at what crypto exchanges are brought to the market, it's actually been hugely innovative in terms of capital usage really instantaneous trading, and position keeping in your wallet and all sorts of really cool things, which is available in the regulated market world.
But a lot of this stuff in the digital asset, well, there's actually not regulatory compliance. We took what we thought was the best of both worlds and combine that into what we call our end-to-end exchange. We really started to form that strong model last year. It took us really a couple of years to get to the point where we understood that actually we really wanted to be not just an exchange, but also a central securities depository, and if we could be a central securities depository and an exchange, then half within that, our collateral management platform for borrowing and lending and that's blockchain, then you start to create a vertical stack that can start to tick a lot of those boxes. I always say to people, and there is a reason why there isn't a trading venue for digital securities in Europe yet because it's not easy and it takes time. It's not something because you have to go back to legislation to make sure that you can achieve what you want to achieve in a compliant way.
Samuel: Part of the thing that I saw was that most of the work that's done on the security side is having to go through legal. If the technology works, that's half the battle, right or it may not even be the battle itself. The battle may be figuring out how to simplify your description of the technology in the first place, to be able to present it to the regulators because Gibraltar is a small place and you guys have a close relationship with the regulators, but still, these guys are working with large capital markets and the regulatory systems, which they have designed over hundreds of years and they work.
When you're coming with new technology and new innovations, I would say the hardest part is being able to put it into structured words and phrases and diagrams or whatever, to be able to take that idea of what T-instant actually means and give it to the regulators and have them understand it within a couple of minutes of them looking at a few pages of documents.
Nick: I think you're absolutely right. I think, you know, when you think of regulators, obligations tend to be when they go to work in the morning: investor protection is number one, reputation wherever the regulator is based, but also competition. They want to encourage competition.
The first thing you got to understand is, you know, we all dealing with that as the backdrop. You have to demonstrate the number one. You're right, and the legal framework will not be compromised. First of all, you cannot have a security entry trading venue without a central securities depository, maintaining the registry book entry for what does that mean?
It means you need a CSD to maintain the shareholder register effectively. We see exchanges out there who say they're trading digital securities, but they don't have a CSD. So actually they're not trading digital securities cause you're not compliant with the legislation.
You have to look at number one, can this jurisdiction, is there anything to stop in companies law, an issuer issuing securities and maintain that registry effectively in digital form? Is that illegal? If that isn't illegal, then you can say, okay, is there anything to stop that security being admitted to a trading venue?
Whether that's an offer to the public or a professional admission, and then is there a CSD which can maintain that book of members and with all of that legal framework you think, or say, well, actually is tokenization actually adding anything? Or is it just another layer of cost?
If there's an additional layer of cost when actually it's achieving nothing, I'll kind of take on it as to say, okay, well, we understand the legislative framework. You've got to operate within the law, as you said, there's a reason why this has been around for a couple of hundred years because it works.
It achieves the objectives of the regulators and effectively keeps investors protected. Therefore we have to make sure that we comply with that legislation. The technology supports safe custody of the assets and all those good things. You then have to design the technology to enable all of the above, not take your technology and say, The regulations are wrong, or the regulations need to change because that's never going to happen. That's a policy approach from whether it's the SEC, the European Union or the Bank of England and the FCA, the government, you have to have an overarching aim to say, we're going to change the regulatory legislation accordingly, but you can actually stay within that framework in our view and be compliant, but apply digital digitalization to securities, whether that is in brand new issues of securities, what we call them natives, or whether you are taking traditional securities and applying digital to it, or all of those things that are possible, all of those efficiencies can be achieved.
Samuel: When you were designing the technology, were you looking at the regulatory framework first and then figuring out how to design the technology behind it, or was it that you had the idea to use a blockchain to manage these securities, let's figure out how to explain it to the regulators so that we can become compliant?
Nick: Yeah, I think at the time we looked at the technologies that were available out there, and we just felt that for securities, for digital securities, bear in mind, we're going back a while now. There have been changes since, but one of the challenges with decentralized networks and this is when you get to securities, you know, it's not just securities, it's also about anonymity, you know? The big broker-dealers don't necessarily, or big investment banks, they don't necessarily want other investment banks to know the trades that they're doing at any point in time. Do you know? The problem with a decentralized network apart from potentially the governance of a decentralized network is the anonymity/transparency.
If you have decentralized nodes and you need say 51% to approve a transaction, that information is relatively public to those nodes, so that immediately becomes an issue. I think for anonymity in securities markets which is one of the challenges I think that decentralized networks may have.
I think number one is we have to think of it as a private permission network and then number two, we then had a number of issues that we wanted to be clear on, which was they're registered securities. You have to have transferability control. You have to have eligibility control. You potentially have the ability for a regulator to step in. You've always got the potential of. What we call, you know, digital divorces, forks. You can't really have a fork in a securities market if you're open and trading, you know, hundreds of thousands of trades a day, and then suddenly there's some type of fork, and an upgrade, who actually runs the exchange or the protocol which runs the network. Is the information secure? Is that governance questionable?
There is nothing bad about it. It's just when in our view coming from a capital markets background, when you apply those question marks to a securities business, we didn't feel entirely comfortable. Our view was okay, we need to design something which meets our requirements, and that effectively is a private mission network that allows members to join our network via API and join our native but at the same time, you know, we effectively control that network. We have a phased approach to the technology where we want to start off with our CSD running in parallel program testing with our stacks blockchain, and we'll migrate the CSD then onto the blockchain. Ultimately we will converge in time the matching engine and the CSD into a single entity, but you know, that could be two/three years away. Once you get there and you've achieved absolute, pure T instant. Then you can start to at least look at bringing in external nodes because your anonymity has been protected. But until then we just could not see a way that you're going to get, if you're interested in getting the financial institutions on board and we are by the way because we see that they have an enormous role to play, whether it's buy-side, sell-side or HFTs and by the way, legislation means my mum can open an account at Binance and buy Bitcoin, but she can't open an account at a stock exchange and buy Apple because that's risky. It's just completely dumb, but that's the law. Unfortunately, you need to have intermediaries on the legislation between a retail investor and directly the exchange.
So exchanges, that's why they always have a member of firms, we want to keep all that privacy and anonymity stuff. We just couldn't get with the protocols we looked at, so we just said, okay, we need to solve design something from the bottom up, and that led to us building the company that starts to develop that technology as well and, you know, the group is a shareholder in Hashtags, and they're starting now to do wonderful things, engaging with other exchanges, financial institutions. Globally, we're providing all sorts of different solutions using that technology. But within the GSX group, we've got our native, and we're developing that internally as part of our growing IP for our exchange network.
Samuel: So, what do you think of the future of these securities that exist on a public blockchain then?
Nick: I can't see them getting adoption any time soon, and I'm sure there'll be evangelists out there who will, you know, be shouting their laptop screens, as I say these words, but I just look at it from a practical perspective in terms of what institutions require from investing in securities.
If you think about actually what we're doing, you've got your pre-trade stuff as we call it. What we're doing is we're actually changing the post-trade, what we call financial markets infrastructure. We're changing the plumbing. So how does a share settle? So at the moment, you know, a buyer and a seller on an exchange that cross the order. The seller sells, and the buyer buys, the central counterparty then gets reported that they then start to take both legs of it. They say, okay, we will make sure that even if you don't have your Apple shares, the buyer will get Apple shares. Then they basically clear that trade the broker who has to post their capital with the CCP, which is the five to 10%, the CCP then reports down to central securities depository.
The CSD has the registry, the CSD then works with the banks, and then you have securities change that whole financial markets infrastructure that post-trade environment. Is there to capture who legally has titled to their securities at that point in time? Now, if you have securities trading on decentralized public exchanges or public networks, I can't see necessarily how that works to the standards and level that a financial institution needs to have.
You know, fingers crossed. We will get there. But as of today, I just don't think that it can get the adoption that's required. They know they're safe, they know they're protected. They know they can't be, moved without their permission, that the corporate actions of being captured when there was a dividend, there was a dividend. I think it's a way away yet.
Samuel: Okay. You know, but one of the things that about Ethereum just in general is that it allows for huge retail interest to come on board. So maybe if there's not even, maybe if it's not institutional securities or it's something is designed for retail, maybe that would work a little bit better, or it would be more desirable to a retail trader who doesn't mind having their public securities being transparently shown and is able to make some compromises that a financial institution might not.
Nick: Yes, I think potentially not. That's correct. I think they, I think one of the issues though, certainly over here in Europe is legislation dictates that, as I said earlier, you know, retail clients have to be onboarded by an investment company. Broker-dealers who are licensed and regulated onboard these retail clients. You look at Merrill Lynch or whoever these guys have huge retail operations where people are buying and selling securities. You can have what's called sponsored access into exchanges. I think you're absolutely right. That's where it becomes really interesting, but at the moment legislatively, it's impossible here to not have that intermediary between the exchange and the retail client.
Samuel: If I'm a private company, can I issue private securities to retail investors?
Nick: Yes, you can. Yeah, you can. Actually primary isn't actually technically governed by a lot of the legislation if you're not making an offer to the public, we have a tokenization venue called the Grid that we did our first security two weeks ago, Canadian security, which was really cool. We're very excited by that first tokenization. You're absolutely right. We see the private sector as being an enormous market. Yes, a private company can tokenize their securities, and they can seek to raise capital from properly categorized investors who are eligible to buy their securities.
Yeah, absolutely wrong. When those securities enter a trading venue, that's when that legislation kicks in, where you need to have certainly in Europe, an intermediary and investment company, providing this services to investors and those responsibilities include checking the KYC and eligibility of the investor and making sure that the investor has the information they need to make an informed decision and all those good things.
Samuel: Well, it isn't the primary issue. I have to check KYC and maintain a whitelist, too.
Nick: They do, but you know, it depends where you're coming to market or not. So for example, you know, we have a private company called GSX group. We have shareholders, we have obviously done our due diligence on our shareholders, and we've done our KYC and AML, but I'm not making an offer to the public.
I didn't have to issue a perspective. It's a private company with private investors. Instead of my shareholders which actually they have a physical certificate saying, well done, you own shares in GSX group, actually. This is the process we're going through at the moment. There was no reason why they just can't have a digital representation of that shared certificate, which is a token NGSX group. If you're making an offer to the public, that is different because then you have to be a PLC. You have to obviously go through the whole perspective stuff, and again, you would have to offer it to the public. You would need intermediaries who have to make sure that your clients cleared KYC and AML. Absolutely no dispute with your comment that at all.
Samuel: I mean, it sounds, so a lot of this is reminiscent of the Spotify story, where you have a private company that takes on private investors, and then at some point, they do a direct listing into an exchange. There is no IPO. There are no investment banks that are brought on to handle all the typical actions that they perform during an IPO. Essentially the token is just floated and then listed on a securities exchange. I mean, it seems that there's a lot of commonalities between what is happening with the primary issuance of securities.
Nick: Yeah. If you draw a line down the middle of the page and you have primary on the left and then secondary on the right. A lot of the legislation that kicks in is on the right-hand side. That's when you basically, if you're going to be admitted to trading on a secondary venue, that's when a lot of that, for example, markets in financial instruments directive kicks in.
If you are primary and you're doing a primary deal, you're completely correct. What you have to do is to make sure, particularly doing a Spotify. You can go directly to exchange. You don't have to have an investment bank. What an investment bank potentially can do for an issuer, because they can bring investors. They can guarantee you that you'll get your funds and investment bank invested some capital to underwrite deals. If you're Spotify, you can just say, you know what? We want it to be different. We don't want to pay X per cent to an investment bank. We will go directly to the exchange. It's incumbent on us to make sure that under the right legal advice, we make sure that we're not financing terrorism or whatever. We've done our KYC and AML. We've outsourced that to a supplier, and we've ticked all the boxes. You don't have to go through an investment bank to bring a deal to market. Well, the challenges are when you go secondary, securities are traded on an exchange, and that's when you have the member network of the exchange bias of the securities involved their retail investors. If you look at IPOs, they've been in decline, they've declined 70% in 20 years is not a growing business because the cost of capital has become so expensive. If you look at the private markets, private companies, particularly the way we've tried to develop our technology is you can help private companies get ready for the day they go public because a lot of the costs is the independent verification of the data that a company has. Do you really have those factories? Do you really make those products? Do you really have that cash in your balance sheet? You have unfortunately huge fees incurred, particularly low lawyers having to independently verify all the information that's in their perspective.
If you go through pre-IPO capital raising as a private company, tokenize your securities, get access to capital to the correctly categorized investors, you can put your resolutions, your company information, you can store all of that on the blockchain and effectively build an immutable data room that, that is specific to you as the issuer and in theory, pull out a lot of that cost when you decide that you wanted to go to the market and then if you wish to not appointed investment bank and go directly to the listing. If you've achieved enough of a following and people, know who you are, and when you look at something that Spotify, they were the original disruptor because they took the record industry and basically turned it on its head as a huge disruptor, you know, 20 plus years ago. They develop that following, which meant that actually, they didn't need an investment bank to bring the buyers because they already had them.
Samuel: Yeah. Spotify was already an established company when they went to go do their direct listing. For them, they had established their business, and they didn't need to raise any more money when they did their listing. A different company that may need to raise money may think to do an IPO instead, is what I would see the split going towards in the future.
I think it's really interesting that you talk about how a primary issuer could keep their record, their primary issuance on a blockchain to streamline the auditing process in the future. When they head towards that, it's just like a secondary listing.
So if they already have that information and it can be easily analyzed, or more easily analyzed than non-blockchain issued, primary securities. I mean, that probably could help more companies go to market faster or to the secondary markets.
Nick: Yeah, I think it helps private companies get access to capital in the first place. Secondly, you know, it's a stepping stone to prepare them for, if they want to, why do companies go public? It's either because the founders want to cash out or they want more capital to expand. If those two things are required, if you've done a lot of the heavy lifting, you've basically just stored a lot of your information, that, that you've collected over the three to five years. For example, that cost to market goes down considerably in our view. And, and then if you ended up if you can get access to then a, a network of exchanges that are.
Yeah, train digital securities. Do you call price discovery? You've got access to global liquidity pools because again, assuming the boxes can be ticked. Why shouldn't you try and distribute your securities in Asia and Europe and other continents, if legally you're able to?
Part of our vision is not just to have GSX exchanges on our network and sat on top of our CSD, but also any other digital exchange. We can provide that CSD to that exchange. And that's why, you know, we're in application to be a central securities depository.
I'm running a blockchain CSD, ultimately, because again, we want to be able to say to an issuer. You know, we've got a bunch of exchanges here, please feel free to talk to any of them. They're all part of the network and your securities can be on any of those exchanges, all of those exchanges if you choose to.
So, you know, where do we want to get to an investor with a smartphone? An app can put in a buy order, and the best offer gets lifted on whichever exchange has the best offer at that time. And that doesn't have to be a GSX exchange, and you get an instant supplement. And that ultimately becomes groundbreaking disruptive and cuts out just that sort of time delay that ultimately in a pre-funded world, you just don't need to have. It's what a lot of the digital asset technology has brought to us where I want to buy one Bitcoin, I press buy, and it's in my account immediately.
And then I can withdraw it straight away. I don't have to wait two days it's, you know, and if you're going, if you can take that approach and apply that to registered securities. Then, and then democratize that is starting to really have, I think some, some impact.
Samuel: You know, it's interesting to hear you talk about the. The backend side of what a blockchain or securities on a blockchain can do, because I'm not somebody who's worked with regulators closely, but I have seen what on-chain securities can do for retail and for me, it's three or four things. Firstly transparency; if you're a primary issuer and you issue a securities token on Ethereum, and you have a dividend, your token holders can see exactly how many tokens are issued and then they can also see the dividends issued as well, too. They can be 100% sure that everyone is getting paid the correct dividend for the number of tokens that are being held. I also think that digital securities allow for micropayments when it comes to dividends. Again, this opens up like huge retail doors where somebody may not be able to buy a $500 or $5,000 of securities in the private markets, but maybe they can afford like five bucks or even like 50 bucks. But if you're paying out like a 10% dividend, you're paying what on $50, you're paying like $5 a year, but with blockchain, you can do micropayments to pay them every day where you're paying them like a 10th of a cent or a thousandth of a cent, and that adds up over time. I think people see that coming into their wallets every day, and it's really cool for them and then lastly, which has really been quite surprising for me, it has been the growth of Defi and just this huge unconquered land where you haven't really seen any major company go in and be able to integrate into DeFi. It's really cool to think about the companies that are working towards having full integration with like the maker contract, where if you own securities, you could borrow against them and generate DAI and then, you know, provided it into a lending pool to create this decentralized digital dollars and then also work within the existing DeFi products to create all sorts of different new services that haven't been able to be offered before in this kind of setting. I guess, my question is if primary issues can issue on Ethereum without too many issues, but the secondary issuers need to move to a private permission blockchain like stacks. How does that get reconciled with DeFi and you know, where do you see both the primary and secondary fitting into it?
Nick: Yeah. You're right on point. Let's take an example you were just talking about. At the moment, I think something like 2% of securities are loaned, so you have this enormous untapped market. Take my mum. She subscribed for British Telecomm shares in 1984 when the British government was privatizing huge amounts of industry, and she still holds those shares. She's done absolutely nothing with those shares. A cheque falls through her letterbox once every year with probably £4.72 on it as her dividend, and the whole thing is just completely barking mad. Actually what you should be able to do is to try to bring all of that together to number one, allow retail investors to do something with securities, to put those up for a loan and start to earn extra interest on terms that she can specify through her sponsored access to the exchange.
Secondly, to be able to have, for example, high-frequency trading companies be able to preload in that if they want to short British telecom, our algorithm will sweep and search for any BT shares on loan as long as it meets the criteria of the HFC. Then they can automatically shortlist security, so you have an instantaneous pool of liquidity. When you look at it, you've got the matching engine which is off-chain, so you do a million trades a second off-chain. What you've then got is a borrowing, lending and collateral management algorithm and platform and technology. If you have assets, you should be able to post those, take a haircut and get access to funding. You should also be able to borrow shares.
You should be able to search automatically to enable you to eat a short or basically a loan, and then you've got the CSD, which is reconciling our central scripts depository, which is reconciling all the time that data to make sure that legal, financial title, beneficial title is transferred at the point of trade.
When I sell my securities to you, you are now not the owner of those securities, and I am not, but equally, I have received your digital fiat instantaneously into my wallet. If Lehman's goes bust, it does not matter, because the title was transferred T-instantly. Also, we cannot fail because I cannot sell my securities to you unless my wallet has my securities in them all.
I have preloaded in my search criteria to be able to borrow and short to you because I've decided that actually I believe the security is going down and I want to short. I think you're right that is absolutely in our design specification because we see that again, it's just a major untapped market where security is just at the moment, tend to sit there and really just did nothing. Where in fact they can be, they can be used to add liquidity to the market, which ultimately is one of the biggest challenges you've got, particularly in the smaller sectors are liquidity or illiquidity where these things trade, you know, once every three or four days.
Samuel: Do you think that with the digital securities they'll exist within these walled gardens where they'll have all the same access to similar products that look like what exists on Ethereum? But there'll just be similar ones that would exist on a private permission blockchain, or how do you see that working?
Nick: Yeah, I do. I think what will happen is that you're going to have several parallel universes if that makes sense? You're going to have the traditional T-plus-two system, and that is an enormous, huge machine that actually works well in a T plus two models. But equally, you know, it does have its challenges. There is a relatively high failure rate and also COVID-19 you saw the central counterparties start to request more capital from the investment banks who guess what don't really want to post any more capital because capital is king right now. So there's tension there.
CCP does an amazing job, but you know it's a risk-on, risk-off business in many ways. I think the CSD starting to do buy-ins from September is gonna twist the machinery even further. I think there's, first of all, T plus two is going to continue to be around for some time yet.
I think what will happen is you will have a number of exchanges start to roll out the technology, and whether they're decentralized exchanges. I will be happy to be proved wrong, but you're going to have, I think these private mission networks start to kick off where then I think over time you will see a gradual migration and it's driven by, in my view, economics, because if the economy of automation and digital securities is such that you can reduce costs by circa 70%, half-complete reduction in regulatory capital and risk-weighted assets being posted for CCPs and, you know, completely eradicate fails and counterparty risk and get country into operability. Those things start to become really compelling. I think you'll just have this evolution over a decade where, you know, you used to get paid in cash on a Friday when you finished work and then it became a check and then it became direct transfer into your bank account. That evolution, I think, will be the same with securities markets. It won't happen tomorrow. It's going to take time, but it's absolutely guaranteed to materialize.
Samuel: So, where is the biggest impact going to be felt by all of this regulatory expansion and movement towards digital securities? Which type of companies performing securities issuance will be able to benefit the most?
Nick: I think the private sector stands to gain a lot. I do. You've got about $6 trillion. I think it is in private company assets, which I'm getting access to capital is pretty difficult.
Samuel: This is for the primary market, right?
Nick: Exactly. Private companies not wanting to go public. They want to get access to capital so they can tap into the capital to sophisticated or categorized investors in digital form. Their registries can be run really efficiently and actually do something which actually is relatively low cost.
I think that is a major area. I think, secondly, the impact will be felt. I do believe in terms of public listings, and I'm talking about, your big securities trading on exchanges that backend financial markets infrastructure, you can start to see some major cost savings and efficiency.
So I think what ultimately they'll pass on hopefully to the end investor, but, you know, market participants, investment firms, I think will stand to benefit and that ultimately should overall lower the cost of capital to companies wanting to go public because I think, if you're truly just trying to sum up what we're trying to do for a living here, we're trying to get issuers and investors to meet each other. That's what we're trying to do. If you can do that cheaply efficiently and automatically, and get really smart in terms of what we're talking about with things like borrowing and lending, then everyone stands to benefit.
Samuel: Yeah, are there issues with the corporate debt markets in Gibraltar at the moment?
Nick: No, I mean, there's a very small market here. I mean, we've got about one and a half billion dollars on our exchange.
Samuel: Pretty small. Yeah.
Nick: It's not a big business. I think what's interesting are corporate bonds and government bonds, and there's about 3% in Europe that fail to settle on time. Again, that really should be nought. Now whether the debt will move on exchange remains to be seen because I think, you know, it's primarily an OTC business, but again, if you can build a marketplace where the costs are minimal, but the risk of failure and therefore, you know, capital being posted is the zero.
It becomes a very attractive proposition. So, I think that the fact that there's still a relatively high failure rate and that's set to change in December, September with legislation coming out here. Then I think that that's also something which I think can be tapped into.
Samuel: I mean, it's really interesting that your corporate debt markets are so small. I was expecting it to be like an order of magnitude or two bigger
Nick: Yeah, Gibraltar is a small jurisdiction, and the capital market here is evolving. You know, we have Brexit coming, at the end of this year, there's still, obviously some question marks over exactly how the landscape will look, but we're taking the view that it will be a relatively hard Brexit.
As Gibraltar leaves with the UK, we set up a presence now in Estonia, for our pro-post Brexit world, where we will have our central securities depository and our exchange we're in licensed for both and, we will be able to, you know, I think because it's a European single marketplace, be able to hopefully build a much bigger market there, but Gibraltar is a small jurisdiction.
To be honest, the capital market is obviously not very old because, you know, we're the only securities exchange here and we've only been here a few years, and Gibraltar does not do equities. Cause that circles right back to what we were thinking a couple of years ago when we said, okay if we're going to do equities, how does it look if we're just going to do traditional securities trading and it just didn't stack up.
That's why we said, okay, let's, let's build a digital securities venue and let's start with the European market, equal access to 30 odd countries. That's a great opportunity for us to be able to bring issues to the market. Also, we're applying in Asia, we've put a license application last December into open an exchange in Asia, and we hope to fund enough. We hope to hear that this week for about six months. So, if we get that permission, it will be another exchange on our stacks network. We can open our trading venue in Q3 in Asia, which be really, really exciting.
Samuel: Yeah. Has it been difficult to navigate the coming Brexit or at least there's a ton of uncertainty that exists in how markets are gonna operate and how the changeover is going to take place? I mean, you just mentioned that you guys have to move the GBX over to Estonia in preparation for Brexit.
Has it just caused business operations To become more expensive as you guys try to figure out the regulatory changes and how the business model needs to adapt? And you know, what have been some of the bigger problems running into this Brexit?
Nick: Yeah, I think for us, I mean, so first of all, we saw the European securities markets as a big opportunity. Therefore we wanted to get our GSX Estonia open because we wanted to have our trading venue in Estonia because we don't have a trading venue yet here in Toronto, we decided to move GBX to Estonia to basically centralize our trading venue, technology, and basically our risk capital.
Samuel: It wasn't a Brexit decision.
Nick: It's nothing to do with Brexit. Obviously being a crypto or digital assets exchange, it's actually Brexit proof, so that was never the agenda for us. It was a case of we're actually going to build a vertical stack in Estonia, to begin with, and therefore to have our training venues in one location, it just makes sense from a commercial perspective in terms of the landscape. What's going to happen in terms of access to the single market, but all the indicators are there that that access to the single market will not be there after December 31st.
Now what that does is it opens up challenges, but also an opportunity. So Gibraltar is the only country that actually can passport into the UK after Brexit. Now that's pretty interesting because you can either as an issuer goes to the UK regulator, I guess, you know, the London stock exchange or get permission to passport in, specifically issue by issue, or you could come to Gibraltar you can get your perspectives approved here by our regulator, list on our exchange, and you can basically go straight into the UK. Gibraltar I think actually has a unique position as a portal. It's opened up a unique opportunity.
Samuel: Is that passporting clause a grandfather only? Or is it something that if I open up a company in 2021, I'll be able to use that passport?
Nick: You can use that yet. You can use that possible. That was part of leaving Europe with the UK that our government here were very quick to get on to clarify that because it's an interesting situation because we have about 60 insurance companies in Gibraltar.
I think one in four cars in the UK are actually insured out of Gibraltar. I think 97% of our services are actually possible in the UK and only 3% of passport into Europe. So actually it was vital. If you came and set up a company financial services company, for example, in Gibraltar, and we're seeing post-Brexit law companies moving abroad from Europe because of that possibility where they can get the licensed tab and get access straight into the UK, which obviously is a massive market. I think what's it going the other way is, we don't anticipate a huge amount of change actually because the legislation is what we already comply with because we are an EU regulated exchange, in Gibraltar already. Opening a European exchange in Estonia, we understand the legislation already. It's actually been a pretty painless process so far in terms of us submitting our application.
Samuel: Yeah. I mean, it should be somewhat similar across European jurisdictions.
Nick: 100%. I think the only nuance across Europe is an innovation for regulators. We've found certainly so far the Estonian regulator to be very welcoming with innovation because they can see the benefits. As we spoke earlier, as long as investor protection, reputational risk, are in place, but equally it improves competition, then that could be a pretty exciting development.
Samuel: Are there any other issues with Gibraltar leaving the EU that are still outstanding? I mean, in kind of a general sense or is everything already taken care of between the EU and Gibraltar?
Nick: I think that the government where they've been working really closely with the UK government and, I think there's been progress as well with Spain, which obviously has been historically a point of tension. Spain, the UK and Gibraltar have signed a tax transparency act. I think Spain's always taken a slightly dim view of Gibraltar, in terms of wrongly tax transparency. I say wrongly because Gibraltar has been complying with EU transparency legislation for decades. In fact, it was ranked alongside, Germany in terms of transparency by the OACD. There was a bit of politics at play there.
Now they signed a tax transparency act. That's transparency between three countries, and so I think that will help, a lot in terms of the smooth transition, but I think otherwise, no, the government here has been spending a huge amount of time in the UK working with treasury and the UK government to basically ensure that Gibraltar's future is as bright as it can be. It's a pretty good place to be biased because of that post-Brexit opportunity.
Samuel: And how do you think you guys are positioned against some of the other smaller jurisdictions in what you're offering for both digital assets and the other issues that we talked about beforehand?
Nick: Yeah, I think the approach has always been proactive in trying to be in front and, you know, they've got their distributed ledger technology regulations in place. They're looking to as a nine-principle regime, and they're looking to add another principle, I think pretty soon, which has to do with market abuse, which I think is sensible.
They've been practical in terms of look, we can't regulate the technology, and we can't regulate decentralized currencies. What we can do is regulate the actors. I think that's been a pretty small way to move forward. I think we have to be realistic about Gibraltar as a financial capital market.
It's always going to be a small jurisdiction and, and that's just that the nature of the jurisdiction. For distributed ledger players, particularly in terms of crypto, I think it's a great jurisdiction to be based in due to the framework they've got in place compared to other jurisdictions. I think when you look across Europe in terms of crypto, you know, I think historically I think Malta has been, relatively ambitious, Cyprus has made noises. Lichtenstein's made noises, the Channel Islands have made noises. I think France has started to really become a lot more forward-thinking and Germany have just approved a couple of issues recently.
They're right at the front of innovation. The government's view from what they've said the more players that join the digital revolution, the better, you know, because I think that leads to more adoption and everybody that can then can they get more access to things. I think Singapore is really, you know, making, I think a lot of ground there, which I think is really exciting.
I think the Monetary Authority of Singapore is really forward-thinking as well. Our technology partner, hashtags, which we own a shareholding in, they've been working with the monetary authority of Singapore on that digital payment currency, which is project urban. Different jurisdictions are doing some really cool things.
It's a great time, you know, these next two to four years are going to be awesome in terms of seeing different jurisdictions, you know, take the lead. We've been particularly impressed with Estonia. You know, we engage with a number of different European jurisdictions, and they came across as just really forward-thinking and obviously a very large population of FinTech, FinTech talent pool, because you've got Estonia, you've got Finland, you've got Latvia, you've got Ukraine, you've got Lithuania. These countries are just packed with really smart, smart people, blockchain-enabled and, I'm very forward-thinking people. There's a good talent pool up there.
About this episodeWhat makes a good Defi investment and why are strong narratives and memetic founders attractive? Michael Anderson breaks down his investment style through Framework Ventures with host Samuel McCulloch.
Michael is a co-founder and partner at Framework Ventures, a venture capital firm focused on building the value of blockchain networks through strategic investment and infrastructural support. Before founding Framework, Michael built and sold Hashletes, the first and only NFLPA-licensed digital collectibles, with co-founder Vance Spencer. Michael’s prior experience bridges investment banking and consumer tech, with experience from Snap, Inc., Dropbox, and Barclays Capital.
Michael's LinksLinkedin | Twitter
Framework Venture's Website
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why communities build networks and drive adoption in DeFi and why this matters when investing in projects as a venture fund. * Why Sam thinks synthetic products in DeFi have higher derivative risk because of the inherent volatility in the system. * How hacks and exploits both expose the different type of weaknesses within DeFi and why the industry is not doing a good enough job preventing or informing users about the risks involved. * Why token economics is a project’s business model in DeFi and why Framework has a multi-year, long term investment approach. * Why Ethereum’s huge network effect is because of their developer community and their choice to build on Ethereum 2.0. * Why decentralised identity is the Web 3.0 component everyone needs, but it hasn’t happened yet. * Why Web 3.0 stands for transparency and openness in order to break the circle of surveillance with the tech industry. * Why getting decentralised applications into Google and Apple’s App stores will be a test of whether or not they are ready to allow DeFi to compete with their monopoly.
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SHOW NOTESSamuel: Today, I’m joined by Michael Anderson from Framework Ventures. Framework is a venture fund focussed on DeFi, and specifically, they’ve invested into Cava’s synthetics chainlink and Edgeware as well too. So, Michael, welcome to the podcast.
Michael: Thanks for having me. I’m excited to chat.
Samuel: How has DeFi fit into your overall narrative of where Ethereum has been and is going and, and also is integrating into Web 3.0?
Michael: Yeah, we view Web 3.0 and DeFi as being intrinsically related. DeFi is really the first category of the building blocks with which we’ll use eventually to build Web 3.0 products on top of, I think We like to call it the financial radios that we’ll be able to use eventually to build different products, but right now DeFi is what’s working in DeFi and especially on Ethereum is really where the industry is focused.
Samuel: I’ve looked into, went through quite a bit, and I’ve always had this kind of nagging suspicion that it’s going to be a lot harder to move away from what has been created with DeFi into non-financial based aspects. When you talk about like domain hosting or social media, or really like any other service that doesn’t have a financial aspect to it, it seems to me that the adoption curve or at least just the ability for the web through products to go out and find users is much harder, in comparison to just building financial products that serve a need for gap finance.
Michael: Okay. I completely agree with you, but I would actually say that maybe we have different opinions about what Web 3.0 is. I think Web 3.0 is actually the financialisation of things that weren’t previously possible to be financialised. This is starting to come through with some of the things we’ve seen around Zora Foundation, which have launched over the last couple of weeks or months. They’re providing access in a financial sense. Two shares of culture, I think that’s how Zora Foundation describes itself, and that’s kind of our view of what Web 3.0 actually is. I don’t expect that we’ll be seeing a decentralised social media network eventually without any sort of financial aspect provided.
Samuel: I mean, so what is the Zuora foundation do?
Michael: Zora. It’s differentiated commerce where your ownership of token grants you access to some piece of limited content or commerce, and this is in the form of limited content in the form of songs. I think there’s a couple of different T-shirts that were put on there. Socks had been put on there. It’s just an interesting way of finding a financial market for a limited supply of goods.
Samuel: I mean, it’s strange that you would like to securitise content, right? When you could just rather have a subscription-based model for it. I mean, I look at what sub stack is doing, and it’s amazing right where you’re enabling all these small content creators to monetise outside of major publications. What would be the need for having a tradeable asset, connected to content?
Michael: Well, I think that question is exactly what we’re trying to figure out right now. I don’t think that these answers or these questions have been answered yet. I think Foundation and Zora are doing really interesting things, but they haven’t hit scale, and they haven’t really found that product-market fit yet, but that, I think if you squint and look into the future is sort of where the Web 3.0 direction is going, that requires there to be these primitives, these foundation layers of DeFi are the backstop to providing and creating that access.
Samuel: My understanding of everything that’s been done on Ethereum, and I’ll give you my thousand-foot view is that the DeFi ecosystem fills a need for gap finance because when you look at traditional markets, they work really well, and they’ve worked really well for a long time.
However, there’s a subset of people who live outside the United States and don’t have access to dollar markets, and DeFi gives them the ability to access, to loan markets, interest rate markets, and pretty much everything else that you can access as an American. So there’s increased risk by using this obviously seen in the weaknesses of smart contracts, but at the same time, it does provide an alternative for people to use.
I guess, my questioning of all the DeFi thing of how it makes the jump is that if this is something solely built for gap finance, how does it get towards broader adoption?
Michael: Well, I think that there’s definitely an aspect of DeFi that is gap finance, or what we like to say is financial inclusion, giving access to the rest of the world the same property and financial capabilities that we have here in the United States. The other aspect of DeFi, which I think isn’t something that we should shy away from is the ability to speculate and having speculation be a form of entertainment, but also a form of income, especially in these times when income and income security is necessarily not something that everybody’s available to. That can become a mode of interest in operating where you didn’t previously have that. DeFi presents that opportunity, not in the same way that, you would have necessarily in the financial markets in the United States, but for those that understand these new technologies better than most. They’re able to make a living by speculating on them.
Samuel: But speculation is a zero-sum game where there’s nothing actually intrinsic created is just that price moves in either direction and some people benefit, and other people don’t.
Michael: Yes. The infrastructure that we’re building now around speculation, I think is the infrastructure that can be used later for Web 3.0.
Samuel: This is one of the things that I have trouble wrapping my head around is that unless you start including, I mean, this has to be the next step for the DeFi ecosystem is to start to include non-Ethereum-based assets onto the DeFi products that exist already so that outside money can come in because if you don’t have these cash flows coming in, all you’re doing is creating this.
Michael: Yeah.
Samuel: Like a strange bubble of value solely connected to the value of Ethereum and some of the smaller cryptocurrencies that are associated with it but I think this is what has been defined by the Maker team and some of the other guys where they see the Maker contract going in the future and starting to include things like USDC, and other like actual physical assets into these contracts to give more stability to the asset and allow for the asset to grow exponentially.
Michael: Absolutely. We are definitely following everything that Maker’s doing. The other team that’s really executing on this vision is Synthetics, and they just came out with a new spec where they’re going to be able to have a perpetual price feed and therefore synthetic asset for crude oil.
It’ll be the first time that you have oil and oil pricing as an asset on Ethereum. I think those types of moves and changes move this industry from what you’re describing as the circular and self-perpetuating engine that is DeFi speculation within cryptocurrencies. On top of Ethereum, it moves it into interesting products that can expand beyond just what’s in the blockchain.
Samuel: My question is that in these synthetic assets, they’re not really built to be held for the long-term. I mean, you would hold a perpetual crude contract like that. It’s a whole other level of derivative away from a futures contract. And it seems like there’d be a lot more carry risk than the actual product itself.
Because one, there is no physical connection to the asset. And two, you’re probably just making short term trades. It’s not something that you’d want to build out a portfolio with, I mean, am I right in thinking that.
Michael: I think it could go either way. It really depends on your point. If someone who doesn’t necessarily have access to trading the WTI crude oil futures but has access to be able to trade a crude oil or S oil or inverse oil synthetic asset. I think that is a huge reason for financial inclusion and being able to then use that.
Once there is a robust market around it, using that as a collateral asset that can go into other assets, I think that’s the purpose of it. I definitely understand the disconnect between understanding or valuing the underlying assets versus a synthetic price feed, but that’s something that we have right now in financial markets.
I mean, how many people actually settle their futures contracts with barrels of oil in the United States? It’s not really what’s done most of its cash though.
Samuel: Correct, but don’t you think that there’s more derivative risk in these synthetic products?
Michael: Explain derivative risk.
Samuel: Well, I mean that, so all of these products are derivatives or they’re synthetic derivatives of the actual assets themselves. So unlike a futures contract where you have a thousand barrels of oil, which is delivered to your warehouse or wherever you’re receiving the barrels of oil, here, that the entire value of those contracts is based on synthetics and then some of the Ethereum as well, too. If there is a breakdown in the crude oil pricing, right? It goes negative again. I mean, maybe there’s a problem with the smart contract where it’s not able to have negative prices and, for some reason that that creates a bug in the smart contract, which is not able to translate correctly into the price feed because maybe nobody thought that crude oil prices could go negative.
So it could create synthetic derivative risk where the asset itself is not able to price correctly, or the underlying assets are not able to keep the value of the synthetic asset for the people that are trading in.
Michael: Definitely. I see what you’re saying. The different software that needs to be built around this industry is what’s happening right now, much in the same way that interactive brokers didn’t have the ability to go negative on the day that those oil futures contracts went negative and so there were a number of trades that went through at 1 cent and had to be clawed back. We see this with traditional finance and software. There will be issues. This is a nascent industry, but I think the bid point around DeFi is, especially as it relates to centralised finance within the blockchain space is really defined, provides trust because the software that’s underlying all of this to your point is open source and available for anyone to view, you can understand whether or not there’s potentially going to be a bug.
If something goes negative, and because it’s decentralised, I think that’s a huge advantage over what’s happening right now whether it be on Binance, BitMex, or any of these other centralised trading platforms.
Samuel: There’s been several exploits or bugs that have been found out with major contracts over the past six months. I mean, Maker had issues, obviously there, the bZx hack, and there have been numerous exploits that have stolen hundreds of thousands of dollars from these contracts so far. The longer that these contracts operate sure they become more robust and it seems that they’re not open to attacks anymore, but flash loans were a new product or new offering that was introduced into the market, and that gave an attack vector into these contracts which hadn’t been before. Yes, it is open-source, but do you think that there’s a level of risk that is just inherent in the contracts themselves?
Michael: Absolutely. I think what we do need to do is differentiate a hack from an exploit; because a hack is when something fails and it isn’t going to work as previously thought. An exploit is when it’s a system as designed, and someone takes advantage of a vulnerability in the system. I think for us to get to the point where we as an industry are dealing with hundreds of millions of dollars of value or tens of millions or millions, there needs to be a deeper understanding around all of the interrelated complexities of having these new systems coming about in a permissionless complete smart contract language that enables anything to be built in anything to be connected to each other, so there’s a lot of second-order effects that go on when something like a bZx exploit happens, and I think those are really serious issues. I don’t think that as an industry, we’re doing a good enough job preventing or informing users about the risks. It’s really easy. My crypto has to have this click-through model as soon as you enter the product every single time. Do you understand the risk?
Do you understand this is alpha-level technology? I think we need to do a better job of that before we start putting real value at hand, but the software will get fixed over time. People will develop better processes and better controls and better libraries to leverage to be able to unify all of this code together, but that’s just kind of the development of any software system.
Samuel: I mean, so how do you take that into account when making your decisions as a venture fund?
Michael: It’s a primary factor that we use to evaluate. I think with anything we need to evaluate the software, need to evaluate the technology, need to review the audits of the technology, make sure that that’s part of the strategy of the go-to-market, and then we’re also a little bit different. We don’t just invest in the token, and back the team and back to the community and the network; we also actively participate. We put our own capital at risk, and in using these platforms, we’ll be able to be lead your seed round then also be a huge part of your liquidity. The collateral that’s being used on your system or your trading volume that you’re trying to bootstrap, so we put our money where our mouth is, and we actually get into the weeds and figure out where there could be vulnerabilities, where there could be, exploits or potential exploits. We worked with the teams pretty closely on that.
Samuel: Yeah. How do you establish those close relationships with those teams? Is it just a matter of they let you on the board or is it just that you, because you’re such a big token holder that you can call the team at any time of the day? I mean, how does that work?
Michael: Yeah. In decentralised networks, there are no corporate boards.
Samuel: But those development teams were run by a company, right?
Michael: Those development teams are essentially a company, or maybe they’re a foundation, or maybe there’s an amorphous group of people, but they are the core team. There are controls in place and, and there are usually infrastructure traditional entities set up, especially at the beginning, but it’s really about getting to know the team, getting to know the community because at some point the team is going to have to hand over the reins to the community who’s neurotic into perpetuity. It’s not like Vitalik necessarily has control over the Ethereum ecosystem as he maybe once did, so that transition from centralisation to decentralisation is a huge divide and we try to help with that transition. We try to get involved early and, and develop good relationships with the core teams and the initial community members.
Samuel: Is this a daily thing that you’re speaking with the teams?
Michael: It’s a daily thing that we’re participating in the discord or chatting about different things and whatever communication channel the networks prefer, but, as users you want, or as users and as entrepreneurs, you want that immediate feedback, you want to be able to talk to the people who have an invested interest in the success like you do, who are using it and participating in the same way that you would want other people to. That feedback, especially at the early stage is crucial, so we try to provide it whenever we can, and if we have any insights or thoughts, we’ll chat with the team or call a meeting or just chat in the discord.
Samuel: Has there been a time where you’ve had to come out publicly against the team’s actions yet, with any of your investments?
Michael: Well, we have been fortunate so far where we haven’t had to do that. I think there are definitely points where we’ve had questions as to which direction the team wanted to go in and ultimately ended up getting settled. We’re about a year in, and I think this industry is early enough where we don’t know which decisions are going to be the best ones and that’s part of the excitement about this. We’re still figuring the models out and so who’s to say one way will work in one way. I mean, it’ll probably take a couple more years to figure that part out.
Samuel: I mean, because in some respect, you’re almost like an activist investor, right?
Michael: Yeah, I think activists comes with a negative connotation, especially when it’s activist investor, but we’re not convinced that comes in peace. We have hopefully the best interest of the community and the team in mind with what we do, and that’s how we like to invest, and that’s definitely a part of how we evaluate which investments make sense for us.
If there’s an openness for that feedback, if there’s an openness for participation, that’s something that we really like to do with everything that we do and everything that we invest in. If that’s something that the team also wants, usually it is, that’s a huge benefit to any investment thesis we’re making.
Samuel: Well, I mean, unlike the team, I mean, the team usually has tokens locked away for several years. So in your case, you actually have money on the line. So it would make sense that you could have strong views about things then than them because it would affect you either in the short or the medium term, where the team may be thinking about the long-term.
Michael: We are definitely a venture style investment thesis firm. We take any multi-year approach sometimes potentially even longer than the core team is thinking. I would say we try in everything that we do, whether it’s participation, investment thesis, our outlook on the industry, or on a specific network, we try to be aligned with the core teams and the entrepreneurs because those are the ones that are going to have to stand up and rally the people around the network, get the initial users, bootstraps, liquidity, bootstrap activity. We’ll be there to help, but it’s not going to be something that we do on our own, so we have to make sure that the entrepreneur is aligned with us.
Samuel: How does that process go from identifying projects to selecting them as an investment?
Michael: Yeah, as the two general partners within framework ventures and we use a four-part, evaluation heuristic, and for any other venture investor in traditional technology, it’s very similar, product-market team and their abilities, but the two things that I would say are different, we think that token economics is the equivalent to a business model.
We go really deep in total economic but then we also look at the community. What is the community like? How active are they? Is there this sense of the medic culture around the community? Because the community is your initial set of users, your suppliers, your partners, and that is how we’ve seen networks really bootstrap themselves, so the community is essential to the success of most decentralised networks, and ultimately community also becomes governance. Whatever the norms of the community become the norms of governance for that network and so that’s how we see the transition from more of a decentralised community to a decentralised governance model.
Samuel: When you mentioned community, the one that comes into the most is Chainlink right, which is your largest investment, and they have a huge community? But how was the identification of something like Chainlink possible in 2017?
The memes about Sergei and the idea of Chainlink as a company that’s announcing partnerships in being involved with pretty much every crypto project didn’t exist back in 2017. What was the reason for developing this idea back then?
Michael: Okay. I would say that we didn’t have the idea fully fleshed out at that point, but we were active in the community in 2017. We were angel investors in CHainlink back then. The entire chain link community was this Furman group of followers that built a community through Slack, and started sharing memes and started sharing culture around Chainlink and this was when nobody really knew what the development process was. There were no partnerships being announced as you said and there were no crumbs even that were given to the chainlink community in terms of where things were and how things were going, and then you overlay that with this massive run-up and then this massive crash in early 2018. What you have developed is this group of followers who have been figuring out what channelling could potentially be and how it could work in this ultimate future of decentralisation and that has fostered this sense of being the underdog that has built this strong community, and weathering the storm together has made the community even stronger.
It’s not something that you can necessarily identify immediately right off the bat. But like I said, we spend almost all of our time and these different communication channels of these different networks. If you spend enough time in there, you can get a sense of what the norms of the community are. You can get a sense of what they’re talking about, what they care about and that’s kind of where you build this futuristic around whether or not it’s a strong community.
Samuel: How has that translated into your guys’ two most recent investments into FutureSwap and Edgeware into common labs which is developer veteran.
Michael: Yeah. We have made a couple since then, they will be announcing soon, but Cava is another example where the community is extremely strong, and the Carbon Knights have this mimetic culture following carbon, promoting all the different things that the team does or the partnerships that they make. Future swap is another example where the discord is very strong, and people are talking about things like music or weekend plans. You have people provide them with feedback and sharing interesting news related to the product. Commonwealth labs is a centralised entity, and they’re building communication channels literally for blockchains, for communities to vote on proposals for governance or just chat about different things and have this thread live on top of a blockchain. So community and communication is a huge aspect of what we do.
Samuel: I’ve spoken with Brian. He came on an earlier. I agree with him. He said he calls himself a liquidity max maximalist. It’ll be interesting to see how it goes because there is quite a lot of competitors who are trying to bring Bitcoin, in theory, to create cross-chain CDPs is very cool. I think it’s pretty novel and they do have a good idea which they’re running with. We’ll see if it plays out.
Michael: Yeah. It’s so early, and I think it’s really easy to get wrapped up in the vicissitudes of the market and price fluctuations. In reality, It really does take years to develop successful networks. Chainlink launched last year, and they had their initial token sale in 2017.
I would probably describe the product as maybe a year or two away from being a fully-fledged product that was envisioned in the white paper. When you have public market liquidity and market gyrations, how many people are sticking around for those full five years?
I think that in and of itself is an investment advantage and something that we definitely look for in any community, but then also in how we view any investment that we make.
Samuel: Now have you started to look at ETH 2.0, and the effects it’s gonna have on the ecosystem,
Michael: Absolutely. We have a policy around not investing in ETH-killers. I think it’s served us well so far. We view ETH 2.0 today one of the most undervalued aspects of blockchain because I’m combining a number of things into what I’m calling ETH 2.0, but what you’ll have in the short run is a renewed sense of interest around ETH as an asset, as soon as you add staking to it, it’s going to become something that I’m sure Coinbase or any of the major providers will provide as a service generally for free.
What you’ll be able to do is just put your Ethereum tokens in that wallet and stake it, so that sense of interest, I think, will drive adoption and then with some of the new infrastructure changes or hopefully a deflationary value model for fees, but also differential fees based on transaction throughput.
I think that in a matter of a couple of months, it could be something that really helps with situations as we saw on March 12th where there was just complete, slowing or stalling of the network. There are some really huge events for the Ethereum network on the very soon horizon and then the full realisation of ETH 2.0.
I think whether it’s ETH 1.0 or ETH 2.0. it’s going to be what we had all hoped Ethereum would be, but even then, the white paper was released in 2014, and it’ll probably be 2021 or 2022 before we realised full vision of it. Another example of how long these things take, but we’re really excited about it because it really provides the first example of consumer scale applications that can live on a decentralised network.
Samuel: It was the Chainlink Oracle’s, which failed on March 12th, which eventually led to the failure of the maker contract, but the exploit of the major maker contract, and there were $400,000 of liquidations which were able to bid on for just a couple of cents.
Michael: So Maker has its own Oracle system. The Maker Oracle, were failing, but what was really happening was that the keepers in the network of Maker who are the ones that are supposed to keep everything in balance, putting these blocks of ease up for auction, those were failing, and so ultimately it ended up being about $8 million of value that was able to be auctioned for free. Yes, there were failures within the entire Ethereum ecosystem which led to a complete stall so anything couldn’t process.
Samuel: So gas prices have been high for the last couple of months and for a company like Synthetics, which is running these expensive smart contracts, they need to update the price feeds what every couple blocks. How has the impact of these high gas prices been affecting your operations?
Michael: Our operations are really largely unaffected. DeFi right now is not a throughput constraint really. There was just a synthetics demonstration of what the exchange would look like if built on top of an OVM, the opportunism virtual machine and it’s a roll-up mechanism, which is a layer two on top of Ethereum with thousands of transactions per second throughput, and that really kind of, once again, shows where this industry is moving in the next call it six, maybe nine months. Everything will be either on top of the side chain or on top of a shard in 2.0. but you’re right in that there are a couple of applications, I think, not necessarily, or potentially nefarious applications that are sucking up all the gas in Ethereum right now, leading to extremely high prices and it’s definitely a concern at least in the short term, and in longterm, it’ll be sidechains in Ethereum that really solve this issue.
Samuel: Because let’s say five out of the 10 top gas users on Ethereum right now are scams. I guess indicative of what’s happening on the network. It’s hard to find these projects. You wouldn’t find them easily. I don’t know. I see these names pop up, but I don’t know actually how to find them without Googling them. They are not really advertised anywhere. TripleM scam has spent three and a half thousand ETH over the past month, which is translated to around $800,000 in gas. That’s second only to Tether, which is handling, you know, billions of dollars of transactions.
Michael: Yeah. Those are the potentially nefarious actors that are sucking up all the gas. But one way to think about that is to say, well, they have a choice of blockchain in terms of transaction throughput, and they’re spending however many hundreds, or hundreds of thousands, or millions of dollars on gas just to have their applications run here.
Why is it that they chose EOS or Tron or any of the other blockchains that have low, what would be lower fees to operate their network? They’re still coming back and choosing Ethereum. That could be a very positive sign for Ethereum in that they still view this as the place where people have their accounts. People are using it every day, and there’s just enough infrastructure there to have potentially nefarious applications run on top of it versus any other blockchain. I think it signifies, even with all of this, that Ethereum has already won.
Samuel: Well, yeah, I don’t doubt you on that. It would take a huge difference in how a scale, throughput or latency would be able to have any effect on a new blockchain that came out and give it an ability to compete with Ethereum. Because at this point, Ethereum just has applications, Tether, and then also the tens of thousands of developers who are building on top of it.
Michael: Exactly. I think that’s the huge network effect. It’s really the developer community that nobody’s going to be able to replace. If you think about the switching costs of a developer, it’s not just about what their environment is that they’re writing their code and it’s about their understanding of the network or understanding of the complexities of the language that they’re using. It’s a skill that they’ve learned over a longer period of time. That’s one of the reasons why we don’t look at any other layer ones and really consider Ethereum to be the only place, especially for DeFi right now.
Samuel: I mean, what do you think matters more? Is that the developer community or the fact that Tether has moved over to Ethereum?
Michael: It’s absolutely the developer community. I think any of these things, it comes down to switching costs, how Tether runs on multiple chains, and people say that that is a causal effect of what has happened within the Ethereum. It’s not something that is leading to Ethereum being the winner. Tether wants to go where the developers are because that’s where the applications are.
Samuel: One of the things that I’ve really liked about 2019 is that you’ve seen some Ethereum applications be built into mobile apps without people actually knowing that they’re using Ethereum. Reddit is the, one of the biggest ones to implement your ERC-20 tokens into their sites so far, but you also had applications like Dharma where people can just save money inside the DSR or inside Compound as well too, and they take a little bit off the top. I think that those are really cool where you able to provide the abilities of what you’re accessing and DeFi, but under a slicker mobile app where you don’t actually know that you’re using any blockchain on the backend?
Michael: That’s the future of DeFi. I think that’s where the consumerisation of DeFi starts to happen. It’s not easy, especially going through the app store and getting your application approved and that whole process, but it is something that I think is a huge moment for our industry to be able to say, here’s this application for other saving or getting access to different financial products, in a mobile experience, much like Robinhood, who knows where Robinhood is routing that order. When you buy a stock, just like, who knows where that saving is coming from, if it’s going through the Ethereum blockchain, or if it’s going through a bank, I think that’s where our industry is joining, and we’re really excited about that.
And, and then the other event that I think is, another kind of bellwether moment is under collateralisation. Tying identity to a decentralised London is another huge opportunity that we haven’t seen done well yet. This is something that we’re looking at pretty actively, but that’s where we get to go from 150% collateralisation to potentially lower than a hundred, and that just means the efficiency in our industry improves by order of magnitude.
Samuel: Well, how would that work? I mean, you would need some sort of lending company in the middle to do the KYC and then also to make sure that some sort of contract is signed in case the debt is defaulted upon.
Michael: Yep. That’s essentially it. I think you don’t necessarily need a lending company as much as a data and identity providing a layer. But as soon as you do that, you can also connect it to a peer-to-peer, or peer- to-contract-based lending collateral pool and then have the ability to tie back into identity.
For instance, someone was to default on their loan and have that actually hit their credit score, and it could be just in the same way that you have a savings rate on top of Dharma, it could be something that looks and feels like a consumer application and affects your real-world credit score in the real world, but it’s all based around Ethereum and pull collateral on Ethereum smart contracts.
Samuel: But first, you would have to have some sort of digital identity that could be built out. And I don’t think there’s anybody that’s done that yet.
Michael: Not yet. It’s something that a number of projects we’re working on.
Samuel: The decentralised identity projects have been long in the running,
Michael: Oh yeah.
Samuel: There hasn’t been one to have product fit yet, but so what you’re talking about right there is shadow banking of some sorts. It’s almost like a lending club or one of the other lending providers where I can go to a lending club and give them money, and then they lend that money out and earn a higher yield than I would by just putting it into my savings account.
Michael: Yeah, and that’s exactly it. I would describe this more as a decentralised lending club than a shadow bank. I think one of the novel aspects about this is with a lending club, you can invest in a pool or a traunch of loans from people that are borrowing, or you can go individual to individual.
I think that there are some interesting things you can do around peer to contract versus peer to peer where you have pooled collateral and then socialised risk essentially, and then all tranches and returns based on that.
Samuel: Yeah. It’s an interesting concept to think about how all of that would be managed and who would be the entity that would be managing it because it almost seems that you would just have a regular company? Why couldn’t a lending club just come on Ethereum and say, here we haven’t pulled the theory of contract that you can put money into, and then we can extract the value of that and lend it out? It doesn’t seem like they would have to make much difference to their existing operations.
Michael: Well, that’s true, but then they take a fee, they take a cut, and there’s a lot of KYC, which is prohibitive as we discussed to getting people around the world involved and I think that is the innovation here. It shouldn’t lessen the effect of not having a fee and having this be smart contract based where you’re paying gas fees. But as soon as it moves to a Layer 2.0, that the gas fees go down in orders of magnitude, there is no 10% or 15% cut that lending club is getting because they’re a centralised company that needs to make their revenue to employ all the people that are working there. It’s all just controlled by smart contracts and programs that are run on Ethereum.
Samuel: Right, but the smart contracts and other developers who are building out this ecosystem would also have to get paid.
Michael: Yeah. This is where a token model, I think has a lot of advantages over a rented, distracted finance company, where the tokens are governance, and the tokens are used as payment for people contributing to the project.
Samuel: But why wouldn’t you just use a dollar-pegged? Okay. Cause like one of the problems with having like a token that is used for payment is that it’s always going to be extremely volatile. It could go to zero, right? But if you have some sort of dollar peg, then you have your value which is preserved.
I mean, I understand the need for governance and thing, but whether that has to be captured within a token, I don’t know. There are a lot of people who push for like decentralised projects and companies and developers building these things out, but a lot of the times, there are a lot of efficiencies that are gained from running a company and having a team and a strong leader that can drive these teams to do things and especially like at least pre COVID working in one place helps to have a team/community and ability to interact with others in a close space to speed along development.
Michael: Absolutely. I don’t mean to say that everything needs to be decentralised. I don’t think that that’s the case. I come to this industry from previously working at Dropbox and Snapchat, two very centralised technology companies where the efficiencies and the advantages gained from everyone being in the same room are palpable. What I do think is interesting is when you have an open-source protocol, and you have a token as a form of incentivisation for open source contributions, that is a novel concept when you’re dealing with things that are potentially open source and could be with this new business model that we’ve developed, not to say that they need to be, or that they should be, but it is a novel concept, and I think that’s some of the things that we’re looking at. It’s also possible that there’s a centralised entity that earns whatever revenues based on the way that they interface with it. We haven’t really seen that either. Having centralised entities built on top of these decentralised protocols, where there is a token, I think is another interesting business model.
Maybe instead of it being a lending club that says, Hey, We’re going to decentralise a portion of our operation and put it on Ethereum. Maybe it’s a decentralised lending club protocol. They’re the ones that are working and building, and they’re earning revenues or grants to do so, but there are potential business models on both sides I would say.
Samuel: Yeah, I think one of the big gaps in the market right now is that you don’t really have too many companies that are coming in and providing a lending club stepped in and started operating. There are almost no companies that have revenue-generating products that work inside of Ethereum right now. I mean, there’s probably, I can count them on one hand, and there has not been this rush of companies to jump in. I think that if you are operating a US-based company where you are going to be offering security.
Because if you’re offering loans to people and then you have a pooled contract on the back end, that investment contract would obviously be a security. The ability of that company to navigate those securities issues and legal issues is very expensive. They’re going to have to spend hundreds of thousands of dollars on legal fees before they even start to get an opinion that they’re within securities laws.
Michael: Yeah. I one hundred per cent agree. I think there is one clarification. The peer to peer lending market does have a specific carve-out, which makes some of the stuff feasible without having to go through the full SEC or CFTC process or FinCEN[CS1] . You’re exactly right in that they’re not being a number of major corporations jumping in into this new technology is two-fold.
The first is regulatory, and the lack of clarity around whether or not these things are securities/commodities. That uncertainty means that there’s a real, tangible risk for a centralised Delaware C corporation based in the United States. The second is really what I’m referring to is just the lack of there being robust business models yet around how to interface with this. There’s no incentive and there’s a lot of stick if you were to be building on top of a blockchain, which just means that it’s crypto native for now. The things that are successful right now didn’t start off as centralised companies that morphed into blockchain technology.
They were blockchain technology through and through from the start. I would guess that in the next few years we will see some model in some interest from centralised companies moving into this space, whether it be exploratory or just technology development based, or actually issuing tokens unclear. I think we’ll see new renewed interest from some of the big companies.
Samuel: People have been saying that for a while, and it’s now 2020. There’s a lot of companies like you see Microsoft and other things providing technology services, but you know, nobody’s really dipping their toes in providing financial services.
Michael: I would, I would say Ernst & Young and the baseline protocol is one that gives me a lot of hope. Essentially the concept there isn’t DeFi specific, but what it is a replacement of traditional ERP systems using Ethereum as the fundamental base layer of data then having connections, either through Chainlink or a number of other protocols, to have systems talk to each other and in the ERP world, having systems talk to each other, usually requires hundreds of thousands of dollars of consulting time and a couple of years to have Boeing and Delta Systems speak to each other. If they were to be built through it, something like Ethereum, I think there’s a huge advantage to that. That’s mostly what I’m referencing.
Samuel: okay. Baseline creates like a side chain to allow for tokenisation and decentralised financial services.
Michael: It’s not necessarily financial services. It’s more enterprise resource planning services, CRM platforms, HCM platforms, those being built and not necessarily in the side chain actually going on to mainnet Ethereum eventually. It’s still very early there, but just that there is a renewed interest in the last 12 months, I think is a huge positive sign.
Samuel: Yeah. So what do you think are the next big trends to occur in DeFi?
Michael: I think under collateralisation is a major trend. But I also think the fragmentation of the decentralised derivatives or centralised derivatives moving to decentralised derivatives is a huge trend. Bitmex, Binance, all of those platforms are, are being exposed to the potential misleading o just unfair practices for people that are using those platforms.
Those are multibillion-dollar companies. I think that’s a huge opportunity for this industry to actually start building and proving out the business models of decentralised networks and revenue tokens. That’s something that I think we’ll see in the next six months, after that, I think it’s identity and as it relates to loans, and then it’s the consumerisation of DeFi. So how do we put this stuff into an iPhone app?
Samuel: If Apple lets us in, in the first place.
Michael: Absolutely.
Samuel: Because I think that there with the uncertainty about securities laws, it really negates a lot of the ability for any project other than some of these, a project like Dharma or something that could build on in the app store and also the Google app store as well to have strict terms and conditions which prevent them from working with companies that may be offering securities or are not offering securities in a compliant way. This is why there are almost no apps in the app store or the Google store, that are crypto-related because these companies don’t want to take the chance of being associated with them.
I think 2017 left to a deep scar on the minds of these technology providers of the number of scams and the amount of money that was lost from the ICO Boom. I don’t know how long that takes to heal and to move past.
Michael: Yeah. In a previous life prior to starting Framework Ventures, Dan and I co-founded a company called Hashfleets, which was building digital collectables on top of Ethereum. We were licensed by the NFL to create essentially digital trading cards for NFL players. We were actually one of the first, if not the first app to have a connection to Ethereum that was accepted for the iOS app store. Going through that process left scar tissue with us. We were able to make it through and get our app in there, but the opening of the app store or both app stores, I think is something that we’re starting to see based on the level of interest of anti-trust, and the level of potential price-fixing, that’s going on between both Apple iOS store app store and the Google Play store.
I think they’re going to have to shift their focus away from being as restricted as they’ve been and opening up to new ideas and new things. It’ll just be a progression over time, but the fact that we have some things in there, like Dharma, I think is a really huge sign that they’re potentially going to be able to open up. I don’t think that you’re going to be able to speculate through an app. I do think that you could have novel financial experiences built into apps as you have with the savings, or potentially loan, peer to peer loan marketplace.
Samuel: Yeah, it’s an interesting dynamic because you know, one of the questions that I’ve been asking myself is that you know, does Web 3.0 actually break the models that Google and Apple have been able to craft for themselves, the business models of surveilling and spying on their users, to generate content are starting to generate like actionable user identities which they can then sell to a third party company either for advertising or for other services? Does Web 3.0 actually break it can, or is it just a more integration of financialisation into the internet? It just gets absorbed by Apple and Google when they can figure out how to make it into a more, user-friendly environment.
Michael: That’s a good question. I really think that the reason why they have prevented the things from entering into and the different applications for this Web 3.0 ecosystem into the app store, largely has to do with they’re worried that it could potentially break their stranglehold monopoly on this industry.
I think that the tides are shifting underneath our feet, the interest away from the Facebook’s of the world and the Googles of the world, I think is something that is real. It’s a trend that will continue, and if they’re thought of as being people that are upholding those bastions of men or wholistic power, I think that could be a large stain on their reputation and something that they would really consider, especially as they’re fighting multiple fights on multiple fronts.
Samuel: But the question is because they have a monopolistic grasp on their subset of the tech economy, it really limits the ability for any competitor to come in and, be an alternative because typically Apple has so much money on hand that any potential competitor that comes along would just get bought out before they even could reach scale.
Michael: That’s true. I’m referring more to the stranglehold around identity, and in advertising. You know Google is whatever 99 plus per cent advertising-based revenue company. Apple has already come out and said that they don’t want to do things that can create the amount of identity surveilling that could happen for iPhone users. I think there are different incentive structures for both Apple and Google. If they see something coming up, we’ll be able to purchase anything. I think what I’m more interested in is the breakdown of that surveillance of identity as it’s used for advertising as an entrance into the Web 3.0 ecosystem, and Apple could actually be a leader there because they have aligned incentives if there are novel use cases and experiences that iPhone users want Apple would want to supply that to their user base.
Samuel: I guess the question is, would Apple expect a 30% cut of the revenues that were going through any of these applications?
Michael: That’s how it is today. I think it’ll be interesting to see if that’s how it will be tomorrow. They take 30% of any digital content that’s bought and consumed within the app within the iOS app store and then consumed on the iPhone any real-world services or anything that has a value outside of the ecosystem, they don’t charge a fee. I think that the question of the fee is something that’s literally at the Supreme court right now, as it relates to Spotify and Amazon Audible. It’ll be interesting to see how that consumption of digital content in the fee that they take, if that can hold up in a time of Web 3.0, being subversive to this ecosystem.
Samuel: Exactly. I really wrestled with the thought of these monopolistic companies and the inability of our democracy to appear inside of them to understand what’s actually going on and to provide any oversight into their operations, the backend of what they’re doing and the amount of surveillance that they provide both to themselves and then also to the US government is really unsettling for me.
I think that they almost get to have the status because they do provide this information structure. People want the ease of access and easy things where they have a couple of clicks, and then they’re using a product, or they’re investing somehow. There’s always going to be a few extra steps unless you’re building it into an application which makes it easy. You don’t even really know that you’re using blockchain in the backend.
Michael: No,
Samuel: It really worries me about the entrenchment of these companies and about where these financial systems that sit outside of Google and Facebook and everything else actually exists because if know Facebook looked upon it in the right way and saying, you know, here we have a developing financial ecosystem. We see that there is demand for Tether and looked at the growth of USDC and said, Oh, we can do this ten times better and then they’ve modified it to be able to meet the regulatory demands of the United States government and also the Europeans as well, too. When they deploy it, it probably is going to be great. You’re going to have access to dollars through Facebook anywhere in the world. That’s huge for people that didn’t have that access before, but at the same time, I think it entrenches them even further, and you know, it’s scary to me.
Michael: I completely agree with you. I think a lot of it went through represents a subversive response to what’s been going on in the tech industry for the last decade or two. I’m sure libra will be a great product when it launches but then I think, whether or not mass consumers care about whether or not they’re interfacing with a financial product developed by Facebook, who’s also advertising to them.
I think it’s a real good question. Most people just won’t even know, and they will continue to go on about their day, without that knowledge and continuing to give up more information to Facebook. It’ll be really interesting to see. I don’t think that this is going to change, at least in the short run.
I do think that what we stand for and what I think DeFi, as a sub industry, stands for creating that transparency and openness in the face of opaqueness and black boxes. I hope that Web 3.0 can do the same. I hope that the companies that distribute technology, whether it be Apple, Facebook, Google, et cetera, I hope that they can get on board as well and figure out a new way of supporting it and promoting it, in the face of their business model being disrupted.
Samuel: No, that’s a really good point. I think that the good thing is that those companies, you know, Facebook, Google have not made any entrance into DeFi yet, and the companies that have been able to develop are really able to break new ground and to exist without a major competitor. Look at what Maker’s done. You know, it was only until synthetics that they were the only provider of a decentralised synthetic dollar in the entire market and synthetics came along and provided a new alternative to what they were doing, and really became their first competitor which is pretty cool.
They do have differences in how they think long-term about what should be the collateralisation base for their projects. Maker is going down the route of integrating physical assets into their contracts while, you know, Kane thinks it’s best to stay fully crypto and fully based on synthetic assets and based on Ethereum and based on the SNX token.
It’s nice to have that differentiation. I think they’ve been able to grow their ecosystems without having a billion-dollar behemoth come in and start their own company with massive amounts of capital and the ability to draw in more users.
Michael: You hit the nail on the head. I think the difference between philosophy and product category is where we are in this industry. We don’t know which models will win. We don’t know which projects will win, right now, and everybody has their own approaches, but that’s just the nature of development in any industry really and the cycle times in DeFi are very short, as they are in early-stage technology ventures. That’s what gets us excited. It’s just able to have many shots on goal to see which ones work and which ones don’t. We’ll see which models are the best and which ones have issues that we can’t see from where we stand right now.
Samuel: So how can people find you and Framework?
Michael: Yeah, we’re, we’re pretty active on Twitter and framework.ventures is our website. If there’s ever any thoughts or ideas, we’re always down to hear more interesting concepts, and Twitter’s probably the best place for engaging in conversation.
About this episodeHow safe is your website? At anytime a government can order the shutdown of a site and its content is forcibly destroyed. In this episode Brad Kam explains why it is necessary to have an independent architecture for the web and why it must be free.
Brad is a serial entrepreneur from Atlanta and co-founder of Unstoppable Domains, a registry business building domain names on blockchains. Previously, he co-founded Talkable, a YC backed marketing software company.
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Unstoppable Domains
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What to listen for* Why censorship resistance matters more than ever today and why this is a question of internet architecture. * Why blockchain domains are better than DNS, which is not fit for purpose and not censorship-resistant. * Why DNS creates centralized control of the infrastructure of the internet, and how this power can be abused. * Why protecting free speech needs to be built into the infrastructure of the internet because there is no universal oversight. * How blockchain domains remove illegal content by denying access to the site but the data remains on the blockchain; so the record of it stills exists. * Why Sam thinks that some content should be removed from the internet because it is illegal, but there is no infrastructure to do this currently that does not involve a person or government or a decider. * Why Brad believes the current internet domain system is not working and why blockchain domains will create sharing between applications instead of the multiple application silos we have today. * Why changing the domain registry system could reduce costs and time to launch domains in the longer term by being on the blockchain. * How there are many further applications around how we could domains in the future and this could reduce the need for a separate payment system. * Why Covid-19 may change the nature of work and reduce workforce costs through remote working. * How San Francisco may be changed by companies going remote and how this will affect salaries and the creative nature of tech networking as we knew before.
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Show TranscriptsShow Notes
Sam: Today we're joined by Brad Kam from Unstoppable Domains. I thought it was really interesting to have you on Brad because one of the things that have come up in the last couple of years has been people taking a look at ICANN again, and what it actually means to own a domain and who's controlling domains and what power they have to manage and run those domains. Welcome to the podcast. It's great to have you here.
Brad: Thanks so much for having me. I'm excited.
Sam: What has driven this growth of ICANN and what are some of the problems that have emerged?
Brad: I think we should probably start with the birthing of the consumer internet, in the 19 years, there was this idea that to get mainstream people to use the internet. They were never going to type in IP addresses. At the start of the internet, that was the way that you would go and find a website. And so the idea was okay, well, we need to have some sort of human-readable name, and we can point that human-readable name to the IP address. And then we would be able to go and tell somebody, Hey, go check out my website, hotels.com or whatever.
You'd also be able to find that website on a search engine by typing in that kind of keyword. And this process of DNS essentially launched the consumer internet. It made it possible for search engines and popular websites to even inform and get going. And I think this is all, this was a brilliant innovation, and there were multiple different groups launching domain registries. There was.org was pretty early in their.com was pretty early. What wound up happening is there was a need to make sure that all of these different systems didn't collide with each other because if you've got two different dot.com, you won't know which ones real users can be endangered, et cetera, et cetera. I can form a way to prevent collisions and create a standard for the system. And at the time, this was a really valuable, really important thing. I think that it has been critical in the growth of the internet. The issue is more around the infrastructure itself is custodial, essentially a license like a 10-year license to sell.com domains. They can take that license away from you, meaning that the registry could change ownership, but the domains themselves can be taken. Verisign can take a domain away from you.
You're required to store your domain with GoDaddy or some other registrar, and they can take the domain away from you. So there are multiple different groups of people, that have a say in the system. The reason why we think that blockchains have a role to play here is that they don't have a system like this. It's not custodial like this system.
Sam: well, there must be some benefits for having a centralized service issuing the registrars and the domains. I think it was more that there wasn't another option there wasn't a way to issue and transfer assets, a trustless lease. So you basically had to rely on some group of people controlling some set of servers saying here's the record of who owns what. I think I guess one of the benefits is that it's easy.
If there is some sort of illegal content or whatever else it is easy to take an offline, although it's not that easy because people can just keep launching it on other sites and things like that. But that's a benefit of having a system that can be that is custodial and therefore can be censored.
Sam: Well, I mean, there must be, I mean, there's always content that people aren't going to like that, that they think should be brought down and whether it's in a grey area or whether it's in a completely illegal area. I mean, there are varying levels to where the content probably should be taken off of the internet.
Brad: Well, it depends on who you ask. I think that it's more a matter of how architecture works. So in the same way that cryptocurrency eliminates the need for a custodian and creates more secure money, blockchain domains, which is what we build are doing that for DNS. It's basically that the infrastructure itself, the architecture of the system itself does not enable any one person, any one group, any one company to be able to decide what's okay to say and not to say, or do and not to do. I think that's pretty critical because if you look at what happened with cryptocurrencies, there were all kinds of groups, people, all kinds of gatekeepers, all kinds of things that were keeping people away from being able to use basic things like bank accounts, payments systems, et cetera. A huge percentage of the population around the world was excluded from this system. I think the same is true for, for DNS, where there are all types of things. That you can't do. And the other problem that you get with all of this is that if you pick some group of people and say, you're in charge, you can decide what's okay.
And what's not okay. Then ultimately it's going to be very hard for that group of people to not come under undue pressure over time. As you mentioned, the US government, other governments and things like that because they have this power, they are then going to be forced to use it and maybe worst-case scenario abuses it, because of the way the system is designed.
We don't think that there's any need for that at the base layer, the most secure system you can have is one system where the user controls their asset and user can add information. Meaning a user can launch a website put it out there, and then applications can say, Hey, this is unethical. This is illegal. This is dangerous, whatever. And then they can not show it. And when you do it this way, you wind up ensuring that the voices and the people out there that are at risk of being silenced, won't be silenced, but you can still get rid of all the really bad stuff that you don't want to have on there.
I think there's, there's a way to get all of the advantages essentially of the existing system, plus some, at the same time protecting free speech. I think that's the critical thing here that I think we realize and part of the reason why we've been fixating on this problem is the current way the internet works. It is really good for stifling free speech around the world. There are just all kinds of cases of this: the.cat registry, which was launched in Catalonia, promoting the independence movement which was shut down by the Spanish government and all the websites were taken offline when the new Libyan government came in, they started regulating the morality of all dot L Y websites around the world. There were Canadian porn companies that were getting shut down and things like that. The way the internet works enables all of these random people to decide what's okay to say and what's okay not to say. It's an unnecessary design, and it's unnecessarily insecure. That's the reason why we think it's a good thing.
Sam: I mean, part of the reason that we have to define what's legal and not legal is that they come from a general consensus of the populous of what's right and wrong. There is kind of edges in grey areas where people may not agree, but I think there are some probably pretty heinous things that that should be kept illegal. Right. Do you agree with that?
Brad: well, of course, this doesn't change any of that.
Sam: I understand that's the case, right, then there is a purpose for having a regulating body to maintain the rules and regulations that are set up by a Democrat democratically elected government.
Brad: No, because there is because the internet is a universal thing, and there is no universal body that can adjudicate that stuff. So it's not practical. It's not possible. It's not currently being done. And what's being done instead is it's getting used to silence people powerful people around the world don't agree with; that is the inevitable output of any system that has one small group of people or one person or one company in charge.
Sam: I don't want to talk about things which may be a political speech. What's the worst thing that you can think of that could be put on the internet.
Brad: How do you program that? That's the thing, the whole point here. You have to decide whether you want a custodian, a decider or not a decider because there's no way to program in this is not okay, so you have to wind up trusting somebody. That's the whole crux of this argument.
Sam: That's the point of having courts in a justice system, though, right?
Brad: All that stuff still works. All that stuff. It works because what winds up happening is you need an application in order to view websites. Your browser is gonna say; I'm not going to show this record. This is illegal. Or your browser is going to say, and you should watch out for this website. It might be a phishing attempt or whatever. All of that can still happen. And in fact, all of this still happens on the second layer right now, because what happens right now is I post content. And then YouTube or Facebook or whoever needs to decide what the line is? Is this okay? Or is this not okay?
It's actually not even a government body that's doing it today. It's applications that are having to do it and applications are having to do it right now in silos. And what's going to happen in the future is applications are gonna be able to share those records. They're not going to need to have thousands of people staring at all kinds of awful content and deciding where the line of free speech is.
They're going to be able to rely on a collective list; that's one of the other huge benefits you get from having these systems having these records on a blockchain versus having it inside of these silos, which I think is another big piece of the problem.
Sam: Then you're just switching the. The responsibility of, of, of maintaining which websites are acceptable from a regulated body or a regulated enforcement agency to a browser to a private company.
Brad: That's accurate; it's already going through private companies. It's going through private companies like Verisign. It's going through private companies like the registrars, or it's going to do private companies like YouTube or Facebook. The government is not going through every single website and saying this one's okay, this one's not okay. They are absolutely relying on private companies currently.
Sam: The companies that the companies are guided by the rules and regulations of the United States government and the FCC, correct.
Brad: And it will be the identical thing in the blockchain world. There's no difference.
Sam: Right. But what happens to what happens if somebody comes along? Oh, okay. So one of the points about your domains, right, is that they can't be seized. So what happens is somebody comes along and post some illegal content on their website, which goes against what could be considered acceptable content.
Brad: Applications won't show the record. So it'll effectively disappear from the internet and anybody who goes and views it through another tool. We'll be breaking the law just like today.
Sam: But, don't you have to get a court order first? How do applications like Opera, right? How would Opera figure out that we need to blacklist this website?
Brad: What is the mechanism for them to become aware of it or to actually do it?
Sam: I mean, both.
Brad: So the mechanism for them to actually do it is quite easy. They just essentially add a little piece of code that says this domain or these domains cannot be resolved and it's pretty easy. It's something that applications are already working with us on because these types of problems come up quick. People tried to do phishing attempts or, or whatever else. It's just a thing you need to figure out.
Sam: Right. But the data's still there. Correct.
Brad: The data is still there on the blockchain.
Sam: Okay. Don't you think there should be ways for people to have information deleted though, and that there shouldn't be a permanent record somewhere, because it's not accessible through the browser doesn't mean that other smarter people with a bit of coding experience, couldn't go and access it some other way?
Brad: I do not believe that tools should be the determinants of what's okay, and what's not okay, which means that the design of the tools themselves prevent this. So it'd be the equivalent of saying I buy a car. And I have rules in the car that make it, so it is impossible for me to do any number of things that would be illegal.
Now it would be great if we could magically design the car to car to work that way, but that's not the way that ownership of things works. So you have to decide, does it make sense for me to attempt to censor all behaviour in advance and is that even possible versus having a system that deals with it on the second layer, and right now on the internet, most problems are also dealt with on the second layer, like Facebook, YouTube, et cetera.
They're not dealt with on the, on the base layer already. It's really an architecture question, what is the safest system? And I think the safest system is one where users control their domains. Users decide whether or not their website goes up or down, and then applications can decide, and users and viewers of those websites can decide whether or not is something that should be out there or not. Right now what we have is we have all kinds of websites, all kinds of free speech being violated and suppressed around the world, using the takedown of domain names and websites.
I think the moral argument is pretty clear. You need to be on the side of censorship-resistant tools because the other side is what's being used to violate people's rights. So if you want to, if you want to pick a side ethically, I think it's pretty clear.
Sam: I don't think so, because I think there's some content which should be removed,
Brad: I agree. And we'll, and we'll make sure that it disappears from the, it just disappears from the internet as much as possible. But it's a question about architecture and yeah. Okay.
Sam: Right. But don't you think if I'm a victim of something, let's say my personal data is leaked somewhere and it's very compromising to me. Don't you think I should be able to engage the justice system to have that information removed? So it doesn't become a threat to me later or is not compromising my personal privacy in any way.
Brad: You'll be able to do exactly that. There's really no difference. You'll be able to do exactly that. Well, what if a person still is storing it on their own device, which the government can't touch, right? That court order can't touch some random person, then they go and put it back out there. So what you wind up having to do, regardless with the current internet is you wind up having to say, Hey, courts, you need to prevent any of these applications from supporting this content.
That's exactly what happens in the current internet. It's what's gonna happen in a future decentralized web as well where applications are going to be forced via court order, not to show this record and it's going to disappear from the internet effectively.
Sam: But it's not actually disappearing. It's somewhere on a server somewhere tucked away. If it's illegal content and it's considered to be something that the person shouldn't have, I mean, the police can always go after them and have them delete it as well to maybe arrest them.
Brad: The identical is still true in this world too. There's no difference.
Sam: I'm just saying you could still access it.
Brad: I mean the police can still go and find the individual who actually did the thing and force them and tell them that they must delete it or they can go and get their device or anybody else who has the content, which is exactly how it happens, how it happens now with anybody who takes the content offline.
It's really more of a conceptual thing. Like it, it. If it disappears from 99.9, 9% of the internet, everyone is effectively safe. The trade-off you get is that you no longer have these cases where powerful people around the world can suppress free speech. Isn’t that a better design of a system? And that's really the question you have to ask yourself.
Sam: Right. But, there's some illegal content which should be deleted.
Brad: I agree with you. I agree with you. I agree with you, but it doesn't, it doesn't matter because what we're saying is is that the system itself has no mechanism for saying one specific type of content can be deleted. Another specific type of content can't be deleted without involving a person who then decides which then gets corrupted, violates free speech, which then leads to authoritarianism and leads to the world that we're going towards today. So I think it's a moral imperative that we don't go down that path. And that's the reason why I'm working on this company.
Sam: If somebody is uploading child porn to some server or something, you probably don't want that kept there. And, because other people could come along and it just increases the number of people who have access to it. And then I'm sure you've seen the statistics about what these sort of spread of this content leads to things considered wholly illegal in our system of justice.
Brad: it's just the current system doesn't stop the spread of those things either.
Sam: No, it does. The FBI has whole divisions that like hunt down people and put them in jail. I mean, it works because we find them and we put them in jail and then.
Brad: It's all open the internet. I don't know. I think calling saying that that system works would be inaccurate and it definitely isn't working; it's all over the place, but the point is that regardless, you're still going to have to take those same steps.
The nice thing about having a decentralized web is that you have more cooperation between applications. What you have right now is you have each group in a silo, and then the government is completely overwhelmed because they need to go into all of these different little silos and say, Hey, you got this bad stuff; it's all these different places you have to go and find it. Whereas what, what you wind up having with a blockchain records is this record that any application can read.
So any application could go and read, Oh, Hey, there's this blacklist of all of these bad websites. And then everybody can be sharing the same blacklist. So right now, Facebook and YouTube and fortune and read it. And everybody else has to do their own filtering in the future. All of those applications can be cooperating and sharing records, and you're going to have a power that you don't have right now, or you're gonna have a far safer internet.
So I think it's actually completely the other way. I think this is a far safer internet than what we have currently today. Um, yeah. Not even close
Sam: Okay, is having a little bit of a freak out one second. I mean, so what's what is required for someone to buy a domain on a dot crypto domain? Like what sort of information do they have to give?
Brad: You need to offer an email address on our site right now, but there are ways to buy directly through partners.
Sam: If someone does break the law and you need to go find them, how do you gain that information to go after them?
Brad: We're not law enforcement. We don't. That's not something that we do. You talked about law enforcement. How would law enforcement go after them?
Sam: No, I'm just saying, do you think there should be a registry of persons identifying information to associate with them with a website?
Brad: Absolutely not. I think the most critical problem that humanity faces right now is that free speech is being violated all across the planet. And that if you force people to identify themselves, then they would not be able to safely spread news and information that is currently not getting out.
Sam: Well, that's not the case, right, because if you're stopped by a police officer, they can ask you for your ID.
Brad: We're in a big world, though. There are people living in places like China and Russia and Iran and all kinds of places where the dynamics are completely different, where free speech is violated. It's not just about doing things that you and I both think are morally reprehensible. It's about people standing up for their basic rights.
Sam: Right, but you always come back to political speech, free speech is a complex topic as well because you can't say anything that you want, write something that's like libellous or slanderous or publishing other things which could be deemed illegal if they're inciting violence or doing other things, for example telling someone to go kill somebody is illegal.
Brad: sure
Sam: The permanent record of data you can have anonymous speech without having a permanent speech, I think is one of the points that I want to make where if you always talk about architecture, there are ways of having anonymous speech, which doesn't reside permanently in some data service somewhere or on a blockchain somewhere.
Brad: That's also that's potentially accurate. I don't know exactly how that would work, but that's theoretically possible.
Sam: Yeah. So when it comes to being able to delete information about you, do you agree with GDPR that you should be able to delete information about yourself?
Brad: This is about the user. So the user can change records. The user can get rid of this information. I can take down my website. You can't take down my website.
Sam: Right, but what if you steal my information and then you publish it and then it's my information that you've published, do I have any rights to have that information be taken off?
Brad: Of course you do. You have all the legal rights that you have in whatever society or country you live in. Nothing changes. This does not change the law in any way, shape or form.
Sam: Right, but how would I do it technically?
Brad: What happens is that, unless it is just a slam dunk illegal, you literally need to go today to every single application and people who are victims of nonconsensual pornography and all sorts of other things find themselves having to go to every single application of that content is posted on, rather than a system where you have global blacklists that applications all across the world can use. Then you're going to wind up having a case where all you need to do is get onto one thing. That's far better than the way it works in the current system.
Sam: Yeah, but this doesn't exist yet, though, right?
Brad: It doesn't, that's what we're working on.
Sam: Ah, okay. These are general ideas then rather than something that's been put into practice,
Brad: The only reason it doesn't exist yet is that the problem hasn't occurred yet. And the day the problem occurs will be the day that we start working on the solution. This tech is super early. So we launched our first registries, the end of 2019, got our first batch, maybe 7,000 websites that have gone live in 2020. We've got opera browser for Android and a couple of extensions. Mostly enthusiasts are building right now. It is theoretical in the sense that it doesn't yet replace the existing web, the decentralized web is, but as it matures, it has a lot more tools in his toolbox to solve the problems that you're talking about than the current internet, and you're going to wind up being far safer and far happier with the decentralized work that you are with the traditional web, especially with the set of concerns that you're talking about.
Sam: Let's just say 30% or 40% where it starts to actually have an impact on economics, and most people would interact with one of these decentralized websites. There's been a big push recently to start to make different platforms responsible for the content that is published on there. They have the responsibility to ensure the content that they've published through their domains meets certain standards. Those standards exist. Once it goes live and it's on a blockchain, right? The data is permanent, but at the same time, your company is the one that's providing the development time and coding services to build out this environment.
Brad: The reason why is because we are not a content platform, we are not even a platform. The user is attaching data to their domain.
For example, if I sell you a car, and then you go and use it to run someone over, or if I sell you a gun and I have no reason to assume that you intend to harm anybody and you do. These cases have been adjudicated well over decades in the United States as the seller of that item, and I do not have responsibility unless you had knowledge that they intended to use it for harm. If we had knowledge that somebody intended to use a domain for harm, we would not be okay with that. And we would try to stop that.
Sam: Where are you storing your data? It's an IPFS. How are the sites set up?
Brad: You have your domain name, your domain name is an ERC token. It's like an NFT on a blockchain. You're storing the domain name in your wallet, and this is the reason why you as the user have control over it. You are signing a message with your private key, and you're writing your IPFS hash to the domain, so you're uploading your website on IPFS, and then you're linking it to your domain. People are able to go and find it from there.
Sam: But there's like limits on what IPFS can provide in your data structures. I've seen a lot of the websites that have been built, and I've had PFS, and I don't think they include like JavaScript or, or any of the more modern tools that are used in web development.
Brad: There is some sort of limitations around the edges right now, and it's early days for decentralized storage. It's not performance ready to go and move Netflix over yet or anything like that. It still has limitations, but there's no reason to think that those will not be ironed out over time.
Sam: How do you see data storage working out in the future? Is this moving to something like file coin or, or swarm? Which tech stack you are guys looking at?
Brad: IDFS is what we're using the most. I don't think there's any specific reason to assume that IPFS won't be able to continue to evolve. I think they're doing an amazing job where in general, network-agnostic users can be able to use whatever they want or maybe even push copies of their websites on multiple networks at the same time. We are imagining an agnostic storage network, but it's a little too early to say how that market plays out in general, but for us, we're just looking for decentralized storage providers that we can offer to our users.
Sam: Okay. Is there any way to have a hybrid mixture where you could offer the DNS without IPFS?
Brad: I wouldn't even consider that a hybrid version. That's still a decentralized website. You're storing the content on your own server. You still have control. You could also even store it on Amazon web services and just point your domain name. Now the problem with the Amazon web services one is that then you don't really have a censorship-resistant website because Amazon web services can just turn you off.
So it's a matter of what your goal is, but you can certainly the blockchain domain is extremely flexible.
Sam: Right. There are different levels of how you can use the domain. Because I think like a lot of people may be interested in censorship-resistant websites, but they don't actually need it in the end, with anonymity as well a lot of people say they want anonymity, but then they give up gobs of data about their IP and a bunch of other information, which could be associated with them through metadata analysis.
Brad: I think that's true. I think most people in the world don't need to worry about censorship resistance per se, but I think the number of people that need to worry about it around the world is going up. The system itself just works completely differently. A traditional domain name takes 60 days before you can set it up. When you take possession of it, blockchain domain name takes 30 seconds to a minute, whatever the block is, whatever the length of time it takes for the blockchain transaction to go through, you can also transfer it in 30 seconds or a minute.
You can also transfer it without an escrow agent and do all kinds of. Secure things that you couldn't do otherwise. We also imagine that decentralized storage networks are likely going to wind up being cheaper and have better uptime than traditional storage, because you're essentially accessing a marketplace of everybody's storage space around the world, as opposed to just going to Amazon and seeing what's the cost.
So there's definitely going to be benefits to everyone. Just like how it was with the internet itself, where, the internet promised free information that can't be censored, et cetera, et cetera. But what really wound up happening is that most people didn't need to use that specific feature, censorship resistance, but they did need to use speed, better access to information, all these tools.
I think there's a lot of reasons why people are going to use the decentralized web besides just that. But censorship resistance is the core thing. That is different from the old system that causes people to migrate. I think it's exactly, exactly like what happened with cryptocurrencies, where it's not that every single person is getting their bank account shut down or can't access a bank account. But this new system that provides censorship-resistant money also provides all these other benefits because of it.
Sam: Have you guys had your ‘WikiLeaks’ moment where someone has come out and published explosive information yet?
Brad: No, not that I'm aware of.
Sam: Where would that information be held? What’s going to be the reasons that people move over other than just censorship resistance? What will be the other driving forces for people to adopt this technology?
Brad: You've got uptime and cost. You've also got this sort of a benefit of it being crypto native. So for example, my blockchain domain, Brad.crypto is my payment gateway and is my website at the same time. So it means that you can send me money to Brad.Crypto, and it means you can also go and check out my website.
When you have this property, then you have the ability to confidently say with 100% certainty say that whoever is showing me this website, is the same person that I'm sending money to. It doesn't seem like the most revolutionary thing, but if you think about it, it creates an entirely new security model where payments no longer have the separate payment system. You no longer need to go and move to other communities, other communication channels, so you have extra security. I think that piece right there is going to lead to all types of new behaviour and all kinds of new, new applications as well. Money is native to this internet. It was not native to the old internet.
Sam: It's interesting to see how something like USDC will get incorporated into it, or like USDT. Do you think it works easier on Ethereum? Do you think it works better on a programmable blockchain, like a native program of a blockchain, like theory versus something like Bitcoin where you'd have to do it on like a side chain?
Brad: I think the side chain stuff is not performing enough to be able to handle a registry. I think a smart contract blockchain is necessary.
Sam: I know there is competition with DNS, but how do they fit within your business space?
Brad: When we launched this company, the first thing we did was we built a registrar application on top of GoDaddy. Our goal always has been that we want to build tools to make the decentralized web easy to use, so we started by building tools on top of daddy's. Realized that there were some issues in terms of the way the registering was designed and we wanted to fix those. We determined that the best thing for us to do was to launch our own registry and then build tools.
And what we decided to do then was to build tools so we have easy tools for you to manage your domains where you can add your crypto addresses and where you can add your IPFS hashes and all of that stuff works for Go Daddy too. They’re pioneers, and we're trying to support them and all of our tools and make it easy for the ecosystem to grow more generally. In the traditional world, there is definitely more than one registry, and we expect them probably say the same thing in the blockchain world.
Sam: Right. Would Handshake be a direct competitor then?
Brad: Yeah, but they're not actually a domain registry. So Handshake is not a competitor to us. Handshake is a competitor to Ethereum, trying to get applications to build on top of them. Now somebody has to go and build an application, a registry on top of Handshake.
Sam: If you guys are domain-agnostic, is that something you looked at building anything on there?
Brad: Yeah, we just think it's a lot harder. Um, it's a lot easier to do everything on Ethereum and Ethereum has all the integrations. We didn't need to do barely needed to do any integration at all. They work inside of all these apps. They also work for storage inside of Ethereum wallets that are debt browsers, which enable you to make updates to your domains. If you build something on Ethereum, you just get this supercharging of your domain works inside of all. Ethereum enables them to offer domain names to their users; it's a pretty big mountain to climb for any other blockchain
Sam: Is it just Opera that you've engaged with, or are you looking at like brave or anything else?
Brad: Yeah, we're talking to several browsers right now.
Sam: Okay. So it should become pretty ubiquitous.
Brad: I think in general, they're pretty excited about the decentralized web in general. I think part of the reason why is because it's a lot closer to the original vision of the internet that everybody thought they were working on, they thought they were working on peer to peer protocols that were going to open up the internet to the world.
Sam: There's a lot of growing pains, and it's been interesting to see how the development goes, but I think it does have a lot of promise it's just figuring out how to provide the service that drives people to use it. With Ethereum, it was easy to get people to come to native Ethereum apps because they figure out how to provide interest to people through financial applications. I guess the next step is to figure out how to effectively drive people to a more decentralized website.
Brad: We are in the first inning. We joke all the time that for any anybody building websites back in the 1990s wherein like the geo cities phase. This is early stuff. We're in the enthusiast phase.
We're just now starting to see apps. I think it makes sense that it would start with DApps because they're crypto native. They have this problem they're trying to offer a decentralized application, meaning that a way for you to just interact directly with a smart contract, but the way that you do that is through DNS domain and a web hosting server that the owner doesn't control.
It's going to be crypto apps first. It's going to be probably these global free speech use cases second, and then it's going to be everyone else as these tools actually get better a third and then somewhere mixed in with all those phases, you'll start to see these kinds of viral websites that can do new things that other websites couldn't do that are driving people in.
Sam: What do you think will be the real first driver of getting people on board?
Brad: Every big company has generated a lot of new users, new excitement, new domain registrations and new websites. I think that the first real trigger here was stuff that we built, which was templates for non-technical users.
And you can go to our website right now, and there's like a series of relatively simple website templates that enable you without knowing how to code, to launch on IPFS, connected to your domain name and have a website up and functioning. So I think that was kind of step one. We started to see a whole lot of activity around this.
Step two was Opera. Opera was probably the biggest jolt in a sense that it made a whole bunch of pages, 80 million monthly active users on Opera for Android. That's the biggest increase in eyeballs to the decentralized web probably and got a whole bunch of people excited.
I think that you can expect things like more browsing tools, search engine support, and those types of things would be the next big drivers.
Sam: I mean, do you think that people use it as kind of a backup for their own websites?
Brad: Yeah. I think that's a very natural use case. YouTube has been taking down the pages of various YouTubers and, in many cases, not even explaining why or what they violated. Some people are taking it to their personal websites as an intermediary step, backing up and then step two is to find alternate places to display it.
Sam: Yeah. People to find it because without proper web crawler support, then it just kind of remains hidden away.
Brad: The opportunity is that you get to rebuild everything. There are all kinds of new businesses that are going to launch here. We also have the benefit. Like it's not like when we built the first internet, we built the first internet. We had no corollary. We had nothing to look at. Now, when we're building this new internet, we can look at the old one, and we can pick out the things that we like and things that we don't like.
We've got all kinds of applications that are pretty mature, like search engines and browsers and others. So we don't need to recreate, like when you lost the first web, every search engine and every browser, it needed to be built from scratch. Now, all we need is for those tools to start supporting this new internet and they can do so at the same time as they support the old one, they don't need to pay.
They can support them both simultaneously. So I think we're going to start to see the decentralized web creep into the point where like a lot of users may not even fully distinguish when they're looking at content. Eventually, we just toss out the old system and replace it entirely with the new, because it's that much is that much better. But I think that that future for the decentralized web is ten years or more away, I think it's going to take quite a while to build out all the stuff.
Sam: For a company to come in and, and provide such as the templates, but help people get these sites set up. I guess that's part of building the ecosystem of partners that you would have in connection with unstoppable domains.
Brad: Yeah, exactly.
Sam: So, how big is the team now?
Brad: We are 24.
Sam: Is Covid-19 affecting the business at all?
Brad: It's weird. In the crypto community more broadly, we were mostly digital remote already and living my whole life on zoom for the past year.
Sam: Do you think there'll be lasting dynamic changes in San Francisco and in that area?
Brad: I think San Francisco was a very difficult place to live before all of this. I don't want to say all almost all of the top tech companies, and we're either in San Francisco or in the Bay, and as a result, it was really important to be there to hang out with everybody.
But on the flip side, it's dirty absurdly expensive and maybe not the safest, and if we lose that first quality of I can go and hang out with all of these interesting tech people, if they're not there anymore, or at least not in a critical mass, then I don't know what happens.
Um, so I, people keep asking me, are you, you're you, are you going back?
Sam: Isn't there an incentive for companies, if they can move out of an office and go fully remote to do that?
Brad: Totally, you can get a lot more bang for your buck and almost every other city. So, your San Francisco salary either goes way further, or you don't even feel like you need as big of a salary in order to support yourself. So that's a big change for workers. From the company's perspective, you now have access to workers all over the world, and you don't need to pay for this, these crazy expensive offices. There's pressure both from the employer and from the worker side to say maybe we don't set up offices again.
I think people's perception of it now has so quickly changed having a purely remote working life is now something that everyone's considering. I like to be around people, so I'm a little, I'm a little worried, but at the same time, I'm also kind of excited that there's all this geographic flexibility now. Maybe our team gets together once every other month or something like that. I don't know what exactly what the future is going to look like, but I'm a little excited to see see what that version of work is going to be like.
Sam: I'm wary actually because one of the things that Facebook came out and said was that you could go work remote, and you can live somewhere else, but we're going to adjust your salary and where labour costs are a big part of our operating expense or sorry, our expenses. It makes sense for them to, to push their workforce out of the most expensive city or the most expensive place to live in the entire world and in San Francisco.
Brad: I just want all those workers to know that we will welcome you with open arms, please let us know. We would love any Facebook engineers that feel like they're being mistreated. We will not do that to you, and you'll be working on a decentralized web instead of a centralized one. That's exciting. Facebook should keep treating workers badly, and maybe we'll have greater opportunities for startups.
Sam: Facebook's really having problems internally recently. Their opinion that they should not be regulating political speech or stopping any political ads has really put a lot of people off in the company.
Brad: it's a weird place they're in, being a content platform; It's a problem with owning people's data, if you had some system where the users own their own data, you would have a completely different dynamic. It’s a problem they bought with their data controlling business model.
Sam: Well, I mean, it's necessary for them. Same for Google and Netflix and pretty much any of the tech companies, they use their data analytics to build a better picture of their customers so that they can sell more things to them.
Brad: You could still do the analytics, though without controlling the data, and that's the core. And I think that's actually one of the core ideas of the decentralized web is that you're going to change the ownership structure, where Facebook doesn't own the data. You own the data you give Facebook access to it, and then Facebook can do their analytics, and they can provide you with a service. It's a good business model, but it's a web-to-business model. I think the future business model is going to need to evolve. It's going to need to monetize showing good content to users, showing the right content to users, and they're going to lose the sort of monopoly cause the data, the fact that YouTube stores, the videos means that there's no portability. So you're stuck inside of YouTube. Whereas in the future, if you control the data, if you control those videos and you store them yourselves yourself, and then you're giving YouTube or YouTube access to it. You're going to wind up having a much better competitive landscape and much better applications for users, and you're going to help solve the censorship problem at the same time.
Unstoppable Domains builds blockchain domain names. So we have two registries dot crypto and Doddsville, we've had 220,000 domain registration so far, just under 8,000 websites launched. I would also encourage you to follow us on Twitter at unstoppable web. You can find all of our updates and hear all the latest and please come build.
About this episodeUnrest, riots and pandemics are a springboard to greater erosion of privacy rights. Corey Petty joins this episode of the End of the Chain to talk about the war on encryption and what Status is doing to fight it.
Dr. Corey Petty is the Chief Security Officer of Status and started his blockchain focused research around 2012 as a personal hobby while doing his PhD candidacy at Texas Tech University in Computational Chemical Physics. He then went on to co-found The Bitcoin Podcast Network and still serves as a host on the flagship The Bitcoin Podcast and a more technical show Hashing It Out. Corey left academia and entered the data science/blockchain security industry for a few years attempting to fix vulnerabilities in ICS/SCADA networks before finding his fit as the head of security at Status.im where he remains today.
Corey's LinksLinkedin | Twitter
Status' Homepage
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How the current unrest in America is the perfect excuse to clamp down on freedom and privacy in the name of security. * Why further thinking does not happen in response to solving a problem right now, and this results in people using rules in unforeseen ways. * How the EARN IT Act could result in a backdoor into message encryption and increase the amount of surveillance longer term. * Why Status’ position is that Web 3.0 should not reduce privacy and security in the name of government control. * Why Status believes that the underlying protocol, the network of messages, must always remain unconstrained and unreadable, even if you were able to see inside the infrastructure they built. * How technology has let the cat out of the bag and why giving up your privacy in the name of security or convenience should not be our future. * Why the recent gas price spikes are the lesson of crypto-kitties that Ethereum did not learn and why these conversations about on-chain business and business logic need to happen now. * Why Layer 2 solutions create “walled gardens” off-chain but give end-users choices to opt-out and to choose the level of security that they need. * Why gaming on the blockchain is testing creative technological innovation and different types of economic situations before applying them to real-world enterprises. * Why for Corey thinks blockchains and smart contracts are the first time we have been able to ‘play’ with actual economics and see the relationships between value and exchange.
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Show Transcription
Hello, and welcome to the end of the chain. I am your host, Samuel McCullough. I’m joined again by Corey Petty. We said that we would have him back for another episode and he’s back to talk about Status and also Ethereum Gas prices. It was a fun conversation, to say the least. I hope you enjoy it. Make sure to leave five stars and make sure to subscribe to this podcast. Share it with your friends. Everybody else. All right. Let’s jump into the episode.
Corey, welcome back to the End of the Chain. It is great to have you back. I would say that things are overall better in the world than the last time that we spoke.
Corey: Arguably.
Samuel: Actually, I’m really surprised how much has happened in the past five weeks. So we spoke on April 22nd of last month, and during that time, apparently, we all forgot about the coronavirus and have moved on to other issues concerning police violence and other racial issues inside the United States. It feels like everybody was just bored at home for months and months and months. All of a sudden, this internal need to break out of the house and break some things has kind of taken over the American populace.
Corey: Yeah, it’s interesting times we’re living in. I think what you just said. People staying at home cooped up, not really knowing how to react. A lot of uncertainty probably bled into that kind of explosion of getting out and doing stuff. Unfortunately, it seems as though it’s doing it in a negative way.
Samuel: Well, where are you?
Corey: I’m in Maryland. I live in the woods, so I tend to keep going for most people most of the time.
Samuel: I know. I live in the suburbs, and I’m kind of happy I live in the suburbs and not in the city anymore because even living in Moscow, previously there’s protests and police and things. But, I guess, at this point, I would much rather live out in the woods somewhere. My wife wouldn’t. She would she’d kill me if I took her out to the country, but it’s something that I think about going forward.
Corey: It’s something I’ve always wanted. My wife was reluctant at first and came into it pretty quickly after we moved. And, I think we’ll probably never go back plus, you know, having things like dogs and stuff, it’s nice to have your own space and not really worry about boundaries around you too much.
Samuel: During these protests, there’s been a lot of coordination. Through either social media or different messenger platforms to direct a lot of the protests or violent response towards businesses and other property and other government buildings across the country.
I know that, just recently, Trump came out and declared ANTIFA a domestic terrorist organization which there’s a really great article by Preston Bren who wrote quite a bit about what it means to be a domestic versus foreign terrorist organization and how they are treated by different businesses, how they’re able to exist within different institutions, banking structures and things, but the ability for them to coordinate their meetings with Facebook and other messengers like Twitter has really been brought to the forefront and, you know, it’s worrying really that a lot of the time you have a strong response by the government towards who they claim are either terrorists, violent protesters or other people; and then they use that as an excuse to curtail the rights of everyone and to place increased restrictions on the companies, providing those communication services to the general public. I think that, even though I may not agree with what a lot of these groups are doing, it’s still worrying for me to see what the response will be to these types of actions over the next few months. It’s good then that Status has its ability to remain encrypted and remain decentralized; Status really can stay above it all.
Corey: Oh, absolutely. I mean, there’s no way for us to inject authority into other people’s conversations based on how we built it, we could, of course, change the application that we distribute and we built from open source, but that is only a layer on top of the protocol. Anyone else can just choose to not use our application and build their own abusing the protocol to get around any type of maybe decision we choose to do.
We didn’t have any real intention at this moment to do anything like that, but it’s always a possibility. Right but we’ve made it in such a way that, if someone doesn’t like the decisions we make, they have the freedom to go and build their own. Do it the way they feel it should be done. I think you’re right, even though we may not agree with all the things that are happening, and why they’re happening or have conjectured about why they’re happening; I guess history has shown that decisions that are made to curtail these things by government bodies tend to never be given back after that power is taken to curtail whatever they’re trying to get rid of, and that usually means giving up privacy and security to the jurisdictions that control in exchange for the ability to do that type of stuff.
I mean, from my perspective, it’s usually done in the name of terrible acts; we’re trying to protect you from these bad guys. Name the bad guys. Make it so heinous that no one’s ever going to argue with you. In the process of saying, yeah, let’s stop those bad guys. A lot more control is taken into the things that people use every day.
Look at the EARN IT Act, as an example of this, and we recently had a Forbes article that kind of dove into how this process happens in the name of being wary of the consequences, in the process of actual trauma and triage happening. Don’t get me wrong, the stuff that’s happening in the United States right now is traumatic, and other things that are happening across the globe were also traumatic. They need to be addressed somehow by the governing bodies that oversee the people who live there.
But you have to be cognizant of when that stuff happens, if they’re changing regulation and the rules are making backdoors into encryption, or further increasing the amount of surveillance on the people so that they can try and find the stuff. When the problem has gone, the ability remains, and if it’s still there, people may at least have the option to choose it in a way that it wasn’t intended for in the first place. I don’t think people quite think about that when they’re quick to try and solve a problem that’s happening right now. That further thinking I don’t think happens because of the potential heinousness or unsavoury aspect of what’s going on at the moment.
Samuel: Coming back to the EARN IT Act, that was a bill put forward recently in January that would give the Senate committee the ability to make wide-sweeping reforms and rules for online platforms. Would that cover a platform like Status as well, too?
Corey: I think it remains to be seen, whether it covers a platform like Status, the way I understood it, they were never specific about what they would do, but it definitely opened the door to introducing back doors, and the person who put it forward has been notorious for looking for encryption backdoors and not liking strong encryption. It made a selection of best practices for online bodies to follow pretty much mandatory by not giving them the ability to have a lot of the regulatory safety measures that are allowed to them unless they did these best practices, so it made a suggested set into a mandatory set.
Then the ability to change what that set is, which could potentially turn into something to introduce a backdoor to your encryption algorithm so that we always have access if we need it. At least that’s my interpretation of what the whole bill was about, or the act was about, and that’s one of those situations where they did it in the name of heinous things that no one’s going to agree with, like child pornography, but the broad sweeping consequences of what that can do and the control that gives to the government is drastically larger than that. In my opinion, the scope of what they really wanted to do was probably dressed larger than what they’re trying to advertise it as.
I think that’s just one instance of a history of attempts to have more easily accessible power when you need if you look at the way large government bodies act in accordance with one another across, not with just their own jurisdiction, but also across the globe, it’s a constant vie for the advantageous position wherever you can possibly have it so that when you need to use it, you have surgical precision to do so. The lengths that people will go to get the position I think it has no limit. It doesn’t mean that it’s going to be done or be used, but it’s a constant jockeying position, and the more you ease up on the technologies that you use and like introducing backdoors of encryption, the more you allow that limit to be pushed further and further. As a company Status maintains a hard position that we’re not going to introduce those things and the new web should be built in such a way where it’s not even possible to do certain types of things so that this constant battle for jockeying can’t push certain boundaries. It’s always going to be trained somewhere, at least in terms of the technology being used.
Samuel: I think looking back on it, in the wake of 9/11, I think the government probably felt it had been caught flatfooted on the intelligence side, while most of the changes that they made to prevent another 9/11 from happening happened actually on the physical security of going through the airports and getting checked and also adding locks to the planes as well too, probably had a bigger impact.
The ability of the intelligence agencies post-9/11 was second-guessed and then ramped up to meet a foe, which they thought they knew, but was outsmarted really by a couple of guys with box cutters. They probably had all the information, but they just overlooked it.
I see now that, you know, 20 years on they probably feel that they never want to be in that place again, to be outwitted and not to have any sort of idea of an attack of that scaled happening inside the United States again, whether it means they overstep their bounds in protecting the security of the American state and also protecting it from foreign enemies. It’s really a debate that’s not happening publicly. I’m sure there’s a lot of back and forth between Google and Facebook and other companies and Intelligence and American government when you have programs like Signal and Status. I think there is a threat that they see in the unknown of what could be done and the ability for them to be caught flatfooted again.
I think it scares them a lot and there’s also this backlash that’s happening right now, what’s happening on the front pages. I think it’s more of a way to distract people from what’s going on with Covid-19 with the whole Section 230, but that’s also closely tied in with the Urnet Act as well of reducing or removing the liability of social media platforms and other online platforms when it comes to user-generated content.
It’s kind of all tied in together because if a platform like Status is responsible for the type of content that’s passed between its users, there can be no security then because there has to be a group, some sort of machine or something that’s maintaining acceptable speech on the platform. While a company like Facebook, or maybe even a Google can do these things because of their ability to survey their users and then also have the machine learning capabilities to read those texts and, and understand it and quickly retaliate and ban people who are engaging in non-acceptable behaviour that doesn’t meet their platform rules.
They’re able to do it, but it’s smaller platforms who don’t have these or platforms that have full encryption like yours which would suffer. They have the ability to comply by adding different text reading features. They can read all their messages by all their users and look at all the pictures and have these huge content moderation teams that are picking out different types of images or content or video and then banning it. They can also make sure that no other type of content is being shared on their platform that would not meet their terms of service, but a smaller platform may have more problems.
Corey: Yep. That’s generally true. The way I kind of see it, it depends on what you’re focused on as an organization. We’re going to spend a good portion of our focus and priority and resources on building open protocols that don’t belong to us and much to the way like TCP IP, how we use the internet today and the protocols that deliver information to each other across the globe and in a myriad of contexts is used. That doesn’t really belong to anyone, but those who build on top of it, then have the ability to change things as needed.
In that sense, in an end to end encrypted scheme for messaging, where can you censor? How deep in the stack can you possibly go to change something? What we’re trying to do is make it so that the only people that can change the things are the people who are reading the messages and maybe the application that they use that talks with the underlying protocol. For instance, at Status, we as an organization could change at the application, like the actual mobile application or desktop application, when that’s ready to use machine learning to look for certain types of cues or certain types of content or conversations that happen in certain types of channels and selectively choose to block that, or just not render it when someone a message runs through the pipeline, but the underlying protocol, it’s completely open. It’s just a bunch of dumb pipes. You just can’t see inside the pipes; they’re completely opaque.
If you were to be able to see inside the pipes, you wouldn’t be able to differentiate between all the different stuff running through them. It’s very important that those pipes, the underlying protocol, the network of message passing through them, stays unconstrained. If something happens, people who can maybe come at Status, they can maybe ask us to do something to comply with a certain jurisdiction or try and get us to understand like what’s going on based on whatever metadata we can pull from those pipes. That’s a reasonable solution, but we as a company should not have control over something that should be used a protocol that should be used on how you communicate with others securely and privately. We, as a company, should only be involved to have access to the applications we distribute that leverage those things.
That’s why we spend most of our resources on making sure that those pipes are really good, the infrastructure, the ability to do that and those can provide a potential functionality as an application for others to do what they need to do with available technology and we’ll build something that uses them.
When you look at the people who generally have broad access that’s not the mentality that they have, they want to own from top to bottom as far wide and as far horizontally as they can go, because that gives them full complete control of everything; and if they have that, then they can do whatever they want. Then they have an obligation to not do bad things or to comply with fixing things in whatever jurisdiction they provide service to, and we don’t want that power. That doesn’t belong to us.
Samuel: I would stress that a lot of companies want encryption and a lot of companies want to be able to securely encrypt their data, but there seem to be certain sectors of our online life, which the government says, okay, well, these people can have encryption and should have it. If you’re running a company and need to send encrypted emails, especially if you’re in the defence industry or something like that, you would never have back doors built into your messaging platform. You would want an extremely secure messaging platform to be able to handle emails and texts and other things in case that there’s some sort of foreign government that would be listening in, but at the same point, there’s almost this double standard where if you’re not a government-supported industry, that you have to give up your privacy in the name of safety. Yeah, it’s really strange.
Corey: I would agree. I feel like that exchange you just mentioned giving something up in the name for security, giving up your privacy in the name of security or convenience is a relic of how we’ve built things in the past. I really do hope that the ideals of Web 3.0 and how we build it are done in such a way that’s no longer the case.
It’s not an implicit exchange, and you have to find some balance in between. You should still have the convenience with full security and privacy because let’s be honest, the technology is there, it exists the cat’s out of the bag. If we don’t develop strong standards, strong infrastructure and a very common knowledge of what’s capable and what is used based on the nonstop increase in the power of our technology, someone’s going to use it, and there’s not going to be enough people with enough information to stop them in the ways that they can. Let’s take the example of nuclear power, once that’s out of the bag, it’s a tool, it’s something that exists that anyone can use with the appropriate resources that you can’t undo. You can’t put it back. It’s one of those situations where it can be used for incredibly good things that have helped people’s lives in a lot of ways and progress civilization and humanity, or incredibly bad things and do the exact opposite. If you pretend it doesn’t exist, the people who want to do bad things don’t really care.
They’re just going to keep doing it. They’re going to try to gain those resources. If you have a full understanding, you can then see what it looks like too. Get to the point where you become a problem, how resources are gained, where they exist, all the peripheral things around the technology, but you can’t stop the technology.
We haven’t made that transition with digital technology and the overwhelming power it gives the defender that doesn’t exist anywhere else. In my opinion, you need to build things and let them be freely accessible, so you’re not trying to use a hammer to do a job that a hammer isn’t good for because that’s what people are doing when they try to say, Oh, you know, we need to introduce back doors into encryption so that we can maintain this power we’ve always had. That’s not how it works.
The technology is out of the bag; your ability to do those types of things is not going to go away. If you try and enforce it on the people that you control, the people you’re trying to stop won’t care. They’re going to go around and use it anyway because the technology exists and it is open source, and it’s going to get better.
I think it’s just a terrible way to try to move forward because you’re ultimately shooting yourself in the foot because you’re going to remain ignorant on how things actually work or the things you’re trying to stop.
Samuel: I want to move on to the next topic for today, which has been the Ethereum network has been extremely congested for the past couple months. It’s been because of several Ponzi schemes, which have been operating on top of Ethereum. Most notably there’s one called TripleM, which has been spending thousands of ETH worth of gas every single month to power their Ponzi smart contract, and it really sucks.
Corey: That’s a good way to put it.
Samuel: Yeah, it’s terrible. When gas prices are in the twenties for days and days, and then like spiking up into the fifties and sixties for a couple of hours at a time, it really renders the network almost useless, and especially for dealing with smart contracts and higher or more complex, more gas-intensive computations that need to take place on-chain. It’s horrible. I’ve really been having to rethink how a business would operate on top of Ethereum. In the past couple of weeks, simply because the gas fees are so unpredictable in this case that if you’re budgeting for one to seven gas fees and all of a sudden you’re paying like 20 and then sometimes 50 to have normal business operations, it just can’t continue. It just eats into your revenue and eats into your profits and kills your margins.
How does a company that’s supposed to grow and thrive in an environment like that? And especially for smart contract developers who test their contracts, they need to put them on-chain and spend maybe hundreds of dollars to pay for gas fees, to do the dev work. You know, how is a company supposed to survive in that kind of environment?
Corey: It’s kind of multifold here. I’m not the best at smart contract development, but I’ve certainly understood that the architecture and foundations of how these things are built and the consequences. It’s very new. We’re just learning how to do this properly, and we’re fumbling our way through on how to really build an incentivized peer to peer networks. It’s very hard to predict these things, I think, it’s cause it’s one of those situations where you can build a bucket and that bucket may have holes in it, but you’re really not going to know about those holes. So you fill the bucket up, and we saw that happen with Bitcoin. You saw what happened with Bitcoin and we realized like how the fee structure and congestion of the network changes with demand, and then you saw a lot of the solutions turn to the second layer which offloads some of that requirement for certain types of transactions to be on-chain.
Most circumstances, you don’t need to buy coffee with a globally secured permissionless auditable forever network. It makes you wonder what a blockchain is good for. When we first introduced the concept of permissionless global ledgers, it was one of the situations where let’s just make everything permissionless; this is a better way of doing it. Then we went full swing to one side, and there’s a lot of stuff that isn’t really amenable to this type of technology in reality. It’s somewhere in the middle, depending on what you’re doing and what risk is associated with it, or how much trust you have and the parties involved, etc. or what kind of time sensitivity it may have for how much you can project into the future in terms of costs and stuff like that? That’s one real side of this. This technology is new. We’re learning as we go. It takes a while for us to learn some lessons because it requires a certain amount of activity and value for like these things that come to light, to find that hole in the bucket that leaks. And secondly, we’re starting to become a little better realizing what types of applications and types of business logic belong on-chain. What should you be doing this stuff with? And then in the circumstances where it’s not really appropriate for blockchain, how do you tie one in? How do you root yourself into it?
We’re just now starting to see different types of concepts in how you route certain types of business logic into a blockchain that leverages the things that it’s good for. On the other hand, people are getting smarter about how they do their businesses or because it’s starting to develop best practices around how to optimize gas, how to make smart contracts that do what you want them to do but aren’t inefficient. What are the security catch-alls? How do you make it so that you can upgrade them when something like this happens? How do you potentially offload gas, buy it when it’s low and use it when it’s high? The whole concept of meta-transactions was like, you know, we can use the security of the blockchain, but not actually spend any gas for certain types of activities.
We’re still playing with that stuff too, so as we keep learning these different ways of operating our business and changing it to deal with these issues that we’re having, as well as building the infrastructure in a way that has a lot of different tools that you can mix and match to do what you need to do for your business. We are learning a lot of lessons, and we have a long way to go.
The fact that one business’ activities can affect the entire network is maybe a lesson learned that we didn’t see coming. To the extent that a Ponzi scheme can basically cripple the network, we saw it with crypto kitties, but we’re still learning. We haven’t scaled any from crypto kitties and the naivety of the people who are doing TripleM or whatever scams that are currently pushing out fees, this ruins it for everyone and so that architectural decision probably isn’t a good one. We need to find a better way to do it.
I think those conversations are being had now. How do we make this work better in the future? If someone does drastically raise fees, the community benefits from fees that are generated somehow, like that redistribution of the costs that company is paying are equitable to the community or make it so they can’t do it.
I guess this would be one shard doesn’t affect other shards or other platforms, or you have a separation of state and consensus. I think these are conversations to be had that we need to learn from because we’re so young and I don’t have the solution for it. I can just see where the problems exist.
Samuel: Would Status have any of these scaling issues?
Corey: We’re affected by it, but not to the extent that most blockchain applications are. We have features that allow you to do certain things. Let me give you a perspective of Status, right? We’re a company that allows like you to have a wallet interact with decentralized applications and chat.
The chat itself has nothing to do with Ethereum. It’s completely separated. It’s a completely separate message-passing network that has nothing to do with Ethereum. We say it uses Ethereum because it was built off of one of the three prongs of the Ethereum trifecta, which was data blockchain storage, blockchain and messaging, but the messaging was called whisper. We built on entire messaging, passing a network, separate from Ethereum, leveraging that software and that protocol, and then we built from there. We give access to Ethereum by allowing you to access these centralized applications from our wallet you use the same type of cryptography.
It’s very easy to kind of add that functionality over time and then have like feature ads within the application that make the chat experience more fun. For instance, like ENS usernames, you can choose to purchase a username or stake 10 SNT. It’s not even purchasing. You’re staking SNT for a unique username that allows you to be more discoverable and have an easier to find username in the chat context.
A feature like that, which costs a certain amount of gas starts to become kind of difficult to use when the price of purchasing it is vastly more expensive than the value add to the network, right? And so that’s what DApps kind of experience they have like, Oh, we kind of planned out this feature or this functionality, it should cost this amount to do; it actually adds value back into the network by this much. When fees rise, its economic understanding and balance are completely skewed, and it becomes intractable to do certain types of things. We’re gonna have to come up with a better solution to add the same functionality and a Layer 2 or off-chain or something else that provides a very similar user experience. It’s very similar security and privacy experience but doesn’t require you to go directly on-chain because maybe that’s not a good use of being directly on-chain.
Samuel: I would say that with Layer 2, there’s a lot of systemic risks because you’re moving users away from making trusted transactions. The further they get away from layer one, the less they’re incorporated into using all of the things that make the base layer so great. The further they getaway, they may not. They may not get access to those same level of features and trust and security, and that would deprive them of the abilities and the characteristics that make the layer on-chain so great.
Corey: I may want to push back on that a little bit. You’re right. Anytime you change or move away, you definitely change the risk structure. There’s always something you’re giving up, particularly something you’re also adding, and it has heavily to do with the implementation of whatever you’re doing. Each Layer 2 solution is not the same in any way, shape or form. In some cases, they add a tremendous amount of benefit, for instance, zero-knowledge proofs.
Samuel: But you’re moving into a walled garden when you go into these Layer 2 solutions where you’re no longer able to interact with the rest of the network, in the same way, is that you’re stuck in this small little Layer 2 area where you can do one specific thing. If you do want to come back and interact with the network, you have to come back on-chain.
Corey: Yeah, right. That’s always going to be the case, and maybe eventually that barrier to flow through Layer 2 to Layer 1 to another Layer 2 is more efficient and minimize so that it happens almost as seamlessly as just using the base layer itself. I don’t know where the technology is going to go that allows that type of communication. Think about shard to shard communication on Layer 2, that’s going to be difficult. It’s not as similar as operating on the same shard and any sharded experience. Layer 2 is no different; plasma is a very similar situation, but maybe it’s useful in the context of whatever you need to do.
You’ll use the chain when you need to use the chain because you still have that option. That’s the main thing that I think we’re providing different options for technology and always the ability to opt-out. That’s the main thing here that in a previous circumstance, in traditional web, you don’t have the option to opt-out if you don’t like it.
You can always do the same stuff on-chain. It just may cost you more if you need that security or trustlessness, but most relationships are not trustless. You can build “walled gardens” or reduced trust and privacy, but it’s still tremendously better than previous applications if it works. I guess that’s the difficulty of the application developers and organizations that are building things that provide services to end-users. They need to balance these things and come up with something that people agree with, so when they do something, it’s operated the way they want it to. If they don’t, they can opt-out, but it’s still economically feasible to do so or feasible in whatever privacy and security demand they need, but they have options.
Samuel: You would choose the level of security that you would need, whether it’s full on-chain trustless security or operating within your own private structure, and then you’re just writing data, writing hashes, to the main chain, or it’s the Layer 1 chain to ensure that the data that you’re putting forth in your private network matches what’s being written on the Layer 1.
Corey: Let me give you an example of this in practice. As it currently stands today, within the blockchain ecosystem, gaming with blockchain technology is introducing the concept of actually generating real-world value from human effort into a game, but the difficulty that they face is scale. You can’t operate most games directly on-chain and have any type of real-world user experience that can be on par with regular games and people are going to play them. It has stickiness, and people invest their time and get involved.
You can’t have that right now. The technology just can’t do it. We’re not there yet. We will be, but we’re not there yet. So what they ended up doing is they virtualized that environment on top. It’s basically a layer two. In a walled garden, but it operates by the exact same rules just within a walled garden.
What happens is that you end up playing the game. It’s fun, and it’s enjoyable. You’re having a good time. You get invested in it. You invest a lot of your human hours into it, and you end up developing still scarce resources within that walled garden. Once they get to a certain value, I don’t want to take this off.
I’m done playing the game. I want to take this money out and sell it. That’s when you take it on-chain. She can sell it in an open market; that’s something you could never do before. That’s really awesome. Until the open and permissionless technology gets to the point where you don’t need that virtualization, it’s a really good way to do it, because it’s still changing what you could do in the past and allowing people to opt-out and take their value that they’ve generated and earn somewhere else, not within a walled garden.
Samuel: Yeah. I mean, this is a really great example. I like that.
Corey: Yeah, then if you think about gaming in general, that’s the real playground for technological innovation, that’s where you are able to experiment with different types of economic situations and rules and games and how people interact with them and how they can gain them, the interplay between mechanism design and game theory, right?
You’re able to do this, and it’s less risky valuable situations that allow you to develop really robust methods and tried and true ways of doing something that has real outcomes because people really want to do these things, over time, which builds standards for more game-changing, world-impacting enterprises to take that stuff and run with it.
For instance, I think the supply chain is going to take a lot of what we’ve learned from gaming and FTs and implement it into ways to making like how we track sourcing to moving, to building, to manufacturing, to delivering things and make it incredibly more efficient and auditable and easy for us to understand what we’re using and where it came from and who put effort into that process. But that came from the fact that we were able to kind of play around with the stuff and figured out how to do it. We’re still playing around with it.
Samuel: There’s a lot of creativity that goes into game design and the ability to have these like sandbox environments where you can design certain structures, rules for people to operate in, and then you can take those ideas and then transition it back towards more real-world examples.
Corey: I guess I’ve always found that concept really interesting. I think that like blockchains and smart contracts is this the first time we’ve been able to play and experiment with actual economics and where the value lies and what the exchange rate is between various types of human effort and relationships and value, and then how you exchange it for other types and a lot of ways like the decentralized exchanges and the things we’re building on top are like giving us an emergent behaviour of what that looks like.
Samuel: I think it’s probably a good place to wrap up on, cause I, I really liked that point and, I really liked the idea of bringing game structures into bigger financial applications and having a small sandbox to develop into bigger ideas, and fine-tune them for actual use.
Corey: if you’re interested in what we do, you can always download Status and your app store from the website and then get on and ask questions and find us. Come ask me questions, and we’re here to help.
Samuel: When is desktop application coming for Status?
Corey: It’s a work in progress. We’ve been playing around with kind of what tech stack we want to use to build it so that we have good security guarantees of the technology that we rely on. It’s actively being developed and worked on. I can’t give you a date.
About this episodeDoes money need to be just? Or is it just a tool of man? Yan Pritzker joins this episode with host Samuel McCulloch to discuss growing up in the Soviet Union, Bitcoin as freedom, and how it can be used as a get out of "troubled" country hedge.
Yan Pritzker is the co-founder and CTO of Swan Bitcoin, the best place to buy Bitcoin with your bank account using automated daily, weekly, and monthly savings plan. Yan is the former co-founder and CTO at Reverb, which was sold to Etsy for $275M.
Yan's LinksHomepage | Linkedin | Crunchbase
Swan Bitcoin
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Yan’s experiences of growing up in the Soviet Union influenced his thinking around Bitcoin and how he came into the space. * Why we need a society where people have freedom with their money and without capital controls. * Why there are always tradeoffs between freedom and surveillance in any society. * What the difference is between people who prefer safety over freedom and people who prefer freedom over safety; and why this matters now more than ever. * Why we need to look beyond the US narrative around ‘Axis of Evil’ countries and our empire perspective to understand the causes of terrorism. * Why money and US financial systems are at the root of most of the conflicts in the world. * Why the US dollar system may be broken and why Bitcoin is a hedge against this future outcome. * Why the lack of short-term volatility is a tradeoff with systemic instability and why volatility always comes back in the long-term. * Why centralized systems create more opportunities for criminals to steal your data because the information is fully public and easily hacked. * Why Yan thinks perfect privacy does not exist and is impossible to achieve if you interact with any centralized system. * Why everyone should be saving a little Bitcoin every month nd how SwanBitcoin helps you do this.
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Show Transcription
Samuel: Hello, and welcome to the end of the chain. I’m your host, Samuel McCullough. And I want to welcome you to this very special episode where I am joined by Yan Pritzker from Swan Bitcoin. Now, I think it’s very important to speak with people who are Bitcoin maximalists and who have a different point of view than I do when it comes to the development of cryptocurrencies and how they’re used in the wider world. This turned out to be a lively debate. I want to thank Yan for coming on. I think we talked about some really great points and really got into some deeper aspects of using cryptocurrencies that I don’t think Yan may have explored before. So I want to thank him for coming on to the episode. As always make sure to subscribe to this podcast, share it with your mothers, brothers, sisters, mothers, and anyone else who you think would enjoy listening to the end of the chain. All right. That wraps it up. Let’s hop into the episode.
Welcome to the podcast. Yan, I’m actually really excited to have you on because, two months ago, my wife and I, we just moved from Russia back in February actually. And yeah, so I had been living there for six years. I moved there in 2013. my wife is from Tuman in Siberia. And, but we met in Moscow and we had lived, we got married a couple years back, three years back and, then just moved here to Florida, for a new job just a while back. In my research, you’re also Russian as well too, and you, like my wife, lived in the Soviet Union as well. When exactly did you immigrate to the United States?
Yan: Yeah, so I came over in 1989. I was seven years old at the time and came over with my parents and my sister. But yeah, I grew up in Russia, in Soviet Russia, which was a very interesting experience for sure.
Samuel: I think a lot of people in the West, it’s really lost on them. Even people that grew up in the United States, the views that they were getting were not really t actual life of living over there. The more time that I’ve spent there, and more so even getting out of Moscow as well too, like living in more rural places, you start to see the differences and kind of cultured people, and it’s a great place. I love Russian culture. I love Russian food.
Yan: Oh yeah.
Yan: We still eat lots of Russian food all the time now.
Samuel: Yeah, I know. It’s great. And, but at the same time, I think I still see a lot of problems there.
Yan: Yeah. Plus or minus.
Samuel: Out of communism. And, I think reading about it and listening to a lot of stories from that time, the growing pains of moving from a completely centrally controlled economy to a less centrally controlled economy has been difficult, and I know that’s one of the reasons that kind of brought you into Bitcoin as well too.
Yan: Yeah. I mean, it’s interesting because I had got into Bitcoin, unrelated to being from the Soviet Union, but then after I sort of studied it for a while, I circled back and started understanding what the actual purpose of Bitcoin was. Because, you know, as somebody who grew up doing technology stuff, I’ve been doing startups for 20 years.
So when I first heard about Bitcoin, I really thought about it as a technology. Is it really interesting distributed systems problem that had been solved? How to get a whole bunch of computers to coordinate that didn’t trust each other, and there was a lot of brilliance there. When I first got into Bitcoin, I spent a lot of time studying decentralised and distributed networks in general, kind of the whole blockchain space, you know, theory and all these other kinds of distributed projects, and then probably six or eight months after doing that, and I circled back to Bitcoin.
Just trying to understand the underlying, like where did this all come from? And I almost, by accident stumbled upon this talk by Andreas Antonopoulos called Currency Wars, where he started talking about why Bitcoin was important and how he had misread it, right? He said that he originally thought of it as a remittance technology that it would maybe compete with Western Union and then over time, he started seeing this pattern in the world where all these governments were essentially playing games with their currencies, and we see that today, right? We see Trump tweeting at Jay Powell, like, we need to lower interest rates to be competitive with the rest of the world.
We need to stimulate our economy and so what they’re really talking about there is currency debasements and capital controls, which is something that’s happening all over the world. Andrea spoke a lot about that and saying how people weren’t able to access money out of their HTMS, and there were bank runs, people weren’t allowed to leave the country with a certain amount of money. When I understood all of that, I started understanding Bitcoin as a money for freedom for defeating capital controls and for allowing people to have real ownership over their money. That’s when I started asking my parents because you know I’d never thought about what the Soviet life was like. I was seven years old when I came over here. We grew up very poor in America. We quickly got back on our feet because my parents were thankfully well-educated. They were engineers and teachers. It took them a while to get back on their feet, but we did. Initially, we were very poor, and I never thought about like why is that the case?
You know, I kind of assumed we just left, the Soviet Union with what we had. But as it turns out, when we left, our parents were able to exchange only $100 per person to leave the country with. So we left the country with $400 in our pocket and the reason for that was capital controls because the Soviet Union did not want; they had a fake exchange rate, just like most countries do when they have broken currency or when they have a centrally planned economy. The government has one exchange rate. It might be, say, 10 rubles, so dollar, and then on the street it’s really like a hundred rubles. Nobody actually wants that currency. Because of that, they have capital controls where they will only exchange a certain amount when you’re leaving the country. That’s when I finally started tying together why Bitcoin was really important for the world. It wasn’t because it was this really interesting technology or payment system. It was because it was a new type of money that you could actually carry out with you from a country like the Soviet Union and that’s kind of when it all came together for me.
Samuel: It acts as like a digital Swiss bank account that can’t be seized.
Yan: Yeah, I think of it that way. Or digital gold, right? It’s something, unlike those things. I mean Swiss bank account, only can’t be seized in quotes, right? Given enough government intervention, all kinds of things are possible, and same thing with gold. If you’re in the Soviet Union or something, you try to walk out of the country with gold in your pockets while you’re not going to leave very far. Bitcoin is interesting in the way that it’s scarce. You know, it’s digital, and it’s portable. You can put it in your head, and you can just memorise, say 24 words, which represent your private keys. And you can just walk out of a country like that. And, you know, you have your money, you have your wealth, and that’s very compelling for people living in those kinds of regimes.
Samuel: One thing that happened in Russia and probably in the rest of the outer Soviet union countries is that from the time of the collapse in like 1991, up until maybe the mid-2010s, there had been a huge process of offshorisation of capital fleeing the country. There were all the dark markets who would use their positions of power, essentially acting as a mafia, right? Changing from essentially a mafia boss legitimately by the government standards, at least like a legitimate business owner who would control vast sums of capital and assets that were legally through the government structure, but like in real life, illegally seized and then use to enrich themselves, beyond the scope of what anybody could think of.
Yan: Yeah, and I think a lot of these people had ties to the prior government, right? Like when people were in the PO in communist Russia, when everybody was supposed to be equal. I mean, that really wasn’t the case. People had special access to capital, to business, and there were bribes everywhere that were obviously in any tightly controlled economy, there’s a thriving black market because the reality is things still have to happen. I think a lot of these folks had access to these markets when everyday people didn’t and were able to rise up
Samuel: Over this time period, you know, it’s estimated that 50% of all of Russia’s wealth has gone offshore and is now in different jurisdictions outside of the scope of the Russian government. This is one thing that led to their big push in the middle of 2000 tens for the offshorisation to try to limit the amount of money that could flee offshore outside of the country. Do you think that the Russian government should be able to go if it wants to and seize these offshore funds?
Yan: It’s a tricky thing, right? Because it’s like a double-edged sword, right? You either have freedom, or you don’t have freedom. So you know, if you have the freedom you have cash and cash is to some degree anonymous, you know, and you’re free to move it around while you’re going to have criminals doing that, right? You’re also going to have everyday people doing that. Now if we say there are two possible futures from this point on. One is that all money is going digital. I don’t think that’s probably not a contentious point. Money is becoming digital very rapidly, and whether that happens, tomorrow or in two generations, it’s going to happen at some point. The vast majority of payments over, you know, in the world are starting to become digital anyway. When money goes fully digital, what kind of world do we want? One answer to that is we want to have a world where every payment is tracked, traced, surveillance, right? That’s what banks and governments want. They push for that. We have papers coming out of the IMF and other baking entities that say when we get to digital money, and especially central bank digital money where we have no intermediaries we can trace everything and that’s really great. We can stop terrorism and drugs and child porn and all that kind of stuff.
Offshoring of oligarch money, right? But what does that mean for the average person? Because we have to remember that criminals are a very small proportion of the general population. So what we’re saying is in order to stop these ten guys who have offshored millions of dollars, we’re going to check and surveil everybody’s payments, and that really leads to very totalitarian regimes. We already see examples of that. Look at China, where they have a social credit system where they’re monitoring what people are doing. Then they can push them out of the system and say, okay, now you can’t buy train tickets cause you smoked on a train.
Is that really the society we want, or do we want a society where people have freedom with their money? It does mean that there will be criminals that are also free of that money, but criminals are also free with the internet. There have always been criminals throughout history.
We’ve always stopped some of them, not all of them. It’s just a question of tradeoffs. For me saying that all money should be surveilled and tracked and we should have the option to press a button and cut a person out of the system or cut an entire country out of the system, that is a bad tradeoff to make because we’re really just saying we’re going to take everybody’s freedom away.
Just look at the Soviet Union, people were just not able to leave because they couldn’t take their money with them and that’s what that means. When you have capital controls, and you have surveillance, and you give the state so much power, you’re really saying people should be stuck in wherever country, whatever country they’re stuck in, and they can’t leave cause they can’t take their money and they can’t buy the things that they need to because those things are illegal because their government has decided that I don’t like that society at all, and that’s not the tradeoff that I would make.
Yan: I’m actually from Ukraine. I am from Kyiv, but I have not followed modern Ukrainian history, really, other than what I’ve heard on the news with, you know, things going down. I don’t really have any ties to the country anymore. There’s nobody, no family there for me.
Samuel: Covich, that’s the guy.
Yan: Putin’s guy, right?
Samuel: I mean, all these things are a very grey area, right? Because to say that somebody is pro-European, pro-Russian, it really comes down to the geopolitics of how the natural gas and oil is passing through Ukraine and who’s benefiting from that because it really doesn’t matter. It really didn’t matter who was in place. It just matters more about who is on top to be able to reap the profits.
From the industry and benefit their friends, in these types of governments, it’s wrong for Americans to think that the Russian government, or maybe not the Russian government, but that the Ukrainian government or the Russian government or any of these former Soviet States work in the same way that the American government does, and that it has the same trend level of transparency and the same level of, ability to protest.
There was this really amazing scene where people from Kyiv walked over to his residence. And this was his dacha that was outside of the city. And nobody actually knew that he lived there. It wasn’t on the government records that, that he lived there.
It was completely surrounded by a giant fence. And this, hundreds of millions of dollar residents was unknown to the people, who actually lived in this city. And the reason was, is that he was able to obscure the ownership records of his dacha by having a British shell company that was owned by a trust or some sort of other structure.
The shell company was able to purchase this piece of property and then own the dacha as a foreign investor. So, the Ukrainian president was able to funnel hundreds of millions of dollars through these types of shell companies and into building residences like these without anyone in the government knowing.
Yan: Yeah. So funny you call it a dacha because, for me, that word means like a cabin that we built by hand out of one.
Samuel: So, no one knew this. And the only reason that anyone found out about his ownership of this at his house and also his offshore ownership records was that when he had to leave in quite a hurry when the revolution happened, and during that time period, he did not have time to burn all of his records inside the Lake where all of his records and they just were laying there in the water. I mean, there were wet. Only through this luck of finding these records in the Lake where they able to find his full ownership records outside of Ukraine, and then through international courts, seize those assets and then bring them back into ownership by either the government or other people within the state.
This function of justice, of seizure, would not be possible with somebody who controlled their own private keys. If he had had a private key, unless they’d been discovered through somebody finding it in a Lake, let’s say he had a billion dollars in Bitcoin, right? It legally belonged to the Ukrainian populace. There’s no way to seize that. Right? And so while you call it a benefit, you don’t think that is an inability of democracy to function.
Yan: There’s that again it’s tradeoffs, right? I’m not claiming that Bitcoin is perfect. The question is, what’s the tradeoff? The guy stole, you know, a billion dollars from the nation in whatever way, but are we willing to trade off like the entire nation’s freedom for that?
Cause that’s what you’re saying, right? You’re saying governments that are able to stop transactions with a click of a button. They’re the ones that are abusing their people’s freedom, their people’s freedom, their citizens. Do you want it to live in a Chinese type of environment? Now, some people do, right? Some people think China’s a great example of a functioning state. I mean, I don’t personally, but they’ve been able to accomplish great things, right? Totalitarian governments, authoritarian governments accomplish great things because they don’t have any checks and balances. They can abuse their populace. They can lock up millions of people in the concentration camp, and that’s fine, but they can build great things. So to me, that’s a bad tradeoff. I would rather have this guy get away with stealing a billion dollars and have people have their freedom. Then lock up everybody else because we have to trace these criminals.
We’ve had criminals since the beginning of time, right? I mean, there’s, there’s always been criminals and processed the crime, right? What did he do? Did he kill somebody? Put them in jail? Did he steal something? Put them in jail. You process the guy as far as seizing money. Money is money, right? Governments print money left and right. Money is nothing to them. I’d rather have people be safe and have their freedom than have this fully digital world where anybody can just pray or take you out of the financial system and with a click of a button. That’s just very scary.
Samuel: I think it’s a common misconception that governments print money, right? But most money is printed through the private banking structure in the form of loans and other debt instruments.
Yan: Yes, banks create money through the creation of credit, of course, but to governments also, or central banks manipulate the price of money.
Samuel: What I’m saying is that in a democratic society, I’m just going to take the United States as an example. We have the best system. We are able to come to agree upon through hundreds of years of a functioning democratic process. Would you agree with that?
Yan: I think it’s pretty good. I think it could be better. Obviously, it’s better than the Soviet Union. I think one of the reasons that we’re so good is because of the checks and balances in our system, right? We have an inefficient system of government compared to a third-year authoritarian government or a monarchy or something like that. Things don’t get done. We have Congress and good luck all the time. That’s why our system is actually resistant to tyranny.
Samuel: Exactly. I mean, that’s how the system was designed is so that things would be slow and it would take a long time, and it would have to go through many different committees and things just wouldn’t be passed in one day.
Yan: Yeah. It’s a system that actually requires consensus building, rather than, you know, tyrannical kind of top-down command, right?
Samuel: Right. We have a pretty well functioning democratic society, and from that democratic society, we’ve had a money system that has evolved through hundreds of years from relying on gold to essentially turning into a credit-based system. That’s all been the product of evolution through the democratic process. It may not be the best, right? But it is something that we’ve come to a democratic agreement on where we’ve had broad consensus among voters who are putting politicians into positions of power to make these decisions about how the money structures should be created.
Yan: Yeah. Although I think the system has been changing rapidly under our feet without necessarily overseeing every single thing that the governments or the banks do. For example, the digitisation of money has happened almost naturally, not because we voted it in and we didn’t all say, okay, we’re going to digitise all of our money is just happening through convenience. We’re all using visa and PayPal and Apple pay, not because we voted those things in is because they’re convenient and we started using them. As a result, our system has become almost entirely digital, which presents a new set of problems, which weren’t things that we designed for. It’s just things that evolved.
Samuel: One of the parts of having a free and open democratic process where anybody can come and put their ideas forward, is that we have also had a strong set of rules where if someone steals money from me I can (as long as they don’t steal Bitcoin from me), it’s really relatively easy for me to go and have that money returned, I just go file a police report. The police go through the banks, they can see all the transactions. And then after a judge rules that that money should be returned to me. The banks remove the money from the person’s account, or their assets are seized. I’m returned my funds. That aspect of justice is something that doesn’t exist within Bitcoin.
Yan: Well, we also have rampant civil asset forfeiture abuse because of those things. There are tradeoffs to every system, right? Yes, you can have a system like that, and yes, it can be also abused. I don’t understand why Bitcoin isn’t compatible with that. I mean, if a judge wants to say you owe a hundred million dollars back or you’re going to jail. Well, if you don’t produce it in Bitcoin or otherwise, you’re going to jail, right? You can still enforce laws by jailing people, which is what governments do, and they’re really good at that.
Of course, it’s tradeoffs, right? We can’t design a perfect system. So here’s the question, right? Like before 9/11happened, we didn’t really have the TSA. Everybody could walk up to the terminal. We didn’t have any of that. Now, everybody goes through Pat downs, takes off their shoes, all of this other stuff. We’ve added this, let’s call it a freedom tax. We’ve added a freedom tax to go into the airport in order to stop a certain percentage of terrorist acts. Oh, I don’t know if people who are 18 years old today don’t remember a world without the TSA. They don’t even know why they take their shoes off. They don’t know about the shoe bomber, none of this stuff, right? It just enters into our culture. So now going to the airport requires you to go through a full-body search, and then eventually it gets worse and worse, right? We’ve given up a certain amount of freedom to have protection from these terrorist acts.
So here’s the question: Is that the right thing to have done? Is it okay to give up that freedom because we want to be protected from a one in a million occurrence? And some people will say yes, and this is the difference between people who I would say prefer safety over freedom and people who prefer freedom over safety.
For me, I would rather not have the TSA. I would rather not be petted down. I’d rather not have people going through that. You know, I think that the TSA is a minor infringement on our rights, whereas something like a Chinese social credit system is a very major infringement on our rights. You have to balance those things with what are you trying to stop.
There are tradeoffs, I’m not going to pretend that Bitcoin is a solution to all the world’s problems, but let’s just take a step back and zoom out and say. Where all these problems actually coming from?
Where’s terrorism actually coming from? Right? You might want to zoom out and say, okay, terrorism might be a problem of these “liberal democracies” oppressing other people and bombing the shit out of them all the time, which might be causing the terrorism, right?
Why are they doing that? Why are they waging war? Is it because they need to have control over the oil supply? Is it because they need to have control over their money? Is it because they’re taking entire countries out of the system using sanctions? Like what is the root cause of all of this? And if you zoom out far enough, money is the root cause of all of these problems. Having no freedom with your money is the root cause of a lot of these problems. The root cause of poverty, right? That like I’ve just started reading the book called debt the first 5,000 years. Why are all these societies impoverished? It’s because they’re in debt to countries like the United States.
All of this stuff comes from money. If you zoom out far enough and you see that that’s a solution to all these problems. I’m not suggesting tomorrow we replace all our entire financial system with Bitcoin and everything’s just going to be fine. Of course, it’s not. But two people are living in circumstances where they have actual oppression, actual lack of freedom, the ability to start saving a small pot of Bitcoin on the side in order to escape that oppression is a huge deal. I don’t think States are going away anytime soon. I don’t think any of this enforcement’s going away is giving people another option that’s in parallel to that.
Samuel: I have a slightly different view on Bitcoin. I mean, I like it. I hold it. My belief is that Satoshi was going down a different rabbit hole than he should have at the time in 2008 and the problem in 2008 and it’s still a problem now, is that there’s a large portion of the world which doesn’t have good access to dollars. Because of this dollar shortage that exists in countries like Russia and Venezuela and other places where you have a local currency, which is losing value against the dollar year on year, on year. There’s just not enough offshore dollars to meet the demand of these international countries. I think Bitcoin was in a naive way for people to be able to access some sort of dollarisation in the beginning to act as a hedge or just to access this international capital. I think this probably view existed for a long time, but one thing that’s really kind of changed my thoughts on all of this over the past, since 2018 really is the growth and the just sheer demand for the stable coin markets.
Yan: I would agree that’s a problem today. I would dispute that that should be the way that the world works. I don’t think the United States should be the bank of the world. I don’t think the US dollar, why do we get a special privilege of basically dollars our goal today, right? If you really look at it. Dollars are actually the only scarce currency in the world. Every other currency is to some degree traded against it or peg to it or whatever, right? Everybody wants dollars, and you’re right, there’s a dollar shortage across the world. But why? Why this is all a historical accident. It was all because of world war II. It’s all because of Bretton Woods. You know, why did we put this one country in charge of the world’s money supply. That’s really messed up. It really requires a lot of faith in the United States not to screw that system up. I don’t have that faith, honestly. I mean, look at what’s happening today. If you still have faith in how our central banks work after all of this. People will dispute what’s actually going on, right? The Coronavirus caused massive deflation or did we create a massive asset bubble since 2008 because of the liquidity injections that we did back then? There are different views on that, but why should one room of people in the United States control the entire world’s money supply? You have countries asking this already.
Samuel: But the Fed doesn’t. The Eurodollar system is a much bigger system than the dollar. And that exists in completely outside of the control of the US Federal Reserve.
Yan: I understand that, but again, that’s all to some degree, dollar-based, right? So I mean, it’s nominated in dollars. At the end of the day, if somebody wants physical cash, it has to come from the United States from the treasury, unless it all goes digital.
Samuel: Right? But I guess my question would be if you’re switching out in zero of dollars into Bitcoin, right? But you still have a credit-based system of banking on top, what exactly changes?
Yan: I’m not suggesting, so I’m not suggesting replacing the worlds dollar supply with Bitcoin. I look at Bitcoin as something that people can opt into so perhaps the dollar remains the world’s currency until, you know, the American empire collapses, and maybe that doesn’t happen for the next 500 years. People should have the option to take their wealth out of their country, and that’s what it comes down to for me. That’s where I look at Bitcoin as a supplement to whatever else you have going on if you live in a country where your currency is completely unusable.
Then you have two options. Either you try to get dollars whether those are digital dollars and some stable coin type fashion, you hope that those stable coins are still not regulated enough that you can move them around. It’s not like if you’re in Iran that you can be shut out of the entire stable coin system by the US government. But if you need to move out of those regimes, then you should have Bitcoin. That’s what it’s for, right? It’s for the feeding capital controls. That’s how I see it. I don’t necessarily see it replacing the entire world’s money supply, although I would say that going back to our conversation about why should the United States control the entire world; you already have this problem. The United States cuts out an entire country from the banking system, and it will just say Iran, you guys are bad guys. Sorry. No more access to dollars. Venezuela. No more access to dollars until we have your oil. Like whatever, right? We can just set the terms however we want.
When we do those things, and we already see this, all these other countries, which let’s call them Axis of evil countries, if you want to be political about it, but Iran’s and Venezuela’s and China’s and Russia’s of the world, they don’t want to have anything to do with the US dollar. They want to have their own system, and they’re already looking at how to settle trades between each other, and you have stories every day coming out; now they’re shipping nine tons of gold to each other. That’s what they’re going back to, shipping nine tons of gold instead of clicking a button and sending Bitcoin.
At some point, these countries, they can’t trust each other and can’t trust the United States. They’re going to have to come up with some other way of settling trades. Bitcoin’s just not there yet; today it’s not big enough for them. But, at the point where it is big enough, that could be a viable option for them. Perhaps if they can fix their trade and not be as reliant on the US dollar anymore, maybe they won’t be quite as so evil anymore. Right. I mean, again, zoom out. What is the root cause of all of this strife in the world? We forget where we live. We live in an empire. We are the dominant empire of the world, and everybody else is suffering under this empire. They don’t like it as much.
Samuel: Having just spent six years living in Russia, I mean, I much preferred living in the United States.
Yan: Right. Of course. I’m sure Romans loved living in the Roman empire too. We’re in a bubble, right? I love America. I would rather not live anywhere else. I agree with you. But look at it from the perspective of Iran who got shut out of our system. Looking at a perspective of a country that has been sanctioned by the United States, because the government might be “evil”, but the people there aren’t; they’re regular people are trying to live their lives and shutting them out of the dollar system, that’s really horrible. That’s what I’m talking about. We’re taking people’s freedom away when we do that.
Samuel: My kind of general thoughts is that Bitcoin and all the other cryptos exist as a means of gap finance. People in Iran and other places that aren’t able to access European or US banking systems, we’re starting to see this with the emergence of DeFi: the ability to access a functioning dollar financial systems outside of the United States and not under the control of the United States. One thing that’s really been catalysed into me from the growth of DeFi and seeing the use case of DeFi on Ethereum is that maybe Bitcoin isn’t supposed to be used as a payment tool in itself for daily transactions, but rather it’s supposed to be the electricity or the oil that creates the functioning, decentralised economy on top of it, through the creation of a synthetic dollar. This is coming to Bitcoin at some point where people will be able to create dollars, from their BTC as a collateralised loan, but it makes much more sense to have a low volatility form of payment. It’s used for cross-border transactions, for trade, for paying salaries rather than depending on a highly volatile currency or highly volatile cryptocurrency.
Yan: Yes, in that the dollar is less volatile than the coin, obviously. Remember that the lack of that volatility, lack of short-term volatility is traded off by systemic instability like the current crash of this current bubble. You can’t suppress volatility. You can hide it in the short term, but then it comes out in the long-term. How long does this system last? In the short term, I completely agree with you. People would rather have dollars than the coin. For the most part, people who really need Bitcoin are people who look at what these stable coins are. If you are in Iran, how do you get out of Iran? How do you, how do you, interact with the teller system? I don’t know the answer to that. Maybe they can.
Samuel: There are OTC places.
Yan: When the government sanction Iran and they say they can’t access these entities are not allowed to use. Let me rephrase my question. My question would be, you know, as long as you’re Tether and it’s this kind of digital thing, and you’re passing it around, everything seems fine. What happens when you need to access actual dollars from that other liquidity and how long is the government going to allow people to pass around synthetic dollars, between terrorist entities? You know, that’s the question
Samuel: That’s a really good question. I mean, I’d like to know that as well too.
Yan: I think as long as it’s small, they don’t care. It’s just too small to care right now. Once we have, you know, trillions of dollars moving through together, people might start to wake up to it.
Samuel: I mean, $10 billion is a lot already,
Yan: Not in the financial world. I mean, $10 billion is nothing
Again, I have no issue with any of this stuff, and I agree with you that in the short term, you know, people want dollars. I guess my bigger question, is that the right system for the world long-term? Should people have access to something that’s entirely outside of the financial system that isn’t under anybody’s control?
Samuel: I mean Tethers outside the financial system, right?
Yan: Well, but Tether is a company, so it is under tethers corporations control, and it is to some degree, not to some degree, but it’s entirely based on the trust that they have some kind of dollars in their bank account backing those synthetic dollars.
Samuel: Well, let’s just take a step back. So like other than Tether, you have DAI, right? And so a DAI equivalent is eventually going to come to Bitcoin.
Yan: It is possible. DAI has its own set of problems in that it is based on a theory which has its own set of problems.
Samuel: It is more about the general idea of having a crypto/digital asset that you use to take a synthetic dollar-based collateralised loan. It doesn’t have to be even dollar base. It could be a Euro-based, or it could be a basket of currency based, but you have a more volatile digital asset that they’re using to generate a less volatile stable asset.
Yan: But we agreed that there’s no magic in the stability of the dollar, the dollar is stable because of the United States, and because it’s widely used in commerce. It’s not like it’s magically stable because it’s the dollar.
Samuel: But it’s the most stable. I don’t know what’s going to happen over the next 50 years. There could be one that replaces it, or it could be some other type of things. Who knows? When people talk about moving their money away from risky assets into less risky assets, they’re talking about moving away into like dollars and treasury bonds.
Yan: I think that’s accurate. Again, I would agree with you in the short term. I would disagree in the long-term. What are we actually protecting against, when we buy Bitcoin? We are protecting against the dollar itself being broken in the future. As long as you think the dollar is not broken and it’s fine, and you know it’s stable, then you should absolutely get dollars in whatever form you can.
If synthetic dollars work for you, it helps you get out of your situation and an oppressive regime. I don’t have any strong opinion on that. I guess my opinion is really on Bitcoin for the long-term when I accumulate Bitcoin, and it’s not for myself. It’s for my children’s children, my grandchildren.
It’s for the possibility that the US dollar is actually broken, and we just don’t know it yet. It’s for the possibility that the world financial system is broken and we just don’t know it yet. As for the possibility that America will one day decide not to let people leave and implement some type of capital controls because the dollar will become broken, just like has happened in lots of countries all over the world.
Maybe America is immune to that. Maybe it is. I pray every day that we are completely immune to all the insanity that went down in the Soviet Union, Venezuela, Iran, and Argentina. You name it. I mean, I hope that I’m wrong. Bitcoin is a nice little thing to have on the side just in case those things come true.
Samuel: I hope the dollar stays strong forever.
Yan: Yeah. I hope the American empire lasts for the next 2000 years, but do I know that that’s the case? No, I don’t.
Samuel: When things fall, there’s a lot of calamity and chaos. People suffer.
Yan: It’s very bad.
Samuel: I really pray that we, like our system, is able to stay functioning and healthy.
Yan: One thing that gives me pause and concern is, you know, we talked about America. Why is America so good? It’s because our government is decentralised. It’s actually the decentralisation and the three branch, you know, checks and balances system that makes American government good, right? But I would argue that those checks and balances are the less effective if the state has strong control over money. Cannabis is legal here in Illinois. Now, can I go there to the cannabis shop and use my visa card or Apple Pay? Now I can’t because they’re digital systems and cannabis is still federally illegal, right?
That’s a small way that the government controls my freedom. If I can’t spend my money in the way that I want, then I don’t have that voice, right? The question is if the government is decentralised to some degree, but they still have very tight control over the money, and when it comes down to it and when scary things happen in the world, like Coronavirus or terrorism or whatever, then we all run back to Uncle Sam, and we asked them to fix the problem, right? Give us more money. Give us more stimulus payments, give us this and that. And they have the button. Despite that, there’s credit creation. That’s how money gets created for the most part. Well, there’s also 3 trillion borrowed by Congress in order to pay out stimulus payments. Right? Those things are also how money gets created. As long as we let governments have control of our money, then it’s not really fully decentralised.
I would argue that the strength of the American government being decentralised in the way that it is, could be even stronger if money’s also decentralised if they don’t have control of the money. If money was more like gold when we had a fully functioning government with a gold standard. For millennia we had governments and we had gold. Occasionally we had bouts of Fiat usually to finance Wars. But most of the time, we had a functioning system of money where the government didn’t control the money, so they weren’t able to arbitrarily create more of it.
Samuel: So this is this pandemic, right? I’m talking about the actual event, right? This where you have an entire reduction in global aggregate demand at the same time at pretty much every country on earth is going into some lockdown for several months where industries are being shut down. I mean, these are not normal events, right?
Yan: I would agree. They’re not normal. I don’t know if they’re one time. I mean, why wouldn’t this happen again?
Samuel: Like another pandemic.
Yan: Why wouldn’t we have another pandemic, you know, 20 years from now?
Samuel: Well, we would be more prepared for it.
Yan: And we will do what? Shut down the economy again?
Samuel: No, it’s just there would be, there would be a better response. I think China had ample time to respond to the virus to prevent it from spreading.
Yan: Yeah, part of the reason is that they have a highly totalitarian government and they were able to implement like soldiers on the street walking around with guns, right? So that could be one way we respond to future pandemics to make it really effective to stop them.
Samuel: Right.
Yan: That’s what we want and the way we want it to go.
Samuel: At the next outbreak, don’t you think people overreact? I think for the next virus outbreaks that have happened in the next 30 to 50 years, you’ll see huge overreactions as people do not want to another 2020 happening again.
Yan: Potentially, right.
[00:47:04] Samuel: [00:47:04] all, all these things, I mean, what’s scary to me? I was in the Marines and I worked as a Russian linguist. Since there was no Russians in Iraq at the time, I got transferred into being a signals intelligence analyst. And primarily what we did is we looked at metadata to build analytical cases against people. We look at all the information that you’re generating the thousands of metadata. Now we generate billions of points of metadata every single day that tell our entire life story and for me the growth that thing that really worries me is the growth of the surveillance industry with our own consent, and, and not just from the government side, but also on the corporate side as well to where every single device that we use program that we use is really designed to track users and to track our attention, and to track us so that they can have better statistics on how they can market products to us or design better things.
Yan: Yeah, it’s somewhat scary. I mean, I don’t know if you have you watched Westworld on HBO?
Samuel: No.
Yan: You should absolutely check out the series, it really plays out where this goes. It’s very dystopian sci-fi obviously, but it plays out kind of where the society is going. It’s close to home.
]amuel: One thing that we had was like full access to these top-secret databases that had billions of points of metadata on individuals. A lot of this information was released in the Snowdon files in 2008. It was like a year or two after I got out.
When I came into Bitcoin for the first time when it was like five bucks, the thing that was so interesting to me was that how you could have a huge public database with all this metadata just out there waiting for someone else, so whether it’s a government or whether it’s a private company or anything else to take that metadata and then pair it with identifying information to build an analytic report in this case to be a financial analytical report on the person being targeted. I’ve asked this question to a couple of people that have come on the show before, but do you think that with all the advances that we’ve seen since the publishing of the Bitcoin white papers, so the development of like ZSnarks and some of the other privacy-preserving features, do you think that if Satoshi had access to these privacy features and advances in 2020 versus 2008 when he created Bitcoin, that he would have included a greater level of transaction privacy into Bitcoin itself?
Yan: I’m not sure it’s hard to say. I mean, obviously, I don’t know his motivations, but one thing we do know is the messaging embedded into the first block was related to the bailouts of 2008. It wasn’t really about privacy or anything else. It seems to me like he was talking about the sanctity of money as a scarce good as a something, he was very much into this whole idea of digital scarcity.
I think what was more important to him was having sound money, auditable money supply and things like that. Again, I’m just guessing there’s no way, this is speculation. Obviously, there’s no way to know what he wanted. With a lot of these privacy technologies, there’s a certain tradeoff with audibility. That said, Bitcoin, if the base layer is scarce, then other things could be more private. So, for example, lightning network payments could be more private. You could do transactions on a liquid side chain with constant confidential transactions there. There were other second layers that could be more private if needed.
The other thing I would say is that even on the base layer and when you’re transacting, we’re seeing, you know, the rise of coin join, which is people essentially mixing their coins with other transactions. There’s something called Payjoin, which just came out from a BTC pay server. If you pay somebody who’s running a shop, a BTC pay server, your coins are mixed together with the merchant.
As these things started becoming more and more popular, they kind of create a certain amount of herd immunity because most transactions start to look kind of messy and hard to trace and that would also say that Bitcoin is totally public and transparent, but it’s also pseudonymous.
In that sense, it’s way better than using PayPal or Apple pay or something like that, where there definitely is a tie between your identity and the transaction you made versus PayPal where that tie could probably be uncovered if you dig far enough and subpoena records from my IP address and all this kind of stuff, you could probably get to the identity, but it’s a lot harder than your typical current electronic money.
Samuel: I mean in the future, right? Or maybe even now is that the US government and all the other EU governments or whoever’s on the SATF, rules or like whoever’s involved with FETs. They are essentially demanding from any on-ramp that they should have full access to the person’s KYC information, their deposits, their withdrawals, and all of this information needs to be shared between all exchanges. If you kind of extrapolate into the future, any on-ramp that will exist in any capacity in the future will be sharing information with governments.
Yan: Of course. Yeah, of course. Once the coins come off of the exchange, you can mix them. You can do whatever you want with them, and you have plausible deniability. I mean, it’s pretty tough to say that you haven’t lost those keys in a boating accident. So yes, they’re identifying information. There’s also peer to peer exchanges now. This is a phrase I really liked from Andreas Antonopoulos, who again was kind of my on-ramp into Bitcoin, that these efforts, the KYC and AML, they catch the innocent and the idiots, for the most part, criminals are good enough to walk around this stuff as needed. Most people are just trying to get their business done.
Samuel: Coming from an intelligence background, it is impossible for you to be completely secure with your information.
Yan: Of course, I agree with you. I do not disagree with that. I’m just saying what’s better? Is it better to have some amount of anonymity or is it better to have things like Equifax where everybody’s information is stored, and then a hacker gets 140 million people’s worth of identity information in one go?
To me, the world where things are slightly more obscured is better. I don’t think perfect privacy exists; it is almost damn near impossible. I agree with you to have a trail that’s totally clean, to have coins that have never touched KYC, you know, that have been mixed properly, you never logged into any centralised place. Yeah, you got to mine them yourself. You have to mix them. You have to be on a VPN all your life on tour. I don’t know what, and maybe never even associate your name with Bitcoin as I have online. Right. I get that. Of course. I prefer the world where you get to transact and not leave a trace in terms of your name and stuff like that in a centralised databases. We see every day, people’s identity data be stolen and used for nefarious purposes. Everything we do and decide has a tradeoff. Using these centralised systems, it has a tradeoff that your identity information is fully public.
That’s why I actually think the KYC and everything else on the exchanges are horrible. You’re just leaving giant honeypot for hackers. And that’s where people’s money will actually get stolen and where people’s lives will actually get destroyed because of the KYC. I think it’s a very lopsided system that tries to stop crime at the expense of actually creating more opportunities for crime.
Samuel: Yeah. Well, I think it’s probably a good point to wrap upon. You want to talk about Swan, and then we can wrap up.
Yan: This has been a very lively debate. We are at www.swanbitcoin.com, and we are a Bitcoin on-ramp. We help you buy Bitcoin directly from your bank account. And we do it on a recurring basis because we believe that everybody should be building a small pot of Bitcoin on a recurring basis, just like they save for their house, for their mortgage, for their 401k. We want the coin to be that third bucket. You save a little bit for your house, a little bit for their 401k and a little bit for your Bitcoin stash. We make that easy with recurring purchases. We also have automated withdrawals to your Bitcoin wallet, so you can either leave it in custody with a licensed and regulated custodian and yes, we do KYC. We do have to identify our customers, begrudgingly, but after that, you can withdraw to your own, wallet. We also have a team of educators and podcasts, so we’ve created lots of content to help people new to Bitcoin understand why they should be saving some and how to use it.
About this episodeWhat does it mean to be agnostic about blockchain? Jesse Proudman joins the episode to discuss his time at IBM, Tether flows, gap finance and how his hedge fund is navigating the volatility of crypto markets.
Jesse is the CEO and Founder of Strix Leviathan and a member of the Strix Leviathan Investment Committee. Jesse has over 20 years of experience as a technical entrepreneur. Prior to Strix Leviathan, Jesse founded Blue Box, a cloud computing startup. Jesse raised $22M in venture capital for Blue Box and subsequently sold the company to IBM where Jesse was named as an IBM Distinguished Engineer. At IBM, Jesse spent time researching blockchain and cryptocurrency. Jesse is an active member of the Seattle startup community. He was awarded the 2014 GeekWire Young Entrepreneur of the Year award, was named to the 2013 PSBJ 40 under 40 class and serves on the board for the Buerk Center for Entrepreneurship at the University of Washington. Jesse holds a bachelor’s degree from the University of Puget Sound.
Jesse's LinksLinkedin | Wikipedia
Strix Leviathan's Website
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Jesse’s time at IBM and working in Hyperledger, helped him develop his approach to blockchain investment. * How IBM’s marketing machine is doing a great job of getting people talking about blockchain and asking why? * Why public blockchains solve three/four problems well and why most business models do not need one. * How Jesse’s research demonstrated that prices are entirely driven by behaviour, speculation and liquidity in the crypto space. * Why Tether is a privatised Eurodollar network and how this is used to evade capital controls and sanctions. * Why the next halving is different than the previous two because of the number of leveraged loans. * Why miners are betting on speculation and leveraging their businesses to pay their bills rather than selling their Bitcoin. * Why the Stablecoin business model falls apart when you have negative rates, which are coming sooner than you think. * Why the painful user experience problem still exists in the crypto/DeFi space and how this needs to be fixed to allow for wider adoption. * Why Jesse is a big fan of Silvergate Bank’s exchange transfer network and why infrastructure development still has a long way to go in the space. * Why Jesse believes price is a function of the narrative that people choose to believe in: if you think it will happen, it will happen.
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Show Transcription
Jesse Proudman Show Notes
Samuel: Today, I am joined by Jesse, who is the CEO at Strix Leviathan, an algorithmic crypto-focused quantitative hedge fund. Jesse, welcome to the End of the Chain.
Jesse: Thrilled to be here. Thanks for having us.
Samuel: I wanted really to dive into your opinions on some of the things that you were doing in your past. I know that you had started a company called Bluebox, and then they were acquired by IBM back in 2015, and you bounced around between different divisions. Once they determined you can figure out what you want to do with IBM. You came to the VC side of things and their accelerator, specifically at IBM. But one of the things that IBM has done in terms of blockchain since like 2016/17, is developing Hyperledger which is a private blockchain developed for companies and other small enterprises or small/medium enterprises, or even large ones, that would need some sort of private ledger that they could use in relation to what is being done on the public side with say, Ethereum. I’ve never really been a huge proponent of private blockchains. I mean, they’re a read-only database that’s connected between a lot of actors. With the development of the rules and regulations that we have, for data privacy, especially in the EU with GDPR, it takes a lot of the trust factor out of the equation when developing these sorts of databases. I want to start by getting your feeling on since it has been three years almost since you left. What have you seen at IBM really since then, and how do you think that the Hyperledger system can develop, or is it even necessary with today’s network systems that are being built out for companies?
Jesse: Yeah, it’s a great question. IBM acquired Blueblocks, June of 2015. I spent the first year and a half after the acquisition working with the IBM cloud group to integrate the broader Bluebox products in IBM clouds, their private cloud initiatives, and then began to look for other opportunities there. The blockchain space and the blockchain initiative at IBM, in particular, were really interesting to me. From my side, I’m most interested in blockchain due to the financial aspects of it, and the sort of blockchain as a distributed database is not super interesting to me. When I was making that transition, my pitch was to effectively become the subject matter expert on the cryptocurrency component of blockchain.
At that point in time, IBM didn’t have a focus or an interest on that side. They’d wanted to stay out of sort of the cryptocurrency component, and they wanted to focus on more of the supply chain style implementations. That original sort of pitch that I made was denied. I was offered a role as a product manager working on the Hyperledger project, and I think my challenge or concern is very much like yours. In the midst of the summer of 2017, the word blockchain or distributed ledger was being used really as a marketing initiative to be able to gain sort of excitement from folks, without really thinking through the rationale for why to use these sets of technologies.
I think by far and large, it doesn’t make sense to add the complexity and overhead that private blockchains create for the use cases that they’re being used for or being used for at the time. I think there can be certain use cases where this technology does make sense in a private sense, but for the most part, when you have a bunch of parties that trust each other, which most of the implementations that were being done at the time were for, you don’t need this kind of overhead. That role wasn’t particularly interesting to me, and I ended up settling on the accelerator role, trying to develop a blockchain-focused accelerator for startups and wrote the prospectus for that and then ultimately my job was to continue to research the space over the summer of 2017. At the conclusion of 2017, IBM came back, and it was determined that there wasn’t capital to fund the accelerator.
So I made the decision to leave and to launch strikes. Kind of over the last couple of years I’ve been watching the IBM blockchain group, sort of from my periphery, I think that organization is led by one of IBM’s better managers, Marie Weeks. She ran IBM cloud when we were there for a period of time, so I interacted with her in that domain, and she seems to be sort of in IBM, there are two casts of characters. There’s like the lifelong IBM folks that have kind of moved from role to role and have kind of worked their way up in the company and it in my eyes, IBM has this culture where you don’t really fail out of IBM. You fail up to some extent, so a lot of folks were in positions where they, in my eyes, didn’t necessarily have the technical or leadership capability to effectively run that organization. Then there were other folks in the organization that that really seem to get it. They understood what the technology landscape IBM was operating in looked like. They understood what it took to lead Marie was, was one of those leaders.
I felt like at least that organization had a good head on his shoulders and it seemed to be pulling many of them, brighter folks and the IBM organization into it. I just think that the issue, and this is kind of IBM’s broader issue, has been this focus on immediate revenue growth over-investing in research and development. In any emerging technology blockchain, in particular, there’s going to be a pretty significant lag between capital you invest now in understanding and developing a sort of a new domain and the revenue that’s going to materialize from that investment down the path and IBM, particularly under the leadership of Ginni Rometty, was so focused on quarterly revenue growth that there wasn’t a lot of tolerance or patience for sort of longer-term investment.
That’s the concern I had at the time, and the concern I’ve continued to have over the last couple of years, there’s not significant, being measured in hundreds of millions or billions of dollars, investment from third party companies into private blockchain space. Yet, like there’s investment/ interest, but this is not the next Watson at this point in time, and it’s going to take time for that to materialize. The question I have is there patience or the ability to sort of wait out that timeframe? I’m not sure. I’m not sure how that’s played out internally, but that’s been my observation and my consideration.
Samuel: Well, I think you called IBM a marketing machine primarily in one of your previous interviews, and you know, they have to keep rolling out technologies to sell to their clients to drive revenues. I think it doesn’t meet the necessity of why you would ever need a blockchain. Right, I’m in the camp of probably 99% of people don’t need a blockchain or companies; it just doesn’t do anything for them. It adds complexity to the typical business operations that they would do and makes it more difficult for them to grow as a company.
Because you’re locking yourself into this one specific network structure that has very conservative growth patterns and is not something that can be adapted to your own personal company’s needs very readily. If you do move on to using a blockchain, going halfway just doesn’t do it. You have to jump all the way into using Ethereum or something else which would then allow you to develop specifically for the traits that are inherent to those blockchains itself. I work for a company that issues securities. I think we’re actually the only company that has a tradable security token on Ethereum right now.
The amount of legal that goes into every decision that we make is the majority of the problems that we have. I can see this exponentially magnified for a company like IBM or any other major corporation, which does not want to get in the sights of the SEC or any other regulatory body when they’re trying to roll out this new technology to their clients because it’s the last thing that they would want to end up on was something like huge liabilities from breaking securities regulations, but there are only a few benefits that are really specific, and if you don’t offer those benefits, then there’s almost no point. But if you can figure them out, which I think we have, then you know there is a benefit to using a public blockchain, but I don’t know about a private one.
Jesse: I think you’re exactly right. You think about, in my eyes, like some of the most clickable use cases outside of financial transactions, like the one that always comes to mind for me is property titles and property deeds, and so here is an existing legacy process and involves a bunch of physical paperwork. It’s shuffled around from signing partner to the escrow agents to being recorded with each individual city. It’s an old bureaucratic, broken process and it’s expensive, and it’s painful. That is a use case where you’ve got a bunch of parties that don’t necessarily trust each other, where you want to a history that is immutable. It’s a perfect use case, but then you think through the regulatory landscape of what it would take to change how that process works, and it’s just immense. The challenge I think that IBM has with going down that private blockchain road is that most of the use cases that really do make sense and where a private blockchain or even a public blockchain would be applicable are touched by so many historical actors and would require so much agreement across so many different parties to make that transition. The bureaucratic headwinds themselves feel almost impossible to overcome. So that’s the challenge. You end up with sort of these pilot projects that are amongst small groups of trusted parties to try to prove that the technology works, and it just doesn’t, the benefits I don’t think, outweigh the effort.
Samuel: Yeah, exactly. I’m excited to see what comes out of IBM because I know there’s a lot of smart people working there, especially in Hyperledger, and it adds back into the system of all the other different networks of what they’re developing. Right? It’s a win-win for everybody else, but at the same time, I don’t see how it directly affects their business bottom line, the business revenues in the short term. I mean, maybe in the longer term they can figure it out.
Jesse: The powerful pieces that IBM truly is a marketing machine. Like I’ve always been impressed with their marketing organization and for the broader blockchain industry as a whole. IBM has the ability to inform and educate such a broader audience with the marketing budget that they have than any individual company could do on their own. That’s a really powerful benefit to having IBM in this industry. Right? I remember sort of the end of 17/beginning of 18, you would see these IBM ads in the airport talking about blockchain technology, and at least it starts a question for folks. The answer may not be particularly clear, but if IBM can get people interested in the space and can get people starting to do their own research and learning more about what’s involved here, that’s a net win. Whether or not you’re exactly right, whether or not that has a financial benefit for the company as a whole is it’s a different question. But from an industry promotion perspective, I think they’ve done a great service.
Samuel: Well, here’s the thing is that I’m of the opinion that even in 2020, even with the release of CME futures and the development of grayscale trust and all the different products that have been released in the past couple of years, I still see these platforms, these networks as retail predominantly driven networks, right? Where the individual users that makeup of it are the ones who are driving price and who may not have that level of sophistication which would be equivalent to a Goldman or a top-level, top tier hedge fund that’s managing hundreds of billions of dollars where they have specific outcomes they want to affect onto the market by entering it. I think we’re inching closer towards that. There’s a lot of issues, and in getting these types of entities on board, there are regulatory and custodial and all these things which are being solved at the moment, but when you look at the actual users of the products themselves, once you get away from Bitcoin, like Ethereum, primary users of these applications are our retail clients. Even if they have $50 million dollars, you could still probably consider them a retail user just in the way that they’re using it and the way that they are structuring their trade setups or even their general use cases for interacting with these blockchains. If that’s the case, then if you are designing new products, right? At RealT, we’ve designed a product which is geared towards the retail client. The reason we do this is because public blockchains solve three/four things.
The first one is, of course, transparency and accounting, right? So, you know, if you issue a token or anything on a blockchain, you can see it everywhere. It’s completely public and completely transparent. The second thing, which I think a lot of people miss, which is something I feel is really important, and we just haven’t had the explosive growth of any use case for it yet is the micropayments aspect of these public blockchains, especially ones that when they shift to a proof of stake and they can drive transaction costs down to a millionth of a cent or something. What was Google’s microsite they had?
Jesse: I can’t recall that.
Samuel: No, but do you remember? Do you remember what, what I’m talking about? It was something Turk,
Jesse: Oh, mechanical Turk. Amazon has mechanical Turk yet.
Samuel: Right, exactly. So they shut mechanical Turk down, I think because the issue was that they couldn’t make payments to people globally. When people are making like a cent or 2 cents a day, that’s not something that you can easily distribute. But on Ethereum, you can send a tenth of a thousandth of a cent to someone, you know, if there are low gas fees for relatively low cost and these costs should go down in the future. I think the micropayments aspect, and it’s really overlooked. Also, the interaction with DeFi which we see recently has been huge. We’re still in the test phase of this like billion-dollar rollout of DeFi products. There’s been a lot of hacks and money lost, but somebody has to do it first.
The fourth thing, which I kind of has been my thesis for all of this since the very beginning, is that Cryptocurrencies represent like gap finance. The reason that that they were created, Bitcoin was created in the first place was an alternative to the dollar, and every single major product which has seen growth on the crypto ecosystem has been a decentralized, either private or semi-private version of the dollar system.
Tether is a prime example, right? Why is there such demand for Tether? It’s because it’s a privatized or semi privatized Eurodollar system and people are hungry for dollars right now. If you can focus on those four things, then I think you can make it work. But if you’re not focusing on those things, I think it’s an exercise in futility.
Jesse: I think it’s spot on and the broader cryptocurrency industry has been claiming that the institutional capital is coming as long as I can remember, and the reality is, and we learned this the hard way at Strix, the regulatory landscape is so unfriendly for institutional players to enter this space, whether it’s to start new companies dealing with the previous items you’ve discussed, micropayments or cryptocurrency networks themselves or any of the DeFi pieces, or even just entities like ourselves that are trying to launch a fund. The regulatory framework is not designed or is not friendly for the types of custodians you need to use in this space; the way the exchanges are set up, it’s a challenge. This largely keeps the institutional players out, which leaves retail users to be the predominant majority of capital flowing through this space. It’s an interesting result of traditional regulation and how that impacts the space.
Samuel: I mean, my belief was always that the crypto space exists because there’s a gap which traditional finance can’t fill. If a Venezuelan wants to buy dollars in large amounts, they’re heavily restricted and then there’s also OFAC sanctions that restrict their country even further from dealing with the US banking system. Same thing if you’re living in Argentina or somewhere where your currency relative to the dollar has been declining at an ever-growing rate. I don’t see the efficacy of these dollar-based DeFi system competing against countries that are primarily using the dollar as the United States. There’s really no point to move into a DeFi system away from traditional finance because there are such good structures already made.
Jesse: Right. Our systems work. You go to Thanksgiving, and you talk about what you do for work, and people are like, why do we need that? Why do I need some system to send digital dollars and I can just Venmo or PayPal capital here around? It’s because we have the United States, we have these systems, and they work, and they’re easy, and they’re plugged into everything that we do. We have the benefit and the luxury of that privilege. You think about countries that don’t or that have capital controls or any of these considerations. There’s definitely a need, and that’s, I think you’re spot-on; that’s been fueling much of the growth in this product.
Samuel: If you look at like a product like DAI, which is a synthetic dollar that’s generated from either from an Ethereum basic attention token and some USDC, the reason that it’s so important is that most people have found out by now that, actually making payments with Bitcoin or Ethereum or really any cryptocurrencies is difficult and probably really hard because it can change a couple of per cent in an hour, you know, six-block confirmation times mean that you could lose a per cent or two on the phone call that you’re doing with the OTC desk to actually trade the funds somewhere. But if you have a more stable asset, that’s something that you can actually use for cross-border flows and money, and it provides a much better way of actually being a medium of exchange and people would use that on a day to day basis. I love Bitcoin. I love Ethereum. I love it all because it’s an alternative, but at the same time, I think there’s inherent volatility which doesn’t ever leave any of these cryptocurrencies. I think it is where you stepped in with Strix to take advantage of these huge volatility swings that are seen in crypto on a day to day basis.
Jesse: Yeah, so it’s spot on. So back half of 2017 while I was working on this, this accelerator initiative, my job is effectively to research the space and I started to look at enough of these trading charts and do enough analysis across a number of projects to realize at the end of the day. Almost everything in cryptocurrency, it lacks shared fundamental valuation models. So if you go to a stock market or you go to the bond market, there are market participants with established valuation models that can generally agree on the value that something should be worth and someone’s going to think it’s worth more or less, but broadly speaking, there are models that that market participants can use to come up with some thesis for why an asset should be priced the way it’s priced right. That doesn’t exist in cryptocurrency. There are some fundamental models based on transaction volumes or address counts, but they’re not widely shared amongst market participants.
As a result of that, effectively prices is driven entirely by behaviour, by speculation; and you combine that with sort of this fractured 24 by 7 liquidity pool. You’ve got exchanges all over the globe that are trading these assets and trading never stops. You’ve got all of these derivative platforms that create sort of immense leverage and pressures as a function of that. And then the last piece that was really interesting to me was with market data. I can’t go to the New York stock exchange as a startup and get access to their entire trade ticker, like every trade that’s being made on the exchange. But every crypto exchange allows you to subscribe to every trade that’s being made on those exchanges, so being able to aggregate that data in real-time and make decisions on it felt like a really unique aspect of this space.
So you take all of those things and then you recognize that there, for the most part in the top 10 coins, there is liquidity to be able to trade in and out. It felt like the perfect recipe to go and be able to build software that would allow an entity to go algorithmically trade in this space and early on, as I was doing this research, I was sort of dabbling in the day trading space and began to realize I was not very good at it.
Quite frankly, there’s a lot of emotion and fear, and sort of human psyche involves in day trading, and if I was struggling with that, I realized so many other market participants were and felt like if I could remove myself from the equation and be reliant solely on algorithms and on computers to drive the decisions that that would help. Often in crypto, people will kind of make this recommendation to dollar cost average into a position and hold it for a long time. I think it’s a good strategy for many people, but it’s also a really also an emotionally difficult strategy in an industry where drawdowns can exceed sort of 80%.
Right? It’s very hard to watch. There’s just always this trading quote, right? It’s more painful to lose money than to gain money. It’s really painful to watch 80% of your capital disappear. I didn’t want to do that anymore. So bringing all of those pieces together, it felt like an opportunity to build software to solve this problem, and that was the thesis to launch Strix in January of 18.
Samuel: So how has liquidity developed since then?
Jesse: Yeah. I’ve learned so much over the last two and a half years. I went into this industry pretty naive about what was available and how everything would work. So when we started this company, and when trading first started, everything was in theory and in code designed to go execute on an exchange, and you think about sort of traditional stocks like if I want to go buy shares of Tesla, I don’t really have to worry about liquidity. You can move capital in and out of these large-cap stocks that have at will without having you think about execution costs. The moment we started, and the moment we tried to begin to move any kind of capital through these exchanges, it was very apparent that on exchange liquidity was not where it needed to be to make any kind of these strategies profitable.
Samuel: I think the main reason is that there are probably one or two exchanges which have most of the liquidity, and these are probably the most used ones that get most of the volume. And then all the other sub exchanges are building out market-making bots that are; they’re arbitraging the spreads between the big exchanges and then their own.
Jesse: Yep, but even the big exchanges, right? We’re now two and a half years later, and we did this analysis the other day to answer a question for a prospect like there is on Coinbase if you are to buy a million dollars of Bitcoin, the complete execution costs, including fees and the slippage you’ll get in the order book; it’s significant. It’s on the order of 40, 50, 60 basis points depending on what’s going on in the book and a million dollars for a retail investor, that’s a significant trade. But for an institutional investor, that’s not that large, and so this was the challenge then, and this kind of continues to be the challenge.
We quickly pivoted early on to work directly with OTC counterparties. An OTC counterparty is, effectively, you can think of them as a market maker. Well, they will block trade a preset price. Say we want to buy 100 Bitcoin, they will give us a preset price for that. That price will always be higher than sort of whatever the spot price is at the time. They will take on the risks to go find that Bitcoin in the market. Instead of the best OTC desks that we work with, they’re often some of the best market makers in the space. They have built the connectivity into broad swaths of exchanges so that they can go source that coin, or they’ll have unique relationships with particular liquidity providers.
So like Miners, for example, in the course of Bitcoin who are looking to offer that coin and on a regular predetermined schedule and they’ll have access to that. They make these OTC desks make their money based on the spread that they charge. From our perspective that became more interesting because the execution costs became predictable. When you’re trading something that’s algorithmically derived or that has been built using models, at the end of the day, you want to ensure that those execution costs can be at or below what you’ve modelled them in the models you developed and that that was our goal that you see. We started at 18. We were working with about four or five different desks, and this was the first big wake-up call and in 2018 working with OTC desk meant you got on Skype and you sat in these Skype chat rooms and when you needed to make a buy or sell. You literally negotiated in a chat room with these four desks and figured out what the best price was, and then everything was done over chat.
It was incredibly inefficient, and it was my first sort of realization about how early this space truly was. The tooling was so premature and so underdeveloped. It was a big shock. Over the next kind of year and a half, we started to see some advancements with a number of the counterparties we worked with many people started, or any of these entities started to create their own APIs that we as an end-user could use to get our own streaming prices. Now in 2020, we’ve built our own complete execution engine that instead of talking to individual exchanges, goes and talks to six or seven of these OTC desks to be their APIs and is able to give us streaming prices and it’s transformed our business pretty immensely.
Samuel: How big were the spreads? I guess the question is how much have spreads collapsed in the OTC market since 2018?
Jesse: It’s obviously a function of markets. It’s a function of what’s happening in the market, and it’s a function of what coin you’re trading. Bitcoin is obviously the most liquid of all of the assets that exist, and I would say spreads when we started in in 18, we’re in the 50 to 100 basis point range depending on trade size and what was happening.
Now we’ll often see them in the four to 12 basis point range, so pretty dramatic compression. The interesting thing to me though is as you moved down the list of assets on from a market cap perspective, how dramatic the execution costs increase. If you think sort of top five coins, so that’s Bitcoin, LightCoin, Ethereum, XRP, Bitcoin cash, like those all generally have pretty good liquidity. A number of those assets will at certain times, be more expensive to trade. As soon as you get out from those top five, and you go five to 10, the story changes pretty dramatically. And then below 10, it’s shocking. We’ve seen quotes for assets below the top 10 that are in the 300 400 500 basis point range, and these are large trade sizes. You’re looking at maybe a hundred or $200,000 purchases of some of these assets, and it just gets ridiculous. It’s a testament to how much true liquidity actually exists in the space. Like you can go on coin market cap, and you can see these volumes presented that give it the impression that there’s a lot of dollars sloshing back and forth in this space, but you quickly realize that so much of that is fabricated.
Samuel: What about Tether?
Jesse: Tether is a tough one. We have made a decision not to trade actively in Tether. I think Tether has done the industry a great service over the years. I think you’re exactly right. I think it is used by an entire cohort of traders around the world who don’t have access to traditional dollars. It’s given them a medium to store capital that that removes the volatility to exist in Bitcoin. So big benefits there. I think there’s also this big issue I have around transparency right. The entire premise of Tether is that there are US dollars backing the complete reserves of all tethers issued on-chain sitting in bank accounts.
Samuel: It’s not true.
Jesse: Well, it was the original premise.
Samuel: Right. Original premise. Yeah.
Jesse: We now know that’s not actually accurate, right? We know that there was a 25% deficit at one point in time. We know that they have at other points of time elected to use other assets to kind of back those reserves. We know that that was done. Without being particularly transparent until the New York attorney general case sort of forced them to update the website. If I am using something that is purported to be stable, and supported to be stable because there are assets in reserves, I want to know what those assets are and I want to know that I can trust the issuer. I don’t.
Samuel: Here’s the thing, right? Like my explanation of it, to me, and this is what makes it makes a lot more sense now. Let’s say I’m a Russian billionaire, and I have a lot of money in Russia. And maybe some offshore venues, but I don’t have any money in the United States, and I want to get $50 million so that I can go, you know, maybe buy some Bitcoin, or maybe I can pay my operations for my company, or, you know, just do different things with it.
Because of my status, because of who I am, and because I know the Tether people, I can just pick up the phone call Tether whoever it is, and say, Hey, give me 50 million together, send it today. They’re like, sure. You know, you’re a billionaire. We know where to come and find you. You signed some documents just saying that you’re good for it and we’ll send it to you today.
I’m pretty sure that’s how the majority of all of this money, or at least all the Tether is created, right? There is probably some dollars in an account somewhere, but I think the majority of it is loans that the company is issuing to very wealthy people so that they can go out and use it for whatever purpose they have. They come to them and say, you know, like, lend me tether at whatever the going rate is 3 or 4 percent right? I’ll borrow this, and then I will pay you back. Then they can go off, and they can lose all their money in whatever kind of crypto they want. They come back, and they have to pony up the 50 million-plus interest.
Jesse: Yeah. That’s interesting. I haven’t heard that there before, but that would make a lot of sense. Particularly if you look at the piece that’s always been confusing to me is to look at the issue schedule. If you go look at other traditional stable coins, like USDC for example, and you look at the way the market cap of USDC has grown, it is not in these giant lumpy blocks. If you look at how Tether’s market cap has grown to $125 million chunks at a time, it doesn’t make any sense. One of the other big gripes that I have is that particularly as a fonder, as a market maker in the space. I can go mint and redeem USDC.
I can go mint and redeem Paxos like other stable coins have a process where I can take that coin and get true dollars back. Tethers process is not transparent. It’s not easy. There are very few people that I have met in this space who have actually successfully redeemed. Like it is possible. I know people who have redeemed tethers, but it is not a common practice.
Samuel: Let’s say I have a company, and I’m in China, right? I need to send $50 million into India or Russia or somewhere. Normally this would be a very difficult process. I’d have to go to my bank. The bank would have to approve the transfer. Then I’d have to send the money, and then the other bank would have to approve the transfer. This is going to take like a week or two weeks, and it’s very slow. By knowing the tether guys, I can just make an OTC trade where I call them up and say, Hey, you know, I need $50 million today. I need it for my company. Here’s how I’m good for it like issued to me now, and you know, we can settle it later. They issue $50 million. I go on my way, and I pay for all my operations, you know, it’s a stable coin. There’s instantaneous settlement when I pay with things. I can do all the business operations that I want to. Then at some later date when I can, or, you know, maybe not even when I can, I either sell this loan on to somebody else who then takes the Tether from me, or it just gets passed on, or I just keep the tab open while I use the money for different purposes.
Jesse: Yeah. That makes sense. I think that the issue then is if you and I are doing business together and I am receiving your tethers. What do I do with them? I can’t get them back into dollars. The only really generally liquid market for Tether to US dollars on cracking and the spreads there are pretty large, and there’s not a ton of liquidity. Now I’ve got all these, these digital dollars that I’m holding.
Samuel: You’re thinking about it in the wrong way. I think if you take a look at it from an OTC perspective, it makes a lot more sense. It doesn’t have to be the exchange that you could sign up for and try to find liquidity on there that you’re trying to exchange your tethers… there’s an article that was published by Coin Telegraph, and I think like two years ago in 2018 or something. It detailed how these Chinese were bringing their goods into Russia and then selling them on the outskirts for rubles. They would collect their rubles all day, and then at the end of the day, they would take all their cash to a trading desk in OTC desk where they would exchange their cash. Originally it was for Bitcoin, right when the price of Bitcoin was going up every single like 10%. You know, week on week a week, they were just buying Bitcoin and then using Bitcoin to pay off their debts back in China. But once the price started going the other way, then they switched to Tether. Tether was the main way that they would transact a cross border and be able to sell all their goods in different countries and then instantaneously be able to send all of those revenues back to China to the company themselves.
Jesse: That makes sense. It’s fascinating. Looking at this world of sort of central bank digital currencies and thinking about the privacy implications of this, if you think about the model you just described at the end of the day, since Tether rides on top of Bitcoin or Ethereum or predominantly Ethereum, now all of those transactions are now publicly traceable. It sort of creates this surveillance effect. It’s an interesting question around how long can they continue to do knowing that they’re sort of evading capital controls or evading sanctions before government sort of wise up and the chain analysis companies, they get a bunch of these contracts to identify those capital flows.
Samuel: [00:41:24] I spoke with a chief economist at Chainalysis, he told me that what happens on-chain is pretty much outside. They can’t do anything. The only thing that they can control is when money comes into these exchanges or endpoints that they can control.
Where you have an account that can be locked, and that’s the only place that they can actually make a dent. But if you’re making OTC trades, if you send money and you’re dealing with an OTC broker back in China or Russia, or somewhere, that’s fully on-chain. You’re exchanging cash like a bank account. You can do this all offshore as well too. I mean, one of the things that happen, I know this would happen a lot back in Russia many years ago, I think it probably still exists, is that it’s really difficult to move money offshore because of legislation that was put in place nearly a decade ago.
If you’re a company, you used to be able to move billions of rubles offshore in whatever manner that you wanted to, but they instituted this D offshore station. Now it’s extremely hard as a business to do these sorts of schemes. The typical way that things were done would be that you would have a bank account or cash inside the country, and then someone else would have an offshore account where they would have money just in an offshore account.
So you go to them, you say, okay, you know, I’m going to give you my cash. I’ll pay like 4% or 6% or something like that. And then, you know, you give me your money offshore. And then you make the exchange. Everybody’s happy. And, you know, life just goes on. So I think a lot of this happens. Tether made it a lot easier for these transactions to take place because now the cost of moving into an offshore dollar, and one that is essentially like having an offshore bank account is much easier or maybe not easier, but it’s another option for people who like to have a private offshore dollar that they can access.
Jesse: I believe an interesting component of that if you look at USDC or these other coins that are sort of onshore based, they all have mechanisms to sort of freeze funds. They had to build those in as a function of regulatory oversight. As far as I’m aware, Tether does not have that built into its ERC 20 contract.
Certainly, I don’t think the Omni layer supports that so that would explain why there’s such a significant volume there and why the market cap Tether grows so much or has been growing so much faster, particularly this year than any of these traditional stable coins. It’s a fascinating theory.
Samuel: Exactly. It’s a privatized Eurodollar system which was a direct response to the collapse, or at least the problems that existed with the Eurodollar back in 2008.
Jesse: In this model you’re proposing, because my theory has always been that if it is truly backed by dollars and those dollars are sitting in bank accounts, then as soon as the US government or some other entity is tired of that coin being used for whatever elicit purposes or they don’t like it anymore. They go seize those dollars and in a way you go. If your model where these are actually fundamentally just backed by loans held where they bunch of different counterparties are in the club like that’s a much harder network of capital to go seize, which to some extent actually makes it a better digital dollar than some of these traditional, like USDC.
Samuel: Exactly. The traditional Eurodollar system is based on a series of credit issued between banks interbank lending, so this is just a privatized version of that.
Jesse: This is what makes our industry so fun. It’s incredible what private individuals have been able to build over the midst of the last decade.
Samuel: This is my fourth point, which I brought up earlier, is that all of these cryptocurrencies were created for gap finance. That there is a place where traditional financial systems cannot go because of regulatory reasons. There’s a huge demand for dollars mainly since it’s global reserve currency offshore and the integration and creation of crypto into this new economy allows for all these new systems to be built where people who weren’t able to access dollars before now can get a digital dollar that is outside the purview or control of any regulatory body.
Jesse: It’s interesting if you think about all of this was created because of Bitcoin because there was an asset creator that wanted to be sort of removed from the world of dollars and now the end result is creating this mechanism that’s just digitized dollars.
Samuel: Exactly. What’s kind of the end goal that everybody’s pushing for right now with defies to be able to take your Bitcoin and create a credit-based synthetic dollar from it.
Jesse: Absolutely. Yep.
Samuel: I don’t think anybody in the Bitcoin community expects that they will. Maybe, except for like diehard maximalist think that at some point you’ll be able to use your Bitcoin to pay for things that kind of died at this point, so the only other option that exists for the maximalist, this is price appreciation, or it’s the ability to generate a synthetic dollar or like a credit-based synthetic dollar.
Jesse: Yep. Whether it’s DeFi or decentralized finance, you look at the rise of block fee or the rise of Genesis capital’s blending book, that is proof in point. Like Genesis issued something like $2 billion of loans in Q1 for exactly what you’re talking about, that those holding Bitcoin and wanting to continue to hold Bitcoin for the long term, but also need access to use that capital to not have it just locked up on their balance sheet and they need options.
Samuel: Exactly. I think a lot of that the mining community, which is strangely prescient of what’s going to happen and maybe like the next week or two with the having. The big difference between this halving and the last one is that there are a lot more leveraged loans that are issued. This leverage is created because I don’t think the miners sell their Bitcoin. You don’t mine Bitcoin to just sell it and collect a profit margin. Most of these people are speculating on a 5x increase so they can dump their coins in and make a bunch of money.
Jesse: This has been such a fascinating topic for the broader crypto community and for us. I think there’s a gross misunderstanding of how the mining industry works. You see all of these models that go back, and they look at this data set of the two prior halvings and the price appreciation that occurred following both of those.
At the end of the day, the mining industry is so dramatically different today than it was in the last two prior halvings. We have this industrialized process now, whereas the first halving you had individual recreational miners securing the network. In the second halving certainly, it became a little bit more sophisticated, but the amount of capital that has gone into these industrialized scale mining operations now, it’s so far above and beyond. I think people understand, and you’re exactly right, like people say, Oh, well the block reward is being halved, so the sell-side pressure on coming into this space is going to halve, but that’s making the assumption that these miners take all the coin that gets submitted every day and they go immediately to sell it to pay for their operations.
We don’t think that’s true at all. We very much agree with you that miners are in this space because it’s a speculatory vehicle. They believe in price appreciation. They’re holding those assets and using leverage to go create the capital, to pay their electricity bills, to buy new mining infrastructure, to do additional development and build-out. We saw sort of the first hints of that on our black Thursday in March as miners were getting called, left and right on their loans, from a bunch of the lending desks. Fortunately, I think that was a great stress test for the lending desks. All of the ones that we’re aware of passed it with flying colours, and the system didn’t collapse. Miners had some good control over their balance sheets and were able to kind of repay those loans. This fallacy that all of the block reward is sold every day. I think it couldn’t be farther from the truth.
Samuel: You don’t mine just to sell it off. You’re hoping for a like a 2x or even 10x or up to a million dollars for Bitcoin price appreciation. I’m pretty sure that every single miner that is running right now are speculators and they’re not just speculating with a bit of money. They’re over-leveraged. There are even companies like BlockFi and maybe Genesis, which were taking collateral as the mining machines from the miners themselves to be able to issue more loans which is incredible.
Jesse: We worked pretty closely with the BlockFi guys. I don’t think that they have done that. I’m not sure about Genesis, but that would be an incredibly rapidly depreciating asset that has one use case as collateral as a risk officer, it would give me shivers down my spine.
Samuel: I’m pretty sure I saw this somewhere.
Jesse: I wouldn’t doubt it happened like this. That feels like something that absolutely would happen in this space.
Samuel: It really makes sense in that you’re a loan officer and you’re trying to drive more loans from your business because things have been difficult over the past couple of years. And you eventually find a large scale miner, maybe even one that has like 40 or 50 megawatts. You start taking collateral from them as their equipment, but you’re playing with a nice edge right there.
Jesse: It’s a house of cards.
Samuel: Exactly. I have no opinions coming into the next two weeks. My kind of long-term thoughts on where Bitcoin is, I already think it’s succeeded. I think that it does what it’s designed to do already and the same thing for Ethereum. Ethereum is just getting golden with its DeFi systems. And the next step is that you have a layer one, right? You have like a base token, but then everything on top of it, the integration of all these off-chain assets like securities and digital dollars as well too.
That’s there now, or at least the securities are slowly coming, but that’s a different story. Digital dollars are here and also base layer currency to secure the network is also here . Next, are these just on-chain? Financial applications, you know, whether they’re centralized or decentralized, doesn’t really matter, but the ability for people to do all the traditional leveraging and borrowing and lending that they normally would do with a bank. We saw that in 2018 with the growth of DeFi and the growth of the stable coin industry, but again it seems that it’s built on another house of cards, right?
I’m 99.9% that we’re heading towards negative rates in the next five years. Let’s just say that we’ve already seen some negative rates on the front end of the curve, but really it’s the 10-year and the 30-year, that’s one of the long-term bets that I have is that rates go negative on the long end of the curve. At that point, the stable coin market really has a reckoning, how do they make money? By holding money because their business right now is just to collect billions of dollars and then make money on the carry. But how do they do that when you have a negative carry?
Jesse: Yeah. How do you penalize the users of the stable coin appropriately if given that situation?
Samuel: Exactly. What do you see for the development of this stable coin market?
Jesse: In my eyes, we’ve had this really painful user experience problem that has existed in this space since inception. I had some belief that sort of 2017 would create enough of a focus on that user experience issue to kind of change it. I’ve not necessarily seen that these are hard technologies to use. They’re not user friendly, they’re error-prone, and the risk of losses is immense. Whether it’s just Bitcoin or stable coins, all of these technologies and coins and networks kind of suffer from the same challenge. That continues to be a concern of mine. Widespread adoption in my eyes is not going to happen until we can solve a bunch of this user experience problem.
I don’t know who’s focusing on it and I don’t know how that ultimately gets fixed, so that’s a concern. We’ve been at this for years and still every time we send capital across one of these networks, your heart skips a beat, making sure the address is correct, and the funds are going to the right place. The stable coin industry more broadly I’ve been really impressed with the development of Paxos USDC over the last couple years. As someone who has to deal with both the traditional wire system and the stable coin system, it’s just such a better experience being able to demonstrate sort of capital flows and being able to send transactions.
Everything about it is better than the traditional wire system. We’ve got something that’s really interesting, but, but I absolutely agree in this world of negative rates, the long-term sustainability of this business, these business models comes into question.
I think there are solutions. There can be creative ways to somehow tap sort of the transaction flows of the network as a way to drive, revenue, but I don’t know what those look like. I’m glad that’s not my business to solve, that’s for sure.
Samuel: One thing that you can do is that you can build in the negative rate into the token itself. So the token can lose value over time if you hold it just by readjusting the supply every single day. If you had a thousand USDC after a whole year of negative 2% rates, they could automatically adjust your coin balance down to what 980 algorithmically.
Jesse: It’ll make for an interesting world. Like you look at some of the business models referenced BlockFi earlier, right? They lend 8.6% in your bar on your USDC holdings because there’s the demand for them to be able to go out and lend that USDC to other folks as that asset becomes potentially punitive to hold. It’ll be interesting to see how those business models play out.
Samuel: I found that article that I was talking about. It just came out at the beginning of April. Zach Prince said that we’re starting to establish relationships with miners for the first time now. And then he says, two months ago, lots of lenders were accepting mining equipment as collateral, and this isn’t happening anymore.
Now the risk tolerance has declined. It seems as if they, or maybe not them, but there are other lenders who were taking this mining equipment as collateral, and then the sell-off just completely wrecked their balance sheets.
Jesse: Yeah, that is a great article. That is exactly why anybody participating in DeFi or centralized finance in this space needs to do an immense amount of due diligence on the counterparty and what they do with their balance sheet and how they hold collateral like that. That’s terrifying, and I’m glad it was the competitive landscape.
Samuel: There’s a lot more risk in doing in investing in these companies. It’s like doing startup investing, right? There’s been a whole host of companies which have come out of your area in Seattle which really has not succeeded. I mean, you had dragon chain which came out of Seattle, right? They lost 99% of their market cap, and I don’t know if they’re still working, but it seems that they’re not where they were and that they hadn’t been able to grow where they wanted to grow. I think there’s been a lot of internal struggles there, but there has been a whole host of other companies like them, which have just come and gone and just have quickly faded it into the token bubble that was. You’re left with a few core providers that are dominating the space now. I mean, you look at USDC and its growth and Paxos. How would you take a look at these companies balance sheets and how do you take a look at the companies themselves and make sure if it’s somebody that you’d want to work with.
Jesse: Yeah, it’s an interesting question. I think 2017 created so many perverse incentives for market participants in the space because things were just so out of control, that there’s a lot of sort of consequences that we’re still seeing from that today. It’s interesting Seattle actually has had far fewer companies emerged in the cryptocurrency space than I would have imagined. When I started looking into this in 2017, Dragonchain is still chugging along as far as I’m aware, but certainly, they’re not as successful as I think the holders of the token would hope.
We’ve got kind of a handful of companies, and there’ve been a couple of others that have been acquired, and there was another one that was acquired by a healthcare company, but it’s not in my eyes the community that I thought we would see, and that’s interesting.
I’ve thought about it over the last couple of years, at the end of the day, this is all about liquid angel investing. You are making speculative bats into a handful of assets with the high probability that the majority of them are going to die and your investment will go to zero. To some extent that requires that you think about it like a venture portfolio that you need to spread your bets around as far and wide as you can. This has been why, as some of the maximalist that have belief in any single asset that it’s always been confusing for me. Like you wouldn’t in 2000 make the argument that Yahoo was the only tech stock you should buy because Yahoo will win all tech stocks. You wouldn’t say today that Amazon is the only cloud computing company that you should buy because they’re going to win all of cloud computing. It’s a silly argument to me. So to say that Bitcoin is the only thing that matters and the only thing that will survive, it doesn’t feel appropriate given what we know about the space and given all the uncertainty in the industry going forward.
I think about it like liquid angel investing. I’m going to place a bunch of bets. I’m going to be smart about those bets, and so that’s kind of step one. Then step two is really thinking about. What is the business model? What is the token appreciation model? How am I going to get my money back from these assets?
In terms of the centralized finance lenders, if that means I’m personally lending capital to BlockFi, I want to make sure I understand what BlockFi’s business model is, what they do with my capital, how they make their money? I want to have a lot of confidence and faith in that business as much as I can—the same thing on the DeFi side. I’ve personally made the decision not to participate in a bunch of the DeFi projects cause I think it’s a big state of experimentation right now. You have to be willing to lose everything to participate in that. I think I’m happy that people are right. I think that’s it’s part of the evolution of the network.
Samuel: Does that include holding DAI as well?
Jesse: Yeah. I won’t touch DAI. It’s not that I don’t think they’re interesting projects. I think it’s a fascinating project. I think what they’re trying to achieve is really interesting, but at the end of the day, part of it is able to have a complete understanding, right? I went to college with Eric Vorhees who went on to found Shapeshift and Nick Kerry. I’ve been friends with those guys for years, and I’ve been watching over their shoulders for years as they’ve built their businesses. I didn’t have the intellectual barrier to understand Bitcoin until the beginning of 2017, and I’m not super comfortable investing in things that I don’t understand.
I missed out early on, but I’m okay with that because I want to make sure that I understand the ramifications of what I’m participating in, to spend that time and that energy to understand the nuances and the mechanics and the whole situation with the Oracle pricing, the auctions with DAI in March. There are so many edge cases to all of these protocols that are going to be discovered over the next couple of years. I just don’t have the bandwidth right now to try to understand and think through the ramifications of those.
Samuel: I think that there’s been a lot of good investigatory work done into what the different outcomes can be. I’m not sold on the eternal hopium that a lot of maximalists have. I don’t think that you would ever see a cryptocurrency like Bitcoin or anything else replace a Fiat issued US Dollar. It’s not even because the design of the cryptocurrency or anything is better. It removes the democratic process from the issuance of the currency itself. We lose the fact that it was our own governments that created the federal reserve, and it also created the banking system, it was legislated, right? People may think that it was some grand conspiracy to establish some sort of strange, control over people in the United States and to take away all their gold, but we’ve created a really stable, dominant currency that has been able to become the global reserve currency of the world, right?
By having the federal reserve, you were able to become the most dominant currency in the entire world. When you take away these controls, and you take away the ability of our lawmakers to influence and then also people to have a representative and a position in determining their money structure. I think it’s a net negative. Even if the structure of the crypto or whatever it may be, the coin, it doesn’t matter, even if it’s been hardcoded in and nobody can change it, I think that having a voice and being able to change the monetary structure as you go forward is a really important factor in our economy and also our monetary and fiscal systems at large.
Jesse: Yeah, absolutely. All of these technologies are incredible. They’re fascinating. I mean, people are pushing the envelope in what was thought to be possible. You look at even some of the DeFi attacks that have happened over the last couple of months. When you actually analyze them, and you think about how they occurred, it gets pretty amazing how interwoven and interlinked so many of these different contracts and protocols have become like that.
Samuel: The bZx flash loans hack was…
Jesse: Absolutely. You’ve got people out there that understand this well enough to pull something like that off. I guess it’s a testament to both the complexity of what’s being built into the creativity of those out there and kind of evaluating it all.
Samuel: Right for people listening, right? The bZx hack you had; Stu Stein came on the podcast a while back and talked about flash loans, and this is before the actual hack. It wasn’t really a hack. It’s an exploit, right? Because they were able to borrow, I think 10000 ETH for a block, and during that block, they executed a bunch of on-chain transactions.
Jesse: Yeah. Everything changes together.
Samuel: A bunch of interactions between all these different contracts and we’re able to steal, I think the first hack was what, a couple of million dollars, and then the second one was, like $700,000.
Jesse: Yeah. That sounds right.
Samuel: This was like a brand new offering, and within like a month, you had someone use it for a system breaking exploit with one of these projects.
Jesse: Yeah. Same thing with the D-Force attack or the last couple of weeks. Yeah. It’s amazing how fast these things move, and then how quickly they can be tested, validated that things are secure.
Samuel: Well, what would you want to see before interacting with any of these contracts?
Jesse: That’s a really interesting question, and I haven’t been able to put the intellectual throughput to figure that out. I think that the challenge that I have is that because contracts are world-readable. It’s like the worst thing about open source software, right? Everybody can read the code, which means anybody with time can go look for exploits, except now there is financial reward for individuals that have identified those exploits. That’s the ultimate challenge. It’s like how do you know that these contracts are secure, that they aren’t going to suffer from some edge case scenario that that’s not thought about because some additional set of contracts was brought online down the road.
I just haven’t thought through the ramifications of that yet, and there are much smarter people with much more time are spending their energy focusing there. I do think like regardless of that, I think it’s really neat. It’s showing the power that these platforms like Ethereum have created. It’s showing the power of being in weave all of these different applications together. That’s an incredibly interesting demonstration of what the next decade of development on these platforms will look like.
Samuel: I’m interested personally just to see if there is any other competitor that can grow to the size of Ethereum. There’s a bunch of other protocols, which telegram eventually once they kick all the U S investors out. There are all these other different protocols that are launching, but none of them starts on the back foot, and you have to spend billions of dollars to catch up to where the room is
Jesse: This is the Ethereum version. Wander theory in version two transition will be a fascinating case study for protocols as they think creative ways to upgrade, sort of the base layer technology and I think Bitcoin gets a lot of grief for being sort of slow and it’s innovation, but I think there’s been a lot of benefit to that for the industry. It’s stable, and it’s been a consistent operating entity with incredible uptime and reliability. There’s a lot of benefit to that. This one to two transitions will be the first time a multi-billion-dollar protocol. It was undergoing such a major transformation is sort of how that goes economically. How that goes technologically will be fascinating, and we’ll set the direction, I think, for a lot of these projects going forward.
Samuel: Will you take a step away from trading during that period?
Jesse: We’ll definitely look at it. We have a policy around assets like the Bitcoin Cash hard fork in November of 18. if we think there will be network instability, we will suspend active trading of an asset. A big part of our business requires being able to actively send these, these assets on-chain. And if the chains are broken or if counterparties have suspended their activities, then then it’s not an appropriate asset for us. So yeah, we definitely do a bunch of diligence around what we’re trading and what market events within that basket that we’re trading may impact.
Samuel: Are you also working with any banks like Silvergate or anything?
Jesse: Yeah, we work with multiple banks in the space. Silvergate has been our longest partner, and we’re big fans of theirs.
Samuel: Can you walk me through their dollar transfer system that they have between the different exchanges?
Jesse: Yeah, absolutely. Silvergate has a network they call the Silvergate exchange network, and effectively it is an internal bank to bank transfer mechanism that has an API. Think about your own bank, if you have a checking account and a savings account, you can go onto your online banking, and you can move money from your checking account to your savings account any point in time, regardless of the bank holiday, regardless of what needs to happen.
Because all that’s happening on the bank side is they’re just upgrading, updating their internal ledger. Silvergate exchange network is exactly like that. It creates a mechanism that allows an entity like us to transfer US dollars to enter any counterparty that’s active on the system 24 hours a day and then they’ve overlayed an API on top of that. Programmatically, within our platform, we can initiate these Silvergate exchange network transfers. Then they also have webhooks, so when a transfer is completed, we can be notified. The transfer is complete and we can take actions. If you send it over to the subrogated exchange network, it shows up in their account with an identifier. They get a notification on their side that new capital’s arrived and they’re able to respond instantly. It’s really for folks that are moving capital around frequently in this space, and it has been pretty much a game-changer. You’re not reliant on wire systems. You’re not reliant on the traditional banking system operating with the speed in which it operates. You can move capital in and in an out of counterparties in a matter of minutes.
Samuel: And has it changed your business structure? A lot.
[01:14:59] Jesse: [01:14:59] Okay. There were counterparties that we started with that did not accept Silvergate or that were not on this super good exchange network. To some extent, we ended up choosing our counterparties based on who was a participant there. That’s the biggest change. I think because they were sort of first with that system, they have gained critical mass. So now everybody sort of has to be there to some extent. Other banks, like they have something called Cigna that is similar or prime trust, has something called Primex, which is similar, but because those offerings launched after Silvergate, that they’re good offerings, but they just don’t have that critical mass that Silvergate has been able to establish.
Samuel: I purchased some silver get stock at IPO. Sold it a little while later, but I know it’s come down a bit. I’ll probably look at purchasing more at some point. I think they have a strong business model and a particularly good use case for what they’re doing. It’s probably good to look at them. They’re not going to have their public disclosures in their 10 K’s that get published every quarter. But it’s very cool to see that sort of counterparty transfer development happen within the space.
Jesse: Oh, it’s been a blessing. I mean, you think about 2017 2018 there weren’t banks available for most of the companies in crypto. To see an entity like Silvergate kind of make a bet on this industry and then kind of go full force after that has been absolutely wonderful to see and the leadership team over there the product’s been great. We have a lot of respect for that.
Samuel: What other parts of your business do you have? Would you need another service provider or two to come in and be able to provide a counterparty solution or custodial solution? What’s missing at the moment? What are the biggest gaps?
Jesse: Yeah, the infrastructure continues to be very weak for crypto funds, and we ended up as a result of that building an entire operating and platform to solve most of those problems for ourselves. Things like portfolio management, order execution, reconciliation, settlements, LP, accounting, all of these pieces, they exist in piecemeal solutions, but there’s not been a provider out there that’s been able to aggregate all of those into one end to end offering. That’s something that we ended up building from the ground up. We thought about possibly selling that as a standalone product, but at the end of the day, there’s just not enough market participants out there with enough assets under management to make that an interesting, standalone viable business. That’s a big challenge. And the second big issue is regulatory compliance; it’s very difficult. In this space, particularly for an entity like ourselves that we’re trying to be sort of transparent and compliant. That’s our mandate. We want to do this the right way, and it’s very difficult in this space to even know what the right way is. We have spent 10 times more in legal costs to set up and operate our entity than if we had just launched a venture fund, right? Because a venture fund, everybody understands what the structure looks like and what the documents need to look like, but in this world, you are constantly interfacing with lawyers, trying to figure out, as the world evolves, how to stay compliant and be doing things correctly and it’s a waste of money because we’re doing that, other funds are doing that, all the centralized lending platforms doing that, the OTC counterparties are doing that.
We’re all spending money on the same set of lawyers trying to answer the same questions, as as a function of the opaque regulatory environment. It’s a shame. One thing that would be nice to have is a centralized, regulatory agency that was able to answer a lot of these questions, and it’s becoming better. It’s definitely better than it was in 2018, but there’s still a lot of challenges.
Samuel: Is this a problem that’s specific to operating within the United States, or would you be having these issues if you had set up offshore?
Jesse: Both. I mean, we have some unique issues because we’re in Washington state. There is the DFI, the regulatory agency that oversees investor protection. If we had set up our investment management company offshore, the DFI still has jurisdiction because we’re physically here. We were working very hard with the DFI to do this all correctly, so that’s a challenge. If we had been offshore entirely, I think that that may have made it an easier issue, but it’s still like they’re still questioning. It’s regulatory endeavours like there, it’s not particularly clear how they’re set up, where you look at what, what a BitMex has been doing. There’s no simple answer to all of this, right? Everybody is kind of trying to write the book as they build their business. It’s a waste of time. It’s a waste of capital in my eyes. By far and large, most of the market participants in this space have the desire to do this correctly. There’s not a clear, correct way to do most of this, so you have to figure it out as you go.
Samuel: I think you’re probably right on the infrastructure and then also the liquidity aspects that kind of prevent a lot of larger institutional clients from coming in as well too. I know that the recent events of March, was it already March when the dip occurred? In March, right when we went to almost zero because of one exchange, that is a scary thought process, right? That one single derivative exchange could potentially drive the price of BTC to, you know, double figures if they had been able to if they haven’t if they didn’t kill the exchange like they literally had to shut the exchange off to stop the price from falling.
Jesse: It’s the pros and cons of this giant distributed liquidity pools, right? I talked about at the beginning, one of the things that really was fascinating and curious to me about this space, despite all of those different liquidity pools, sort of March 12th really called out the reality that there are subsets of those pools or subsets of those providers that really have an oversized impact on everything that we all do.
Samuel: I was always of the belief that the CME futures with somehow settle things down. But after the events of March, I’m really not even sure that they matter. You now have a few derivatives exchanges where the outside leverage allows people to push price the way that they want to farther than they normally would on a traditional stock exchange or anywhere else.
Jesse: Right, and you hear a lot of calls for things like circuit breakers in the aftermath of that event. When you think about the reality of having these distributed exchanges, like circuit breakers arguably work to some extent because they’re on a single exchange, you’re able to stop those assets sitting in that exchange.
When you have Bitcoin trading across hundreds of exchanges globally, circuit breaking on one doesn’t necessarily stop a cascading effect. March 12th, I think it was largely driven by liquidations being pushed on Bitmex so being able to pause those, which is exactly what they did by turning the exchange off, obviously helps the situation pretty dramatically. But if that’s sort of the solution going forward for this type of situation, I think it’s to be determined.
Samuel: It may not even be the best solution, right? Because you could just move from one during this exchange to another and you know, take advantage of that because there are no centralized liquidity pools. It means that the liquidity is fractured and you’re able to push the price around in these, either with spot or with the derivatives, exchange a lot easier than you normally would be if there was some sort of central liquidity pool.
Jesse: I think it’s the broader interesting question to me is, is it fiscally responsible or appropriate for these exchanges to be offering 50x to 100x leverage for traders? And what ramifications does that have on the industry more broadly going forward? Would it make more sense to have, some of that, reigned in? But other people would argue that it’s that kind of leverage that makes the industry so interesting. The powerful piece here is that nobody can set these roles across the entire industry.
Samuel: I mean, look at the FX markets, right? That’s the closest analogy to what’s going on in the crypto markets. With FX, you can get up to what, like 2000% on your collateral. Yeah and it’s not really a problem, but then again the FX markets are like a $6 trillion a day market.
Jesse: There is liquidity.
Samuel: In the BTC markets, if you have 5,000 BTC, you can move the price a lot. That’s a small amount. I think that what did they say March 12th collapse was caused by someone who had like a hundred thousand BTC, I think it was. It was, or maybe 80,000,
Jesse: It sounds definitely like a number that it could be used to move these markets around.
Samuel: They took it, what, 80% down or 70% down in a couple of days. It’s ridiculous. I think it highlights the lack of liquidity and for as many exchanges have come online, and for all the different products that you have across all the different markets, there still is not the liquidity there that would allow for this type of product to grow into the global instrument that people use with a high degree of trust.
Jesse: Right.
Samuel: Yeah. So, but again, these are just my opinions.
Jesse: Yeah. I think you’re spot on. I mean, it’s an interesting question. There’s always liquidity. It is how deep is it? You’re highlighting that exactly in the way that is materially important that the equity that exists in these markets is predominantly provided by market makers in this space and not necessarily by sort of new market participants. You go back to this is halving talk like much of the industry believes that halving is going to have a significant impact on price and the reality is it that we need new market participants putting new capital to work in the space to have a significant impact on price.
Whether or not the halving helps create that as a function of a narrative that people can believe in, I think is to be determined. It’s not sort of this magical event that changes the existing market dynamics and the existing participation by new capital.
Samuel: Yeah. The longer that I am in the industry, the more that I see that people don’t really have a good understanding of how their economic and monetary system works, especially the monetary system when you’re talking about different lending between banks and how the Eurodollar system works and how it applies to crypto especially, is something that I think is really lacking.
And that kind of gets lost when, when you have all these monetary actions by the Fed, people look at theirs $6 trillion of increase in their balance sheet, and they just think that that somehow is going to get directly transferred into PTC somehow when really the Fed is using that, they’re that balance sheet transfer to be able to affect the yield curve and not, and they’re not distributing money to people.
They’re affecting the yield curve and also lending to tier-one banks as well. The tier one banks can go out and learn, but it’s just mind-boggling to me about some of the two in points people come to.
Jesse: Narratives are powerful, particularly in an industry where everything is speculative and if you can get enough people bought into your narrative that it can manifest itself into reality. That’s the fascinating part for us and a big thesis in how we’ve approached these markets.
Samuel: That’s a really good thesis actually. That if you think it’ll happen, it’ll happen.
Jesse: Right? Yeah. If enough people think it will happen, it can happen, and it’s an interesting observation.
Samuel: That’s probably a great point to probably wrap upon. Is there anything else that we missed or that you want to talk about Strix?
Jesse: Absolutely. I may briefly go over it. We’re quantitative. A hedge fund trades cryptocurrencies algorithmically. Yeah. You can find more about us@strixfund.com. Our big belief is that there is a better way to invest in this space than buying holds, and that being the leading transparent, compliant provider approaching it that way has been an important differentiator for us.
We’ve recently launched an investor portal that allows our investors to gain access and visibility into performance and documents and market news. I think that sets us apart. We are a hedge fund, so applicable to qualified purchasers, so always happy to speak with qualified purchasers who would be interested in learning more.
About this episodeHugh Karp joins this episode to discuss onchain insurance, protecting Defi against hacks and what it means for the insurance companies of the future.
Hugh Karp is the Founder of Nexus Mutual, an automated discretionary mutual running on Ethereum. He is an insurance professional and actuary with over 15 years of experience in the insurance industry. He has held a variety of roles in both primary and reinsurance companies including as CFO for a global reinsurers’ Life operations in the UK.
Hugh's LinksLinkedin | Twitter | Medium
Nexus Mutual
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why insurance is one of the massive verticals in the real-world financial economy and why it is now being built on-chain in the DeFi economy. * Why insurance came about as a community method of sharing risk between people. * How their decentralized protocol prices risk on-chain and how they developed their crypto risk pricing framework. * What the recent bZx hack and Black Thursday taught Nexus about their smart contract cover and why they need to look at creating complete coverage to meet the needs of the evolving DeFi space. * Why Nexus can provide any insurance product on-chain so long as its members vote on it and the staking around the risks being covered. * Why Hugh thinks their risk pricing framework could be applied to exotic products like digital art or tokenized assets in the future. * As a huge privacy proponent, Hugh is worried about going too far too fast in the pursuit of privacy in DeFi and the perceived political risk to the ecosystem from regulatory/political clampdown as a result. * Why Hugh loves experimentation, but maybe we should do this without putting massive amounts of funds at risk. * Why sometimes we are running before we can walk in DeFi.
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Show TranscriptionHello and welcome to the end of the chain. I am your host Samuel McCulloch in this episode. I’m joined by Hugh Karp from Nexus Mutual. We jump right into discussing the interactions of on-chain insurance and also the evolution of how the industry has been growing, especially after the multitude of hacks that have happened over the past few months. If you haven’t already, make sure to subscribe to this podcast wherever you listen to it and to follow me on twitter, so that wraps everything up, let’s hop into the episode now:
Samuel: [00:00:45] Hugh, welcome, you are the founder of Nexus Mutual, an on-chain insurance protocol for Ethereum, which I think people took less seriously a couple of months ago before the bZx hacks and before the attack on Maker How would you say that insurance has changed in the Ethereum landscape in late 2019/2020?
Hugh: [00:01:15] Yeah. I think insurance is one of these massive verticals of the financial ecosystem that kind of needs to be built. I think if we’re building a parallel financial ecosystem or just a parallel economy on Ethereum, then it needs to happen. I guess it’s also a lot more complex to build than some other financial products, so it does make sense that it comes a bit later than some of the other stuff. We were the kind of one of the first main ones to get out there, covering crypto-native risks if you want to call it that. There’ve been a few other kinds of alternative approaches coming out more recently. We are definitely still at the experimental stage, but, everyone’s got to start somewhere and, you know, we’re starting small, and I guess hoping to grow and hoping to protect people getting involved in this new economy.
Samuel: [00:02:09] But why does it need to be on-chain? I mean, what are the reasons for it needing to be trustless and decentralized when most insurance has underwriters, and it’s done through a per-claim basis?
Hugh: [00:02:22] Yeah, the main benefits of actually doing this on-chain, they kind of come back to why you actually regulate insurance companies in the first place. I mean, the crux of why you regulate insurance companies is because in essence, they’re looking after customers’ money on their behalf, and then at some point, they will pay it back as claims. They take fees along the way to, you know, to pay expenses and profit, etc. but essentially they have to do the right things by that money and protect it. Invest that appropriately, you know, make sure it’s there to meet those potential liabilities. So you have all of these controls, laws and regulations around why and how you should do that.
The other main reason why you’d want to regulate insurance companies is to ensure this kind of asymmetry of information between the customer and the insurance company. That’s kind of basically done through reporting, financial accounts and that type of stuff. This means you can be confident that they hold the money and are well-capitalized. Those two things are actually done really well on-chain. If you can specify the rules about how the money can be used and it can only be used in these circumstances, then you’ve effectively taken away that agency risk that is the primary reason for regulating. Then the second reason is about transparency, about how much money is there. That it is all there and open which is by definition on Ethereum, that is the reason for the regulation; it’s just dealing with it in a different way.
[00:03:50]That means it can all flow back to benefit the people who were buying, cover insurance and they can benefit from it. When it comes down to it, the insurance came from community-based methods where people got together and shared risk together. Then it morphed into shareholder-based companies because, that was a more effective way of getting capital to the customers, connecting the capital to the risk that people wanted. Butt now we can cut out that entire value chain and connect the people and the capital together in a one really easy way. In theory, this allows us to do non-custodial ways of holding funds and defining those particular rules. To me, it fits very naturally with a decentralized framework, and it can strip out massive costs compared to the regular insurance industry, and it can hand those kinds of benefits back to the people involved in the protocol.
[00:04:47]Obviously we’re really small and all the rest of it. The insurance vertical in the regular financial world is huge, but we have to start somewhere and, I think it’s a really natural fit for a decentralized network.
Samuel: [00:05:00] What was the name of a group of people that would get together and implement insurance for retirement? A tontine.
Hugh: [00:05:15] A Tontine, it is like a type of life insurance or the opposite of life insurance in some ways. Basically, in the extreme version of the tontine, which you’ve may have seen on the Simpsons where the last surviving person receives the whole pot of money. Everyone puts in an equal amount of money, and then the last person gets it. Apart from the obvious social issues about incentivizing murder or something like that, if you can actually work around those things, this is actually a very useful financial construct. I think they abandoned it in a few places, but they’re actually useful in particular for managing longevity risk or paying pension liabilities and those types of things, even though they’re not widely used anymore.
Samuel: [00:05:59] How do you do pricing for these on-chain assets? The risk of a certain event happening is typically decided by underwriters, by insurance companies. How does it actually get done with a decentralized protocol or through Nexus Mutual?
Hugh: [00:06:21] The way underwriting and pricing work in the regular financial world is you have a combination of these underwriters with specific risk knowledge, and also actuarial tables based on historical data and those types of things. Right now, especially with the crypto risks where I’m covering the risk of smart contracts failing as an example, then you don’t necessarily have enough data to construct that. The way we’ve got around that problem is constructing a staking mechanism, and it works in a similar fashion to a prediction market where the more you stake on a particular risk, the lower the price. Ours is more structured than a prediction market as it has some other factors and frameworks in it as well, but essentially it is like a prediction with built-in staking on the risk to lower the price.
Samuel: [00:07:03] How has the response been to some of the bigger events that have happened? I guess the two that I mentioned before the bZx attack. It was not really even a hack, there was just too much congestion within the market at that moment, and people couldn’t get their transactions through. Somebody took advantage of that and made little bits for these liquidated CDPs.
Hugh: [00:07:44] Our product that Nexus offers right now is called smart contract cover. It covers the risk of smart contracts failing. It came from events like DAO hack or the Parody multisig quality issues which we observed actually happening. This is a risk, but in theory, it needs to be dealt with if it’s going to be successful.
I think the first BCX hack is actually a good example because it was a complicated transaction with a flash loan and a whole bunch of different protocols. Quite a lot going on. It took a while for people to realize that. The initial reaction was that it was an oracle manipulation that you change the price on UniSwap, and then you take money out, et cetera. That’s what we initially thought it was kind of a large part of what the transaction is doing, but it also turned out that there was a check in the bZx smart contracts that were intended to be triggered that would prevent an under-collateralized position, but it was bypassed and as part of that the flash loan transaction. Our community members and people voted on the claims, and we agreed to pay out the claims related to bZx hack.
That was a really good test to have a system. It proved it pays claims. It was really quite an important moment for us then I guess. A few weeks ago with the black Thursday events with Maker as you described that that was more outside of the smart contracts cover with congestion and a few other bits and pieces kind of coming together which meant that some people got fully liquidated, even though the smart contracts did operate as designed and intended.
I think there was quite a lot of discussion on discord because claims got submitted to Nexus. They were all declined because it didn’t meet the definition of what we were doing. I think we’ve got some good learnings from that, to be honest. We started with a narrow product because it was our first attempt at things. My opinion is that the claims should have been declined because they were outside the terms; however, it’s not necessarily where we want to get to. There are a lot of risk people are taking on interacting with DeFi. We want to provide complete coverage so they can feel safe with that type of thing. We’re definitely looking at ways to expand the coverage and change the terms so a wider variety of things can be covered in the future. It’s a bit more tricky, but we’re definitely looking at doing that.
Samuel: [00:10:11] Especially with all of these, DeFi is nascent, right? It’s only four years old now with 65 projects came out in 2016, found establishment in 2019 with the launch of most of the interest-bearing contracts. I think is what got most of the interest, but there’s a bunch of other projects which have released over the past 18 months, a lot of those contracts (I mean this is what Nexus is designed for) may have critical issues which could cost a growing amount of money that the amount of money locked in DeFi is recovering, but at the same time, there are still risks. I remember even before the BZX hack, they had come out and talked about the emergency shutdown with Major, where someone with enough of MKR could come along and trigger an emergency shutdown and drain the Ether that was in or was being used as collateral for the major contract. Do these problems ever go away, do you think? Or is it just the longevity of the contracts that play out and then in addition to that you have insurance protocols like Nexus that support any losses?
Hugh: [00:11:40] I mean that’s the way I view it. These are new systems, but also they’re also complicated systems. They are system with many moving parts, and, you know, we were getting better at coding more securely, but we still have issues, so several years in after tooling has improved massively. Now we’re looking at economic attacks and, you know, flash loans didn’t actually change the potential attacks, it just made some of them a lot easier to access. We have a lot of people working on governance type stuff, so there will be covenant attacks and network congestion that no one ever really thought about. It’s kind of like when things go bad, multiple things tend to go bad at the same time, and it’s really hard to think about all those potential scenarios when you’re designing a system, and you only get to learn about them through experience.
When it comes down to it, there’s kind of marginal benefit of testing and analyzing absolutely every combination of everything you can think of, and you may even miss stuff cause you just don’t know what it is, and that’s kind of where insurance comes in. It helps when the marginal benefit is just not worth it and, to me, if there’s always going to be some use for it, just like there is in the regular world. I mean, you don’t really do anything in the regular world without insurance, even for example airline safety, right? It’s one of the most secure things that a lot of people are looking at it and all the rest of it, and everyone does what they can, but, you know, planes still do have issues. I kind of consider it to be a similar situation to that.
Samuel: [00:13:13] insurance, it varies by industry and by the ability of the insurance companies to create a cartel essentially to control prices for the insurance. Do you think that can happen on Ethereum where a group of insurance providers could dictate or create a monopoly on providing insurance? I know that any smart contract can be replicated and that the idea of providing insurance could also be replicated, but if there’s enough liquidity that’s funnelled into certain companies such as yours, right? Let’s say that you gain significant market share and really could dictate prices at that point. Is there a potential threat of monopolization cartelization that we should be looking out for?
Hugh: [00:14:08] Potentially, I mean, I’m not quite sure actually how much that happens in the regular insurance world. In any big enough market, we’ll have a few big players that you’re going to get some competitiveness, and you know the same thing’s going to happen here. I think one of the benefits with what we’re doing is that everything is completely out in the open and transparent. Any behaviour like that will become quite obvious rather than hidden away for a while, and people can’t necessarily connect the dots.
Samuel: [00:14:42] I guess the answer would be that in a non-regulated industry, right, because you guys are not regulated.
Hugh: [00:14:51] Yeah, that’s correct. We not regulate.
Samuel: [00:14:53] Okay. Exactly so in a non-regulated industry, there are no barriers to competition for other people entering the market, so for health insurance, for example, it’s a highly regulated noncompetitive market where you have a bunch of big players who are able to use their size and ability to navigate the legal system and the obtuse regulatory system that exists to ensure that they can maintain their margins. Right. But in a competitive environment where anyone can take a smart contract or a design out their own type of insurance protocol, the margins really shouldn’t be quite competitive, and they shouldn’t be healthy, I guess, in that people could really drive down the cost of providing insurance to these on-chain protocols or smart contracts.
Hugh: [00:15:52] I totally agree. It’s going to come down because everything’s completely open, transparent, low barriers to entry. It’s going to come down to things like, liquidity, how much capital you have. Things that a bit harder to kind of just copy-paste ’em or fork. It’s definitely gonna be much more competitive in the future than regulated industries.
Samuel: [00:16:16] Can you bridge the gap? Are you guys planning to bridge the gap between being a non-regulated purely on-chain company and maybe a hybrid on-chain/off-chain insurance provider?
Hugh: [00:16:29] We’re kind of a hybrid right now, to be honest. Nexus is actually a company in the UK. When you join the Dow or the Mutual, you actually become a member of a UK company. It’s what’s called a discretionary mutual, so it doesn’t actually provide the contractor insurance. It provides discretionary cover and so that’s a specific setup in the UK and a few other jurisdictions that allow you to provide coverage on a non-regulated basis. So it exists right now in a non-blockchain world, and it works, and people benefit from it. We’re using something that’s known and exists.
I think more to your point is, does it make sense to do a hybrid in the regulated industry? It’s a good question. I think there are massive benefits of not. I think the principles of what we’re trying to do actually deal with the reasons you regulate in a different way going back to what I was talking about at the start, so I don’t necessarily think there’s a massive consumer issue by doing it this way. We should be much more competitive. One of the challenges with insurance regulation is that it is regulated in every jurisdiction in a different way, and you need a license in every state in the US. That is in a lot of conflict with something that’s supposed to be open and borderless, and allow anyone to join. Those two things don’t fit well together. The things that the insurance industry can obviously bring, in if you can manage to get them in somehow, is obviously a lot of existing capital, which is needed to provide more coverage to more people. I am not saying no to anything right now, but ideally, you keep this fully on-chain.
Samuel: [00:18:12] Yeah. No, I mean it would make more sense, especially, but I’m wondering about once hybridized assets come on that have both an on-chain token and then an off-chain counterpart, how that would be covered through insurance. Can you provide some sort of hybrid insurance both to token holders and then the asset holder at the same time, or would that need to be done through two different companies?
Hugh: [00:18:42] You can provide any product in an on-chain world. As long as you can get the member, like in our model, the members of the mutual vote on claims essentially, there’s a staking process and, and the terms and conditions of what’s covered and what’s not are actually a PDF document, it’s just two pages long. They interpret them based on the information that they have to hand as long as that process works for whatever risk you’re talking about, you can cover anything. I can see that there would be challenges working out if any particular individual has gone into hospital for health insurance or something like that cause that’s very localized specific knowledge, but there are a whole bunch of other products that you can do that don’t actually require that localized specific knowledge that is a bit more general or the information’s readily available in the public domain, and then you can construct products around those quite easily, and that can bridge into the real work or, you know, the non-blockchain world quite easily.
Samuel: [00:19:41] Interesting. How do you think it evolves from here over the next couple of years?
Hugh: [00:19:46] I think the crypto-native space is definitely where our home is for the next couple of years. I just see risks everywhere. We’re doing a whole bunch of new stuff. Everyone’s experimenting with everything, and the new risks are popping up all over the place. Most people are, in the space now. You know, generally happily gambling a little bit, but if we were to attract the kind of next wave of users, they’re going to want more safety nets in place, and hopefully, we’re kind of part of that.
But also the regular insurance industry doesn’t provide much cover if very limited cover for crypto businesses or risks right now, and it’s very hard to get standard cover, even just normal insurance for a business that operates in the crypto sphere. It’s very hard to get cover, for no particular additional reason, just because they don’t really understand what’s going on. There’s a bit of a niche there for us to be able to grow into and get some scale. Once that happens, then you have a bit more choice about what you do next, and what kind of products you offer. You can start with a whole bunch of different things, but you could, once you’ve got some scale, you can start getting into the more usual products that people are used to.
Samuel: [00:21:00] What about (insurance) for exotic products like on-chain digital art or other things which may have a stranger means of pricing?
Hugh: [00:21:14] Yeah, to be honest, that’s probably the type of thing that I’d be really interesting to us. The pricing approach that we have is very flexible in that it can be applied to a whole bunch of different risks, especially ones without any data, but ones where there’s like a community of people that understand it, that can bring that knowledge to bear and through the staking process kind of discover the price, and those niche communities where they have something that needs to be covered that they just can’t get covered elsewhere, that’s where a mutual does work really well. Especially if that’s crypto-related, then that’s definitely something to be looking at. I personally have no real knowledge of that type stuff, but that’s the type of product that’s really fascinating that we could be offering.
Samuel: [00:22:00] Yeah. I mean that’s probably the case. It helps if it’s fully on-chain.
Hugh: [00:22:06] Yeah, exactly. Then you can verify if something happens, and you can verify that there’s a claim payment due. So, those are two things that are really helpful.
Samuel: [00:22:20] Is there any need for you guys to branch away from Ethereum onto somewhere else? Do you think that you’ll continue to stay here?
Hugh: [00:22:32] We will continue to stay here. There were a couple of reasons why we built on Ethereum, but it was the only real choice when we started building.
Samuel: [00:22:41] Yeah. For DeFi, it’s still really the only choice to be anywhere. You can’t really go anywhere else and get the same services that you’re getting on Ethereum.
Hugh: [00:22:52] Yeah, exactly. I think one interesting thing is that we can cover smart contracts risks on any crypto-chain from Ethereum so basically everything can run on Ethereum, but the claims look at the email chain or the Pocono powertrain or whatever it is, and if something happens there, they can use that to report back essentially, because we have people that bridge the information across (chains).
Samuel: [00:23:21] Right, right. Okay. I mean, that’s pretty cool. I guess you can continue to rely on Ethereum. I don’t think DeFi really works or will work anywhere else. There’s no liquidity, and DeFi needs liquidity to exist if you’re going to have these synthetic dollar debt protocols and then all the cool stuff built on top of it, you need to have liquidity backing it, and if the money isn’t there, then there’s not really going to be a DeFi ecosystem. My prevailing thoughts for the next decade is that unless Ethereum loses its top spot for providing smart contract-based transactions, then it will continue to be the only place where DeFi really exists in a usable and workable form.
Hugh: [00:24:16] Yeah, I totally agree with that. It’s obviously still really early days, but I think it is up to Ethereum to lose it rather than anything else. If it keeps sucking in assets, like stable coins and soon to be BTC, in whatever form, then it becomes where the liquidity is, as you said, and that’s where the capital is, and you need that. Once you have all the interoperability, devs love putting stuff together, and when they have more things to be able to put together, there are more options and it kind of builds on each other. It’s a fantastic playground right now, and that’s being used to its advantage.
Samuel: [00:24:56] I agree with you. It is a playground, and there’s nowhere else or no other blockchain that has this playground. While Bitcoin may have its liquidity, I saw a chart about how the transaction value on Ethereum has surpassed Bitcoin this month, and more value is being transacted on the Ethereum blockchain because all of the stable coins are in theory now, mainly Tether and USBC. I think the most incredible stat that I’ve seen in a while.
Hugh: [00:25:38] Yeah, I mean, it’s the usage. It’s actually being used for something really useful, and it’s not just a bunch of gamblers gambling with each other. There’s actually kind of real usage behind this stuff, and to me, that’s just going to keep going. I mean, especially when I think I’m getting Bitcoin on Ethereum in whatever form, I don’t know what the most trustless way of doing it is, but someone else will work it out. To me, that’s massive social liquidity that can enable a whole bunch of other things.
Samuel: [00:26:11] Sure, but nobody’s going to build it on Bitcoin, or at least if they do build it, it’s going to take twice as long to build as they would on Ethereum.
Hugh: [00:26:23] Oh, yeah, for sure. I’m talking about like TBTC or whatever, so like a tokenized representation of a Bitcoin on Ethereum, and then all of a sudden you’ve got something like atomic loans or something where you can effectively you don’t port the BTC across, but you can take out a loan on Ethereum. It’s just massive. As you said before, it just massively increases liquidity, and that’s a catalyst for everything to work.
Samuel: [00:26:50] Yeah. Do you have any thoughts about what’s going to happen in the next few years that may cut against the grain or kind of set you apart from some of the other people in the Ethereum system or just in crypto in general?
Hugh: [00:27:12] In terms of Nexus?
Samuel: [00:27:14] Well, no, I mean in general about how things develop, right? Myself personally, I think that most of the development and the cool stuff is released on Ethereum. I have some thoughts about volatility, which I don’t think ever goes away. But one thing that is really being hammered and crystallize for me over the past couple of years is the stable coin usage on Ethereum and how that is only going to grow, or maybe not even Ethereum but right across all the platforms is that the stable current usage and the dollar demand is incredible and I don’t think that goes away. I think that keeps growing.
Hugh: [00:28:00] I might have a slightly different view to others on is the privacy side of things. I’m a heavy privacy proponent. I think it’s critical and ends on a level of the zero-knowledge proofs in confidential transactions and stuff. So that’s been worked on. The thing that worries me is if we actually enable that stuff on a widespread basis too early, we may not be big enough. It’s basically picking a fight, and we may have started picking the fight with the regular world a bit too early. They may be able to basically shut down and close all the on-ramps, and that would be a big setback. I have a feeling that goes across the line. Like other stuff is kind of borderline and all the rest of it, but they can say it’s helping people here. It could here be specifically detrimental to control money laundering and terrorist stuff and all that type of thing. It could push regulators to act much harder and much faster than the ecosystem could potentially handle. I don’t know if that’s true, obviously, but that’s one wary point of pushing too hard, too fast on that stuff.
Samuel: [00:29:26] I just talked to Alex from Beam weeks ago, and I’m a firm believer in the need for transactional privacy. Even if all the wallets and everything else stays public, you still need to have transactional privacy. So if I send you money, you can’t see my wallet balance on the other side. I think that’s if, if we can have transactional privacy, but still have auditable accounts, which I think Beam is doing, I think that’s the kind of fine line where you can exist with existing regulations and make sure that you’re not crossing too many lines when you have too much privacy, and I think that’s when the regulators and law enforcement starts taking a harder look at what you’re doing. Monero or Grant or anything else. Having spoken with a few people who are involved in this type of transactional tracking and analysis, most of the good information that’s gathered is at the service level. So the exchanges themselves or other places where you have to give identifying documents to that company and which they then can use to track and trace you.
It’s somewhat easy to find out that you’ve taken cash, moved it into Bitcoin, you’ve done a transaction into Z cash, you make a couple of transactions, and then you try to cash it out. That usually can be found out. Stuff that stays purely on-chain is much harder to actually figure out who’s using. If you took your Ether, put it into tornado cash and then took it out while later, and then converted it all to DAI and then used the DAI for your daily payments, by sending DAI to somebody’s other wallet, that would have high transit privacy. But even though everything is public, that in itself would be private because they wouldn’t have the ability to associate an identity with that wallet. Once you break the chain of identities, then privacy becomes an easier feature to keep.
Hugh: [00:31:59] Yeah. I totally agree. To me it’s not necessarily what you actually can do, it’s perhaps the perceived political risk of how that could be misused, and so you can potentially become a target, even though it may not actually be warranted, but it could just raise the ire of law enforcement, regulators and politicians, et cetera.
Samuel: [00:32:26] Remember, nobody buys crypto to pay people with crypto. They buy crypto hopefully with the speculative belief that the price will increase and then they can sell it back to dollars. I’d say 98/99% of the time; there’s always a real-world connection that law enforcement or other investigative services can find to trace a person’s identity to their crypto wallets. Whether it’s going in or out, and then once those Fiat on-ramps are the easiest place to control the money flows. You can’t do anything on-chain, but you can stop it at the service level.
Hugh: [00:33:15] Yeah, exactly. And then to me, that’s the worry. If you get clamped down there, then the ecosystem struggles to get more and more adoption. That’s the thing I’m worried about that you get the clampdown at the on-ramp and off-ramps.
Samuel: [00:33:30] It’s not something I’m worried about. I do care about privacy, but I think it’s a nuanced question of trying to identify what exactly needs to be private and what needs to be public and what needs to be associative with your identity.
Hugh: [00:33:49] Yeah, and I think there’s a lot of nuance in it. I think they can get lost somewhere, to be honest, that’s where I get a bit more worried, but you know hopefully I’m wrong on that front, and then we can progress on that just as fast as everything else. That’s probably a one-way area where I’m a little bit different to others.
Samuel: [00:34:08] Is there enough support? I mean, or is there good support for Ethereum development in London?
Hugh: [00:34:15] Yeah, it’s pretty popular in the spotlight of a whole bunch of teams. It’s probably not as well connected as somewhere like Berlin, where everyone knows each other, and they’re all really close to each other, but there’s a lot of stuff going on in London.
Samuel: [00:34:31] Nice. What are some of the other teams out there?
Hugh: [00:34:34] Colony, Acropolis, Modeling. There’s a whole bunch of different teams out there.
Samuel: [00:34:41] Yeah, no, I know all of those. We’re doing some work with Monolith, and I know the Acropolis people, so it’s a good team. I think that covers pretty much everything. Is there anything that I’ve missed?
Hugh: [00:34:56] No, I don’t think so. I guess there’s a whole bunch of risks out there and, hopefully, Nexus can help with that type of stuff for it. We’re all doing some new things and experimenting. I love it but sometimes… I guess my word of caution would be that sometimes we’re running before we can walk. We go out there with an audited protocol, put millions in it and say what? Maybe we should slow down a touch. I love the experimentation, but maybe we can do it without putting absolute massive amounts of funds at risk.
[00:35:27] There are multiple ways of doing that. Insurance is one, but there are other ways of doing it. It’s funny that we can build something and experiment with large sums of money really, really quickly. We’ve never really had that ability before. It’s a double-edged sword a bit, but it’s one of the massive benefits.
Samuel: [00:35:47] Yeah. Well, cool. Thanks for coming on. I appreciate it.
About this episodeWhat does it mean to have communication privacy? Who is responsible for free speech? Dr. Corey Petty, Chief Security Officer of Status joins the podcast to discuss his role at the company, how he is securing the rights of others and the role of messaging networks in the 21st century.
Dr. Corey Petty is the Chief Security Officer of Status and started his blockchain focused research around 2012 as a personal hobby while doing his PhD candidacy at Texas Tech University in Computational Chemical Physics. He then went on to co-found The Bitcoin Podcast Network and still serves as a host on the flagship The Bitcoin Podcast and a more technical show Hashing It Out. Corey left academia and entered the data science/blockchain security industry for a few years attempting to fix vulnerabilities in ICS/SCADA networks before finding his fit as the head of security at Status.im where he remains today.
Corey's LinksLinkedin | Twitter
Status' Homepage
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What interested Corey about working at Status and how he ended up there after academia. * Would Satoshi have created Bitcoin differently today to build privacy into the network given what we know now? * How Status built privacy and security into their messaging protocol app. * How Web 3.0 companies can compete against big tech whose goal is to monitor and surveillance users to make money. * Why there are a plethora of new ways to capture what users want without compromising their privacy or security through careful protocol building. * Why Bitcoin technology will get better (it’s not there yet) and why eventually data on the network will be obfuscated. * Why Status is decentralised by design and will work regardless of whether or not Status exists as a company. * Why our society needs to have more situational awareness on the internet when interacting online and make users responsible for their conduct, not companies. * Why Sam thinks we need more freedom, not less. * Why Status has a responsibility to build good software that people can use it in the way they want to; but the responsibility for conduct should lie with the end-user, not a central control structure like Facebook. * How Status fits with the three-part purpose of the Ethereum network and achieves its goal of on-chain messaging.
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Show NotesDr Corey Petty, the Chief Security Officer at Status.im, he is more than just a security officer. He is also the co-founder and co-host of the Bitcoin podcast. He has some really interesting views on communications and what it actually means to be building out a network like Bitcoin or some of the other networks that have been created afterwards, such as Ethereum or Status that focus more on the communications aspect and how that propagation of Data allows for greater freedoms and evolving society in this ever more surveillance age.
What is it about working at Status and how you ended up there? You have only been there for the last two years and they have done some amazing stuff in that time. It has been serendipitous. I left academia after finishing my PhD and doing some work in computational chemistry to pursue a blockchain career to leverage the skills I had gained during my PhD which was very data-sciencey. I have always been fascinated and heavily involved in computers from a technical perspective my whole life. When I left, I found a couple jobs in the government consulting area basically leveraging blockchain and making sure people knew what they were talking about and technical education. My goal was to make sure that governments and regulators were looking into these things. And they didn’t have a lot of good quality resources to make good decisions about these things. My goal was to help them with this process. The bureaucracy and how organisations work was not quite my level. I had built some hobby projects doing analysis of very large projects in the space in Ethereum; how tokens were distributed in some of the really large early ICOs and one of these was Status and I talked with Jared Carl and became friends. One day I was talking with Jared on a very different community-based project. He asked what I did and I applied for the job and got it. It has been a wonderful trip working with Status. It is exactly where I wanted to be when I left academia. I have been very fortunate in my experience.
I was never cleared or went through any of the security clearance interviews. I did not want to go through the process or be beholden by the promises you make doing those things. It is great for job security but I wanted to maintain my freedom in pursuing whatever I wanted to pursue and being able to say what I wanted to say it in a timely fashion. I am pretty happy I did not go through the process.
In the military it is a whole different life. It took me two years. I’ve been out since 2008 and I lost my clearance. I was amazed by the job security it gives you. You will basically have a high paying job for the rest of your life if you want it. The second thing is the growth of these consulting/contracting companies out of Hamilton that have a huge responsibility outside the beltway. I learned a lot about security but working in such an organisation was not my bag. I have been out of DC for five years.
It is really interesting to see the growth of these consulting companies and how much the government relies on them. The fact that Bose Allen has a senior blockchain specialist was that a position you carved out for yourself or were they just wanting someone who could call themselves blockchain developers? My opinion is partly my own perspective and partly my experiences of working there. I know that a lot of contracts were looking for bitcoin expertise. When I did educational things I was doing broad scope educational initiatives and then when I moved to Bose Allen was specially carved out around me and my team. We need to say we have some skin in the game. We were incredibly efficient in getting things done.
I just spoke with Alexander from Beam, he talked about the privacy functions embedded in Bitcoin. He said that if Satoshi had been building something today he would have built something closer to Monero, ZCash or one of the protocols that has privacy built into it. The open database that Bitcoin gives you is too much of a honeypot for intelligence agencies or any other foreign government agency that wants to track all on-chain transactions and be able to identify money flows across the network.
Where do you stand on this privacy issue? I agree with Alexander in a sense and if I had to prognosticate about what Satoshi would do today; he would be incorporating a lot of the technology that has been developed and funded directly because of what he built. He build something that solved a computational consensus problem and then as it grew, it became a data mine for financial information because everything is public and included. As a response to that publicicty and lack of privacy, we have been able to fund a lot of the cryptography that wasn’t quite getting the focus that it needed to fix these problems. In many ways he has enabled a lot of that research and development of that cryptography that we have today. As it stands today there are solutions in the pipeline that help address these privacy concerns for Bitcoin and Ethereum, that obliviates some of the information. But if you want real privacy in my opinion, then there are things like zero knowledge proofs. In applications like Status, the most un-private thing we have is when people interact with the blockchain and that is not a reflection on us but rather just the way the technology works at this point.
How do you bake that into a product like Status? How do you identify those privacy concerns and address these in a private messaging app that is both private and secure? That is the million-dollar question. It starts in my opinion with using the available technology appropriately and setting appropriate defaults that lean toward the side of privacy and security for the user. Then you provide users with options of changing those available levers so they can change these; but in an informed manner, they can make the decisions affecting their privacy and protects their data. The only way to really build products that allow users to maintain their privacy and security is to give them all the options you possibly can and defaulting towards private and secure and then allowing them to change it but in an informed way. The business model of What’s App, in theory, it should exist outside of Facebook. Facebook bought What’s App for $2 billion dollars a decade ago. The original founder left because of Facebook’s plans. They wanted to better understand user behaviour and linguistics. That intrusion into user privacy and messaging has allowed them to grow to billions of dollars. This is the same as any other major tech company today.
When we talk about Web 3.0, we are talking about companies that are trying to buck the trend of using people’s data and taking their privacy to sell this information to third party companies—using the information from their user base to generate more revenue. How does a company like Status compete against a company whose goal is to monitor and survey their customers? Our goal is to give people the option if they want it. I think it would be useful for everyone. I am not sure what it is going to be until we have reached the level of convenience. They are able to do what they do because they have all the information.
How does a more decentralised product (that is not spying on its users to use that data to increase their revenues) how can they compete with the FAANGS? I am not sure. My intuition tells me that we have a vast unexplored space of what a social network looks like. If we look at what information is provided in any blockchain network, it represents a value transfer. We do not see that 80 or 90 per cent is communication. If we can capture that value, there are a plethora of new ways to capture what users want and what they want to do without compromising their privacy or security by participating in that network. I think this is my personal vision if we are able to push forward this idealised view of Web 3.0, but it is still early days. Bitcoin is the beginning, and it is only a decade old.
Sam thinks think the shift will happen slowly and then all of a sudden. Bitcoin is boring, and there is not much to develop on. A lot of people have set its past present and future. It is just a not if but when. Corey thinks there is still hope for Bitcoin to develop other use cases. Bitcoin does some things well, but other networks like Ethereum do it better. Some of the potential technologies that could find its way into the base layer drastically expand what you can do with it, and for the time being, Corey does want to spend his time there.
Ethereum is the best place as it stands today to be building. What you can do with this technology and what you can build on top of it is very interesting. Because this technology is so early, I am not comfortable naming what is going to be useful in five years or what we are going to call Web 3.0 or blockchain. There is so much room for expansion because we have to be able to start thinking about what we can do with it or build with it. We are starting to think about how to build stuff this way.
The Big 4 versus Web 3.0 issue is something Sam thinks about quite a lot. We have been trained to be desensitised to how much data we give up every day. I worked with systems that were at the NSA and the hoard of metadata that this creates. You can build a near-perfect picture of everything with metadata. I talked to a police officer – once they are on the Bitcoin, everything is visible because there is this perfect data trail that can be used by law enforcement. When Sam came to Bitcoin what interested him was the metadata to be exploited by companies. The technology will get better, but it’s not there yet. Eventually, everything will be obfuscated.
How does that apply to Status? What sort of data do your users give up? Status is completely open about what we do. It is very hard to see what anyone is sharing or unless you have broken encryption. We use signals whispers encryption to make things very secure. Even if Status dies, the technology stays and remains open. You don’t need any personally identifiable information to set up an account. If you use the Blockchain, you are going to disclose information about yourself and leave a trail behind you. We inform you when you use ENS username then you secure a sub-domain ENS record. You are staking this, and this makes your account public and the wallet attached to it. OR make another account that is not public. You become discoverable you need to put something out there.
Sam is a heavy Telegram user. They have built an interesting product. But because of its origins and the code itself, there are a lot of questions he has about its privacy and security. There is still this veil of obtusification around Telegram as to whether they are private and secure with user information. Even when Sam is trying to have private conversations, he is looking forward to the release of Status. Can it be a good replacement for Telegram? That is what Sam wants to know. How can you trust Telegram when you cannot see the code or know how their privacy and security work?
The ultimate goal, if we do things correctly, is that you won’t need Status. The network will work regardless of our existence, but the question is, how do we build network value while still having a job? Since 2016, we have seen the growth of disinformation across social media and social networks in the hopes of converting peoples opinions or changing the hearts and minds of people using content.
Do you think that these decentralised systems are more open to exploitation or there are other ways that Status can address these issues? In a more general system that is less controlled or constrained is more susceptible to people saying to things that are true because that control does not exist. There are things that we as a company we can do and things we can do as a society. In my option, these are necessary for the future. At Status, as a company, we can build tools that give you more situational awareness; so you know who is saying what and how much we know about that person in terms of trusting their content. Like ENS Usernames – if you have gone through trusting to someone you are talking to that it cannot be faked. It is hard to fake an ENS Username. These are very strong fundamental guarantees that the person who owns the private keys is the person you are talking to. We need to allow people to attest to who they are and attach it to private keys so you can be more confident that you are talking to who you think you – so you cannot be manipulated and/or phished.
As a society, it is about how we conduct ourselves on the internet and having more situational awareness. Thinking about whether or not you are talking to the person who you think you are talking to. That is a terrible way to run a society or the internet that you give over responsibility to people whose whole goal is to make money off you through their system. We need a social shift to ask is this the person I am talking to? We need an attestation – or an identification system. Identifying core contributors on Status – this might be a way to go. We want to build it in a way that we are not necessary for it to work.
Does Status have a responsibility to protect its users? We have a responsibility to build good software that people can use it in the way they want to. The responsibility lies with the end-user to conduct themselves appropriately. If you relinquish control, then it ends up with the user. Facebook has become a political body and polices its network and its content. Misinformation campaigns and other negative reasons have used their platform.
What can be done to stop misinformation? Would Status have to become political to address misinformation? The protocols we are building are completely open. Like Ethereum – to craft a valid transaction that gets processed. We as Status can make political decisions, but it is not going to stop anyone from doing it because we cannot make the protocol do it. We can’t see who is talking to who about what. The network will always be open. What will we do as a platform when people are using our platform but not for the greater good? That is an internal conversation we are going to have to have with any modicum of success. There are going to be people who use it to do things we do not like.
The argument I am making is that I believe in more freedom. The line for me is criminal activity. You do not need a highly intrusive surveillance system to address this criminality. While they may be able to hide online, it is harder to hide offline. If there is something to see that is wrong, then I would report it. The government argument is that we need access to your system to crack down on this activity. It is the wrong framing. It turns the communication provider liable for providing that data, which is what the government uses. Most people do not use encryption even if they think they are using it. I think it is a shift back to the user to control what they disclose.
Sam thinks that owning your own data is the wrong phrase. It means people are trying to steal more data from you. Giving up that data in the first place is what I don’t agree with. There is no on/off switch. Ring doorbell is another great surveillance network; with zero liabilities. This data surveillance economy is too complex for anyone to engage with it or not. GDPR opens this up, but no one asks about it or requests it. Sam doesn’t know where we go from here as a user or a society. We need to move toward a default of encryption and privacy – you have to give explicit consent for someone to take your data and then go use it. Sam doesn’t know how we get there.
There are several roads. It starts with giving people who really want it the ability to have it, and that means that you may be catering to a small group of people then you can then start expanding that audience. You also can co-opt a bunch of people who are using it without knowing they are using it. Status has a lot more functionality than a communications protocol. It is better than WeChat natively. We are a blockchain-enabled communications protocol and application. If people can start using an app with great privacy and security without even realising it, and we give it to people who really need it and want to opt-out of the system as it is. I want everyone to communicate with me only through Status. Building a protocol is a really hard thing to do and takes a lot of time and care. If you are not careful, you can get your priorities skewed. We try to build a future protocol that adheres to our principles and build features afterwards.
For Sam, Status fits in with the three-part purpose of Ethereum: On-chain logic, supported file storage and on-chain messaging. You are right that it does fall into line with what is being built on the Ethereum network. You can see the growth of on-chain logic in the growth of decentralised financial applications. This would be a great network for transacting value freely and provide secure communication across an entire distributed global network.
In my opinion, Value transfer is a form of communication that resides on the blockchain. There is a permanent record of it. The meat of the context of that communication is usually ephemeral. That is really the only way to capture all that communication and have communication storage. Price is just an outcome. Communication is what transacts value.
About this episodeAs one of the first Defi projects, Melonport set the stage for what was to come in 2019 and beyond. Founder Mona El Isa speaks in this episode about Defi's rapid growth, rebuilding Melon, and the future of Web 3.0.
Mona's LinksLinkedin | Twitter
Melon Protocol
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Melon foresaw aspects of DeFi’s rapid growth in composability, but not the speed of its development into a new financial stack. * Why Melon now has a three-year flexible roadmap for their protocol’s development, and how they learned lessons from their first fixed ‘roadmap’ about delivery versus the ability to innovate. * Why Melon rebuilt their user interface to deliver a better user experience and grow their community network in 2019. * Why asset infrastructure is a chicken & egg thing: you build it to see if they will come, without knowing what kind of assets will be integrated in the future. * Why the future is tokenised asset classes, but it may take five, ten or twenty years to get there given the current state of US securities law which is not fit-for-purpose. * Why Mona set up MAMA, the Multi-chain Asset Managers Association, to coordinate action between DeFi projects to lobby Regulators and US lawmakers to change the existing securities laws to be fit for Blockchain. * How DeFi’s creation of Web 3.0 native asset classes makes it much less dependent on security tokens for success. * Why maybe it is time for extreme measures like debt-jubilee in responding to the aftermath of Coronavirus. * How, with bond rates going to zero, the landscape of investing and asset management will change, because bonds will become cash and that has never happened before. * Why both Sam and Mona never foresaw the demand for Stablecoins like Tether and USDC, and why this is one of the most commercially useful innovations in DeFi today.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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Show NotesI heard you speak at a conference in Zug in 2018 and I have been super excited to have you on the podcast. I was impressed with Melon. Melon protocol is live now in 2020, and the transition to the foundation has taken place. I have been following you since 2018. It is cool though to see the growth.
How would you describe the implementation and where you are now? Are you happy with the development so far in the Ethereum Ecosystem? The first time we hit the main net was in February 2019 with Version 1. At the same time, we gave up control of the main net at the same time as we launched it. We were the first protocol in history to do that. It was quite a strange feeling to do that and quite experimental as well. I think we have a very well thought out governance process combined with an attractive token model which aligns the stakeholders in our ecosystem, so it is a well thought out process. In practice, it is a little bit different than the theory, but it has been an interesting first year. To see Melon run and be governed by a DAO. The V1 implementation, we were happy with that and we over delivered on our road map. Having a fixed roadmap in this space is maybe not the most sensible thing to have in this space, to be honest. This space is so fast-moving. When we set out in 2017 and conducted our token sale, to deliver that roadmap – there were only three DeFi projects out there then.
We have had to adapt since them because of the developments in the space. We integrated exchanges, including Kyber Network, that we had not planned on integrating due to developments in the space like lending, credit, derivatives, etc. The space underneath us moved so fast and so much – that having a fixed roadmap was not a good thing. This time the roadmap is not set in stone; we learned from our mistakes, and we decided that we wanted to put forward a three-year road map. We are not one of four projects building on Melon, but we are the lead developer building on Melon. We have also re-architectured the protocol in a large way. Our first UX/UI we delivered last year was not one that we were particularly proud of; it definitely hindered user growth. One of the first things we did in October last year was to rebuild the interface from scratch and so anyone using it today will see a massive improvement in user experience. It still could be better, but it is night/day in comparison to the last version. I tried to show both sides of what we delivered.
You have been building Melon since 2016. You mentioned some of the huge shifts since then. There was no lending platforms then or DeFi platforms. There has been an explosion in DeFi platforms since them. Did you foresee this coming or the rapid growth of composability in the DeFi space? Yes, to some degree, I definitely saw the composability. I didn’t expect there to be only on DEX for the rest of our lives. I also saw the tokenised assets would explode but not in the way I envisioned it would. I think yes and no is the answer. We set out building asset management infrastructure we were building this from Day 1. However, when you are building asset management infrastructure, the products that will be integrate-able into that infrastructure will also be built. The infrastructure play is a chicken and egg thing: you build it to see if they will come to use the asset management platform, without knowing what kind of assets will be integrated in the future. I guess you can take some examples from existing financial products/systems. It is risky to be so far ahead in infrastructure when the rest of the space catches up in having to use it.
One of the assumptions we made was the future would be tokenised asset classes. We envisioned that everything you may wish to purchase or sell would have a tokenised asset classes just like everything does today. This was the main underlying assumption we made from the beginning. The future is tokenised whether it takes 5, 10, or 20 years to get there. What we have seen is that we have to make developments to the protocols, and we would have to integrate these as we go along regardless of our assumptions. There are new decentralised assets that we did not see before, such as Cryptokitties, collectables, DAI etc.
As someone working with securities on Blockchain now, it is interesting to see how everything integrates with existing regulatory structures. Working at Realt.co, we are the primary insurer of securities. If we want to go to an exchange currently on Ethereum, they all want transfer agents like Securitise, when we do a lot of that work ourselves. What I am finding is that there is a walled garden where we can build securities that exist and operate in DeFi really well, through for example using UniSwap and build into Melon if we whitelisted contracts. There are other platforms we know we could integrate into as well; but, when we want to go back to more regulated financial structures, like regulated securities exchanges on Ethereum, it gets much more difficult.
How does this get bridged? This is a good question. I don’t know. Anyone who has looked into securities law and tried to apply it to any Blockchain securities will know that existing US securities law is just not fit for purpose. It doesn’t make any sense at all, and it hinders innovation in that space, which is a real shame. It is also why we haven’t seen more development in tokenised securities because Blockchain offers a ton of advantages that the regulator wants and likes, but often these advantages are overseen. They just get caught up in the narratives of Blockchain and their fear of it.
It results in very inefficient processes, or people giving up on what they were trying to create. What my view is that this is going to have to change, and it is going to require coordinated action from DeFi projects. In 2017, I helped set up MAMA, the Multi-chain Asset Managers Association, which was built exactly for this purpose and to respond to any Blockchain-related papers to governments, regulators, and lawmakers. We are always lobbying for this kind of thing and trying to encourage regulators to be aware that this is detrimental to innovation. We have approached this by coordinating the industry, but this is a longer-term game.
In the meantime, what has been really impressive is that the DeFi space has become less dependent on security tokens as a means of success. Because there are so many Web 3.0 native asset classes now, it doesn’t even matter if it takes five or ten years for security tokens to become a reality. In the meantime, you have interest-bearing tokens, and you can stake against a project or via insurance protocols and earn interest on that. There are on-chain derivatives, etc. being built and the whole collectables market. These all are very interesting investable asset classes that are not securities, and so that is an interesting evolvement. If you had asked me three years ago if the success of DeFi would have been based on security tokens becoming a thing, I would have said yes. I was wrong about that. There are enough native Web 3.0 instruments to make DeFi a stand-alone industry on its own without security tokens. Security tokens will become a thing, and then it will be explosive. We just need the regulatory and security law to catch up to DeFi in order to integrate security tokens into the DeFi space. The problem is that these Web 3.0 Instruments are highly correlated to Bitcoin and Ethereum. It creates too much inherent risk in the portfolios themselves.
We are excited about synthetic tokens and what you guys are doing in the real estate space. Medium to long term, we are convinced protocols like Melon can be used to create trust between investors and fund managers for any kind of tokenised asset.
The point I am trying to make is that if you had asked me in 2016 if we were dependent on security tokens to drive usage, I would have said yes back then. But that is because I did not foresee these native Web 3.0 instruments coming. The longer I am in the space; I have to wrap my head around what kind of assets would I want in my portfolio for a longer period of time? It is a very difficult question. With the inherent volatility in the space, it is hard to do that once you get past the first few native assets. DeFi was when Ethereum people realised they could put interest rates on the Blockchain. Once you have an easier way to integrate with interest rates, it makes the space much more accessible.
Mona sees it differently. What you see now is a new financial stack being built. Like any stack, the stack is made of many layers. The baseline is the Blockchain we are building on: Ethereum. The layer on top of that is the issuance of native Ethereum-based assets, whatever they may be, starting with Ether ranging from RapBTC to all the ERC-20 tokens we know including on-chain derivatives and interest-bearing tokens. This is the asset issuance stack.
On top of that, I see the infrastructure stack (or maybe that is even below, I am not sure); the infrastructure stack is the protocols that are being built that establish trust between various different players. Ethereum does that for token transfer, so the first layer of the stack. Melon does that between investors and fund managers without the need for intermediaries. ZeroX establishes trust between buyers and sellers without intermediaries. Compound establishes trust between borrowers and lenders without the need for intermediaries. That is what I consider the infrastructure layer. On top of that, you have the application layers and interface layers where people build products on top of the infrastructure layer.
My colleague David writes a lot about Ether is Money, and everything is built on top of ETH and which is creating a new monetary system. Even now in 2020, my original idea of Bitcoin was as separate from fiat money structures. The USA has draconian measures for how people can use its money. This causes stress in countries where people cannot get dollars freely, like in Russia and Iran. An asset-backed stablecoin connected to the dollar or synthetic dollars is what people want to keep the value of their money stable in places where inflation is out of control in their home currency. That is hugely compelling and a big selling point that gets missed.
Mona thinks we are still very early the lifecycle of DeFi and Crypto as an asset class and so because of that, everything tends to be very highly correlated though she understands the idea that Bitcoin is a way to hedge against your local currency or against high inflation. They all appear to be very highly correlated in today’s highly volatile environment. These tokens and networks that have been launched are still in their infancy. What gives a token value is a non-security token is linked to the success of the network. We are so early on that curve. Mona thinks it will be a year or two before we see this curve inflect. We won’t really see this value until users start to depend on these protocols, and then you have something that looks like an investable market instead of a speculative market. In that case, your alternative then is not to hedge your Venezuelan currency with Bitcoin, but to invest, for example, in a Melon Fund that diversifies across a range of crypto funds or a basket of crypto assets and/or stablecoins. It could be a fund that arbitrages between DEXs without risk. There could also be a fund that stakes its funds against protocols that they have audited like Nexus Protocol. There will be some very interesting alternative investments that give you all the same things that Bitcoin gives you. It is hard to see that right now.
This goes back to the questions Same asked earlier when Mona launched in 2016 about what Melon did not see coming; what Sam didn’t foresee is the growth of the stablecoin market and especially Tether and the growth of USDC through Circle. These are even more important than the market for Bitcoin or any other cryptocurrency because they allow for commerce to happen on-chain and that is something people talk about happening on Bitcoin or with ETH, but Sam does not think it will. One of Sam’s belief is that Crypto does not become less volatile. It is an inherent characteristic of both protocols. Maybe Ethereum gets over it, but Bitcoin will always be volatile because it has a fixed supply. You can issue synthetic dollars as a means of exchange – using it for commerce and cross-border transactions. There is high demand in Russia for Tether to send money to China on a daily basis back and forth from Chinese traders who sell their products for rubbles and send them back in the form of Tether to China.
It comes down to expectations. There is this idea that there is one asset that you can use for every kind of economic activity. It doesn’t exist. Stability is key for commerce and businesses. You have worked on the institutional side. Sam sees Crypto as a retail product. How can these assets affect the institutional side, which deals in a very different way to the retail side? The traditional side will be steered by its clients. If clients demand certain products, they will go where they can access these asset products. Maybe they will move to CoinDesk etc. to service people in those fields. I am seeing institutional people who are now asking about Bitcoin who I would have never thought would be interested. There is an increasing need for uncorrelated assets given everything going on. Mona was disappointed that Bitcoin was in fact correlated to the markets with Coronavirus. It will be really interesting if Bitcoin stays correlated to traditional investments or not.
The recent market crash in Bitcoin was a direct result of market makers hedging the VIX. Margin calls for market makers caused the crash – because the spreads got too large. The sell-off happened so suddenly. Some of those people moved into USDC and DAI before those huge sell-offs. Retail people saw this coming before the institutional traders. Over time, when you see on-chain funds in these kinds of events outperforming traditional funds, then people will start demanding these type of products. In a couple of years, we will have these interesting alternative DeFi investment products and assets classes which will have proveable on-chain track records of success through these events.
How long does it take after Coronavirus to return back to some semblance of normalcy? If you are in a high-risk group, you probably don’t change your behaviour for a long time. What will business look like for small/medium businesses? What will the aggregate demand look like? The V-shaped recovery is not a given at all. We have never been through this before.
I think it will create a lot of anxiety for many people as reducing asset prices will be a good thing for millennials but not for those approaching retirement. Annualised 30% reduction in GDP is what they are predicting. The reactivity of Government was much faster than in 2008, but QE for the people is much faster, but it is not enough. The Question: Are their infrastructures in place to get the money to the people? The answer is probably No, especially in the US. I think no one knows what will happen.
It would be the perfect time to do something extreme like debt-jubilee. Why not do a haircut on debt to reduce debt exposure for everyone? The core structure of the dollar includes a huge level of offshore debt in the Eurodollar markets which cannot be helped by the federal reserve – they cannot intervene in offshore debt. This will keep the dollar strong for decades to come. The Fed’s response, while large does not fix the problems outside the domestic market. It is mind-boggling. I don’t know who they fix it. It is time to do something big. There is an overwhelming focus on health priorities right now. Beyond that, it is something that we need to think about and address. With the rates going to zero, it changes the landscape of investing and asset management when bonds become cash.
About this episodeLearn how to say "Chainalysis" from Philip Gradwell, the company's chief economist and data driven analytic. He chats with host Samuel McCulloch about what on-chain economics is and their use in day to day operations and analysis.
Philip Gradwell is Chief Economist at Chainalysis, the blockchain analysis company. He analyses on-chain data to understand cryptocurrency markets. This includes identifying economic fundamentals, how cryptocurrency moves on-chain between exchanges and across borders, and the nature of crypto crime, amongst other topics. Prior to joining Chainalysis, Philip led a team of economic consultants working globally on energy system analysis and climate change economics.
Philip's LinksLinkedin | Medium | Twitter
Chainalysis' Website
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why blockchain has much less data precision than people think and why the datasets are noisy. * Why Chainalsysis’ core work is really about mapping datasets of entities and their relationships to one another. * Why the interpretation of the data in the Crypto-economy is so much more complex than in Fiat economic systems. * What the biggest challenges facing on-chain economic studies are and what Philip will be working towards solving in 2020. * Why the creation of Stablecoins is about the demand for a dollar-denominated product which is regulated in a different sphere of jurisdiction from the one the underlying asset originated from: the USA. * Why Tether was essentially filling a gap in the market for a stable fiat on-ramp and meeting the demand for a privately issued tokenised dollar in 2018. * Why Chainalysis’ on-chain metrics during the Bitmex implosion provided data-driven insights into the market structures and the price movements of Bitcoin. * How daily inflows and outflows of cryptocurrencies from exchanges correlate to price movements due to the illiquid nature of Bitcoin and cryptocurrency markets. * Why Philip believes the fundamentals of Bitcoin are stronger than any other Cryptocurrency but that DeFi still has many maturity cycles to go through. * Why we will be exploring a new paradigm in terms of monetary and fiscal policy in the fiat world after the Coronavirus induced recession. * Why Philip worries as an economist that we had not gone far enough into the ‘future’ to see the consequences of the last ten years’ expansionary monetary policies after the 2008 crisis, but we have just doubled down with the economic responses to the Coronavirus in 2020.
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Show NotesChainalysis analyse chain data for regulatory analysis and for clients that need to trace transactions on the blockchain and how they are tied into the real world.
What does a Chief Economist do? Chief Economist is one of the stranger roles in an organisation like Chainalysis. Because the core of the business is about understanding transactions on the blockchain and how they link to the real-world entities, this is mostly used by law enforcement agencies and for compliance purposes. If you look at a blockchain it is a complete economy, so its individuals sending money between themselves in exchange for services. I am here at Chainalsysis to try to understand the crypto economy from that perspective and to take the macro view and describe the trends we see in usage patterns in Bitcoin, Ethereum and all the cryptocurrencies we cover.
Chainalysis covers a lot; they work with some of the largest exchanges in Crypto. They also are providing services for a lot of people. Compliance is an integral part of every real-world businesses’ operations. Employing a company like Chainalysis is important to make sure no company taking funds is connected to criminal or terrorist financing. I have always been interested in Chainalysis because I come from an intelligence background. The gobs of metadata that exist and can be connected with Bitcoin is both extremely interesting, and it also scares me. It scares me in one respect. If you think about the level of data collection, and you can pair the analytics you have with the data, a government might have in their own scale intelligence-gathering operations, it becomes a whole different picture. On the private side, when you are only providing compliance, then maybe it is a bit different.
Blockchains are databases. At the heart, they are database that says this address transacts with this address and actually the core thing we do is we map core sets of addresses to entities because any individual or business can have as many addresses as they want. Entities are individuals and businesses are things like exchanges. This entity looks like a business, and this one looks like an individual. This allows our clients to follow the funds in from these addresses for their services. This is basically the core of what we do. Then you mentioned the metadata which is on the blockchain, but it is quite limited in nature actually. There is also the peer-to-peer network in which transactions are broadcast, but the way in which transactions are broadcast makes it less useful than you might think. The core data set is this mapping from entities to businesses as a real-world thing.
The choke point is really the service where criminal activity can be stopped. This is where governments focus most of their work. The only powers that can be used are at the exchange level.
If I am a business and I am going most of my business on the blockchain, it is publically verifiable transactions that people could use these data flows against a company. I do think Bitcoin is too transparent. People can see what I have – either we see greater privacy options in cryptocurrency or we will get more comfortable with this level of transparency. One example of this is crypto reserves and exchanges showing clearly their cryptocurrency reserves to prove they have not run off with my Bitcoin. I think the exchanges have many reasons why they don’t want to do this. But their nervousness about revealing how big their business is. I don’t like the proof of reserves as it is disingenuous. For a business, as soon as you make a deposit and then lend out based on this deposit; you have created more money, in essence, and you don’t know what their loan book looks like. I think it can give you some help in terms of ratios.
People think blockchain has much more precision than it actually has to be honest. I spent two years at Chainalysis doing fundamental research to make sure that when we say something, we can say it with certainty because we know why we may be wrong, why it may be a high or low bound. The data sets are noisier than people think. It’s not quite this God view of the crypto-economy. It takes a lot of work even to get to this point. Every day I ask myself the same question, how do I know I’m wrong? Because most of the time, you are. Again it mostly comes back to the service providers. With zero transparency into what was happening on these exchanges, there were attempts to show liquidity via volumes of trading.
Do you like that all this data is public? The data is fascinating from an economics perspective. The thing that is really interesting from the crypto-economics side; you mentioned earlier you’ve got the address data set and then you have to do all this work to link these to entities. So you get to look at a complete economy, but it is like you have blurry vision; because you are never sure if these addresses look like they should belong to this entity or if they actually belong to another entity.
I had a whiteboard my first week at Chainalysis listing on the metrics we wanted to do, and it has only taken eighteen months later to do all our research, which means we can finally do all these metric charts. The interpretation of the data is so much more complex than economics in the fiat system. The entities are very clear cut in the fiat system.
What are the biggest challenges facing on-chain economic studies that are yet to be solved or that you are working on in 2020? It is an interesting time for Crypto as we are recording this during the coronavirus lockdown and the really significant price changes we are seeing and whether crypto winter is coming or if Crypto can survive even. I think there is the broader narrative of what is Crypto, is it heading into Winter? Is it even going to survive? Are the people who were holding Bitcoin are they even bothered about the price move and did they move into exchanges? These are all tactical questions that get asked the most. Then there are bigger questions, such as what is the interest rate of Bitcoin? What’s the equivalent metric of GDP growth rate in Crypto? We still don’t have a framework to explain this asset and why it is useful. It will often come down to some high blown narrative trying to convince people to get involved in the tech stock gamble. But I want to give more data on actual use cases and real valuation methods, both on the theoretical side and also bring the data to it. That is the bigger challenge.
Where do you stand on the long term valuation and worth of Bitcoin? Yes, I am not a maximalist. Of the Economists who are in this space, I am not the typical economist; I see cryptocurrencies a really interesting alternative asset that has characteristics that others don’t. If it is a store of value, it can be used as means of exchange; unlike your bar of gold in the apocalypse. Bitcoin is, in many ways, a basket of very interesting properties that get fitted together. I think the world is short of assets that are not correlated to what is going on in a certain country, that have a fixed ownership policy but can be stored in very large amounts safely and securely.
Stablecoins, like Tether, removed the volatility from the Bitcoin model makes sense. The tokenisation of the dollar might change some of how the financial plumbing will be done. We need to see how large the world’s demand for Bitcoin is in the long term. The best example of why people love Tether – People in Russia would send their money back to China using Tether instead of Bitcoin. This asset was dollar-denominated, which makes sense.
Sam thinks there is huge demand for Stablecoins and what came out of 2018 is the demand for a dollar-denominated (less regulated) product that moves freely between countries that do not have the best relationship with the USA. Philip would put it differently: they are regulated in a different sphere of jurisdiction from the one underlying asset originated from. Dollars are regulated by the USA, but the usage of these is happening in China and Russia, which are outside that sphere of jurisdiction to some extent.
Do you look at Tether flows? Yes, we do. One of the most interesting things for me in 2018, was when these Chinese mainland exchanges were shut down, a lot of this bitcoin was exchanged for Tether, and then this Tether moved off the mainland. This is why Tether is quite sticky as there was a lot of wealth transferred into during this period, and that formed the basis for that ecosystem.
Sam goes back and forth on Tether. You have to ask on the day. It does not have the best foundation and exists in an arbitrage structure because it exists outside of normal regulatory properties. This is what creates the demand for Tether and why it is in demand in emerging markets.
Looking at Tether as an economist, what do you see? Philip sees essentially a gap in the market being filled. The reason Tether has been so popular is there was latent demand on two major fronts: (1) to have a stable pair in a trade (you don’t want to always be trading pairs that are correlated to each other), so there was a need for that, but (2) there was a restriction on Fiat getting into exchanges, and there was also a benefit for exchanges to remain Crypto to Crypto. Tether definitely filled that need for a stable fiat on-ramp and fulfilled that leg of the trade, and also there was latent demand for a dollar-like instrument in jurisdictions where people did not want to use the dollar all the time. That is where we see the demand for Tether coming from. What I do think the fascinating thing about Tether is in its issuance and its monetary policy. I find it amazing that people are happy to abstract away from that and just say this is really useful. For me, this is a sign that there is the potential for even greater growth in Stablecoins because if people are willing to value it on par or sometimes worth more than a USD with the caveats that people have. Then there must be a whole bunch of people who would be willing to use a stablecoin that has slightly better properties. Sam completely agrees.
Tether proves that there is demand for a privately issued tokenised dollar that does not exist in an account in a bank somewhere. I think this is what has driven Circle and other stablecoin operators and ramped up their operations. There has been incredible growth in USDC in the past year.
In Sam’s head, the benefit of the company that is issuing the stablecoin, let’s use USDC, is that the underlying asset is a derivative of the cash balances that sit in their account. When you send money to Circle, they reinvest into bills or bonds so they can earn a yield on it. When you can be an asset gatherer, and you can earn 1-2% on that a year in relation to the stablecoin that you have issued, that’s a great business revenue model. But what happens if interest rates continue to go negative? It becomes harder for Circle to find the yield it needs to continue to issue stablecoins. There are huge questions there. Circle has come out with statements saying they will be okay, but that is just a statement.
It would be amazing if the best use case for Crypto was destroyed by expansionary monetary policy and negative interest rates. They would have to run their fiat investments with some risk to earn yield. I don’t think you could treat it like money market funds because they would not make enough money to fund their business, especially with being regulated in the USA. Let’s say they can go to 30-year bonds which are doing 0.5% at the minute. If the 30-year bond collapses any further, it destroys Circle’s business model. I am sure they will say they can continue, but it will see what happens in the future. You can barely get yield for your dollars in the real world, but if you move into the crypto-sphere, you can get a much higher yield.
Do you think they could get to the point where you have to pay more to get a stablecoin from Circle, like $1.02 or above par further? Maybe. The thing that is so interesting for us is that we can move between our bank account and stablecoins on a one to one par. The one thing I worry about with DAI is almost statistically there will be DeFi implosion because we are too early in the lifecycle to have all the kinks ironed out. We can definitely see the DeFi contracts are sending DAI to each other and are making loans on borrowed DAI. There is counterparty risk and leveraging going on in DeFi. Could we create those counterparty risk models? Who knows.
Are you doing analytical research into what is happening in DeFi at the moment? Not really. We work on a very large scale – Bitcoin, Ethereum, XRP – but in terms of commercial focus, it is not on our radar yet.
Is DeFi derivative leveraging? There was a price collapse, and the volatility of Ethereum pushed the GAS price so hard that someone was able to take ETHER thanks to working contracts to take money from the CDP.
What were you looking at in Chainalysis a couple of weeks ago during that implosion? The top-level metric is on-chain inflows into exchanges. The year to date figure up until 9th March 2020 was 52,000 bitcoin going into exchange daily. Then on 11th/12th March, you had 270,000/350,000 bitcoin respectively a day. Vastly higher multiples. Most of that came from people who had been holding bitcoin for 6 to 12 months. Those two figures tell a big story. There are many multiples of sell pressure coming in, and we know what Bitcoin markets are not incredibly liquid. Even if you get 10,000 more bitcoin coming in a day, you will see price effect. That is why we saw such a huge price decline. We also saw an increase of smaller transfers on change, things less than a bitcoin. Retail is people moving less than one Bitcoin. We also saw a lot of large transactions too, which is more of the professional side of the market selling off.
Normally when you see bitcoin going into an exchange, the price effect happens 12 to 24 hours later because people don’t sell all at once. They sold within hours of getting it onto the exchange. Things have been much quieter since these days in March, but there are still 100,000 Bitcoin a daily flowing into exchanges. But a lot of it is flowing off of Exchanges. There is another side taking it and putting it into storage. Then Tether pumped almost a billion dollars worth of new Tether into the system. We kind of have our own Federal Reserve who can buy up these assets. This seems to have stabilised prices. Maybe there were professionals who needed to cover margin calls which created the selling pressure. The people who hold Bitcoin for longer periods of time; they didn’t move any Bitcoin. For now.
It doesn’t take very much to move the exchange, only about 5% can drop the price 50% given the metrics. The spot markets are much more liquid than the derivative markets in Bitcoin. The spreads were amazing to watch for a 12 hour period. It completely collapsed. The widening of spot versus Bitmex was something I had never seen before. There were quite large in-flows into derivatives markets on these days too, which was speculation as much as margin calls. There were rolling margin calls all day which drives the flows. Bitmex turned off the exchange and let the market reset. Crypto version of a circuit breaker I think. Arthur just turned it all off at Bitmex. The derivatives exchange prices could have been pushed down to zero without the reset. I have some sympathy for Bitmex.
The on-chain metrics must have been really interesting. There is a big difference between being an Economist and a Trader – is my data right or wrong? How will it affect the market from a macro perspective? It taught me what people care about, and we were able to help clients make decisions during this event using data. It was the first time that Chainalysis had enough data to actually make a description of what was happening using a data-driven narrative.
Would you say the fundamentals of Bitcoin are strong? I would say they are stronger than for any other crypto asset. I do pause because I do think there are differing visions of where Bitcoin should go, there is: should bitcoin be this financial asset that has widespread adoption, versus should Bitcoin be this asset that can be used by anyone around the world to do whatever they want? These are slightly competing narratives. On the investment side, you need the mainstream to get comfortable with this, which means AML, KYC, regulated exchanges, regulation and custody. You need all these adult things. This does put pressure on the libertarian side of Crypto to be used for whatever you want. They can co-exist, but making this an investment-grade asset means more regulation and more compliance.
The reason for this digression is that we could be entering a new world after Coronavirus from an economic side. There will be a big recession, but after that, we may be exploring a new paradigm in terms of monetary and fiscal policy in the fiat world. It is unclear whether people will go, in a world of unlimited quantitative easing, we will see the effect of Coronavirus on economies, perhaps people will not want to look at something unfamiliar because of all the uncertainty and negative yields. I think we don’t know which world we are going to be in. Maybe that will create more space for using Bitcoin for whatever people what to use it for.
If you spend too much time on Crypto Twitter, you get narratives on the future. Your opinion is nuanced, which is much better than most people. Sam is a trader, so he looks at short term prices. The biggest models you are seeing for Bitcoin right now are stock to flow. This just does not make sense; it shouldn’t be that each to 10x your money. For Philip, the fundamental valuation model we have for Bitcoin right now are just not good. The main use cases for Crypto – holding and criminal activity – are not good. These are not enough of use case for me at the minute. I think that long term price forecasts need use cases that justify valuations.
The crypto ecosystem has not covered itself in glory during the last price drop. It is an illiquid market. We will see what happens, but it is a new paradigm when the 10-year yield goes to zero. At that point, the 10-year note becomes cash. What does that do to investment structures? There is this interesting point that when you take the volatility out of the market, you just displace it somewhere else. At the same time, this volatility just gets pushed down the road, and here we are now. We can’t get away from the median before you need leverage to be reset. It is good for me, and for you, as young people but bad for our parents or those nearing retirement.
I was doing my undergrad in 2008 and went back and read a lot of the stuff I read then. I also thought a lot about the history of the last ten years. It was not that fun graduating into that recession, and now here we are back into it. I think the thing that I worry about is that macro….the monetary and fiscal policy we have had over the last ten years was actually inching us towards expansionary policies; that was because people were changing their minds about doing economic policy. Now we are sort of acting with all those lessons learned – they are dropping interests rates really fast and announcing QE really fast; however, there was no discussion about what this does in the future.
The reason I bring it up is because I worry that we hadn’t gotten far enough into the ‘future’ as it were, to learn some of the consequences of the policy decisions that were made over the last ten years. BUT we just double down on them; so I guess we will find out. I agree this is not good if you are about ready to retire, but I also think it will come back to haunt us when we are getting older. Potentially. If your portfolio is a mixture of bonds, stocks and equities (young people should have a 90/10 portfolio), that kind of portfolio could be really hurt by these expansionary monetary policies of the last ten years and going forward. You need a diversified portfolio which includes alternative investments. I understand why millennial investors would not want gold at the beginning. But I think this goes into the Bitcoin thing. Until recently, Bitcoin was an uncorrelated asset, and it benefitted your portfolio. Over time, it does protect you from the perils of inflation.
From my perspective, maybe there were always large tail risks; but maybe we are just becoming aware of them. Actually, before I got into Chainalysis, I did a lot on the economics of climate change. Climate change is all about how tail risks get fatter than people expect them to be, and that adds in more extreme events; people’s models do not take into account these events or their happenings. I spent a lot of time talking to large companies and government departments about how if it happens, you do need a large number of assets that function in extremes as well. We are in a very similar situation now.
What happens if Bonds and Equities, both of these assets decline at the same time? That kind of market is one we have not experienced yet. Maybe this is the situation, a huge decline in global demand leads to deflation in theory and should raise interest rates. I think we are going to experience a huge increase in inflation and then you increase interest rates to reduce the amount of money floating around the system. The velocity of money needs to slow down to bring inflation under control.
What happens when you have a levelling off of global population? All the models are built on the growth of population and as a result, GDP growth. There is a point where our population levels off, at around 10 billion people. At that point, there is no global growth year on year. Any inflation would create price rises but not any increase in demand.
How do you take into account these global growth economics into monetary policy and interest rates? I think the honest answer is that most economics don’t. It is so far in the future, and you discount those states of the world. I am not saying it is the right way to do it. You have discount rates because you want things now, not in the future; and there is essentially a ratio between those two things. Something that should guide your discount rate is the growth of the economy. As the economy grows, if you’ve got some stake in it, you should get some productivity growth out of it. IF you are thinking of worlds with radically different growth rates, you can’t just add them up in one mathematical model – they need to be individually calculated these valuations based on radically different outcomes. If you went back 15 years ago, that wasn’t thought about at all in Economics. The conceptual tools to understand this have been slow to develop. What people often think about in all long term economic models is that population is a given; there is a technological singularity that is baked into most modelling. I think the thing is that there may be scenarios where this might not happen! People just don’t think about this. The assumption is that monetary policy doesn’t matter because the party hasn’t every stopped before. Coronavirus changes the party because it stopped the economy for three months.
It is the most damaging thing that the economy shuts down, but the debt just keeps piling up. There is nothing you can do other than forcing banks to give people debt holidays. The next three to six months are going to be extremely damaging. You look at the global leverage that existed before the first price drop. It was massive. This is the first wave of deleveraging happening. In Sam’s head, this keeps going because deleveraging will continue. We haven’t seen the rest of it yet.
If Oil goes under $20 or under $10 for an extended period of time, there is so much debt in the oil industry that needs to be serviced. Does this set back the development of renewable and alternative green energy sources? In the power sector, power generation has basically been decarbonised. The power market operates on its own logic. The natural gas price is also low. There is transport which uses most of the Oil, and that is definitely a challenge. What it is about is the stock turnover; what kind of car do people buy when they come to change over their vehicle? Fuel prices are important, but there are other factors that can be played with to change people’s preferences. It is not the end of the world; in 2013, it would have really changed things. There is enough momentum behind this decarbonisation to keep going.
Bitcoin mining, as a whole, uses huge amounts of energy to mine Bitcoin. The carbon footprint of Bitcoin is the same as the entire country of Denmark. It has 8.3-kilo tons of e-waste generation – which is the same as the waste generated by Luxembourg. It is not good for the environment. At the same time, humans do a lot of stupid stuff with electricity. The environment impact of cryptocurrency is the Achilles heel of the industry.
Do other economists struggle to see why you want to work in the industry? They see why you want to work in Crypto academically, but those that work in complex systems totally get why it is interesting to work in Crypto with its data. I do think it is pushing forward some of the research thinking in the fields of complex systems, but standard macroeconomists think I could be doing something better with my time.
How did you get into Crypto? I had always followed technology, and I heard about Silk Road. I thought I need to learn about this, and this is going to be a thing. It changed a paradigm. It got me thinking about it. John Levin, who was an intern at my previous company, founded Chainalysis, and he invited me to come and think about the datasets at Chainalysis.
About this episodeA deep dive into privacy with Alexander Zaidelson, founder of Beam with host Samuel McCulloch in this episode of End of the Chain.
Alexander's LinksLinkedin | Crunchbase | Twitter
Beam Website
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Bitcoin and the overall privacy structure of any open ledger platform is a treasure trove for analysts. * Why we still haven’t figured out what the most acceptable level of privacy is in terms of cryptocurrencies. * Why we need to make transactions private by default, but there needs to a compromise to enable reporting. * How the state of privacy, in general, is not good, and it is getting worse all the time in the world, especially given COVID-19. * How privacy coins are addressing different shades of encryption methods and cryptography, but everyone has the same goal to fight the same war together, to achieve true privacy. * Why encryption is an extension of people’s free speech, and this right needs to be fought for. * What BEAM’s plans are for the rest of 2020 and why their goal is to create a DEFI ecosystem built on top of BEAM with bridges to other blockchains.
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Show NotesSam is a big privacy advocate because he used to work as a signals analyst for the NSA. When I came across Bitcoin and its permissionless nature of transfers, having looked at metadata and how you can link this back to people involved, everything comes back to privacy. Anyone smart enough can put together an identity map of the bitcoin network. I think that is almost a loss since real privacy does not exist in the network.
How do you see the overall privacy structure in Crypto? It is really interesting that you worked for the NSA and you understand that Bitcoin that any other open ledger platform is a treasure trove for analysts. And a lot of people are building nice businesses around this. For me that Bitcoin is not private is a fundamental bug in the design. This bug hinders the realisation of this dream of using Bitcoin has money, the original goal of Satoshi, to create digital cash that businesses could use online blah blah. Without privacy, it is blatantly NOT possible. No private person wants to share their financials with anyone, not how much they are making, what they are spending, where and when. Especially not businesses – as this is a huge disadvantage as your competitors can see everything you are buying, employee payroll etc. etc. This absence of privacy is a huge obstacle to Cryptocurrency becoming a replacement for money.
There are different levels of privacy. There is general transaction privacy; wanting to shield transactions, for example, at a company you want to use Cryptocurrency to do your payroll, if you are paying them out from one wallet, everyone can see the salaries of everyone else. This is a very basic transaction. Of course, businesses want to shield these transactions from others. With Bitcoin, everything is completely open. There is the tracking of individual accounts and businesses on centralised exchanges. It absolutely does open up companies to audibility and to tracking by surveillance companies.
Is only transaction privacy needed? Third-party companies use this data to enhance the idea of who their customer is to sell ads/services or change opinions. This is very scary. My big question is, how does this circle get broken? Bitcoin doesn’t do that.
How do we get to this level of user privacy? Technology-wise there are several answers: Monero, ZCash, Mimblewimble – this is probably the best and most recent development. The only thing that is important in the cryptocurrency network is that you don’t change the supply function. Everything is fully opaque, which is what you want for a financial system. I don’t want you to know how much money I have, I don’t need to know what you have, and no one should be able to know how much we have transacted between us. Beam offers all three: transactional, amount and system level.
I can choose what to share and what not to share. This is what happens today with the banking system; governments can seize my bank account and see all my transactions. The emergence of cryptocurrencies was not just a response to a global crisis, but it was also a response to people outside of the USA wanting dollars. They want to get around the USA’s obtuse regulatory system. I think it is more about freedom and sovereignty over your own money. Ricard puts it very well in his book. Once the government freezes your assets, those are gone. It could happen right now, and it has happened during the world wars. Cryptocurrencies make this taking of assets much more difficult.
A cryptocurrency like BEAM means that no one can take assets easily from people. Once you have full confidentiality and privacy, you lose full legal recourse by governments to try and track assets or transactions. Bitcoin’s success is not because it is transparent; it is because governments did not want to forbid it. Cash is not traceable, so governments want to forbid this or reduce it. I think transparency is more of a bug with Bitcoin – it is a reason for less government pushback.
Has there been any pushback against BEAM by countries? Only in Japan – and this was because of an exchange hack using Monero. We don’t want exchanges to keep confidential currencies because we won’t be able to help people get their money back. It can be dangerous if someone steals those funds. I would think there are ways to track Monero. There are some attempts. These are not as good as Bitcoin. BEAM is in a better position in that regard.
There are atomic swaps where you don’t need a third party or an exchange to having these transactions. You cannot forbid BEAM realistically. I think we still haven’t figured out what the most acceptable level of privacy is in terms of cryptocurrencies. Monero is coming up to 10 years soon. No one has really settled on where the happy medium is.
You need acceptance from governmental structures to grow. There needs to be a compromise. ZCash is a compromise – 95% of transactions are not shielded in ZCash. They have those two modes: that is why they present to the governments, and there is a way to be not shielded. Their approach was to create two separate kinds of transactions. We make transactions private by default, and they can choose to make their transactions visible to the government. It is their choice to reveal this or not. There is a lot of technology around this. You then report this to the government. Governments are trying to make cash obsolete. The biggest success they have had is in Sweden. I don’t think Germans are going to keep their cash and Americans will not give up the Greenbacks. People at the bottom are most affected by a cashless society. It is about them and people who are distrustful of their system and who value privacy. They don’t want to pay any fees to banks or credit card companies. It makes sense, but I would like to see a mixture. Transactional privacy is for me the most important thing. This information is dangerous. They can ask very embarrassing questions.
If all these third party companies are taking your data to put into algorithms, they can track your behaviour online. Snowden’s book addresses how you can rank them and where they go etc. The Chinese use the data collection in a more public way; the USA cannot use them in a negative way against a person because the law prohibits it unless they are involved in illicit activities. I am sure governments have all this data they are collecting about their citizens, but they are bound by law to not use this data from their citizens. Having this capability it very scary; I left ten years ago, and there were no iPhones then. With the amount of machine learning, companies and government have huge amounts of data collection now. The state of privacy, in general, in the world, is not good, and it is getting worse all the time.
Crypto, when it emerged, seemed to counter this movement; but Bitcoin it turns out does not solve the problem but makes it worse. Here at BEAM, we are here to solve the privacy question for Crypto while keeping all the best things. Our vision is not to do something subversive, or for anarchy, it is more like saying you cannot stop it, so privacy coins are here to stay. We give people a way to report to governments. We are trying to find a compromise for everyone.
With the ability of BEAM, with these auditable accounts, that is something that is not out there at the minute. You can nominate an auditor and this way you can be transparent to who you want to be. Maybe that is the best way forward, and a way for regulators to catch up and see the possibilities. We will see how long it takes. It is about doing the groundwork and building a solid user base for your product. You have been launched for a year.
What have you learned in that year? Most of all, being open and hardworking pays off. It is about 50k to 60k people, our community. This way, we gathered a community that really cares about what we are doing. The Crypto world is not like things are getting better all the time; we are ready for the bad times. We learned so much about technology and working with other projects (like GRIN) pays off. We are talking to Lightcoin. My learning is that it is important to be open to other projects. I think privacy coins are addressing different shades of grey – these different shade of encryption methods and the complexity of the underlying cryptography means that it takes a certain type of person to work in this area – everyone has the same goal to fight the same war together, to achieve true privacy for everyone.
Are you worried about the general dissatisfaction of governments with encryption, especially in the USA? Overall it is a movement against businesses and individuals who want to use encryption. There are several attempts by the US government, but this was deemed to be illegal. This will not happen in the States; where people do not want to live in a police state. There are always parts of the government who want to limit privacy and encryption, but it is our job as citizens to monitor that and not to let it happen. More and more people understand the importance of privacy, and I hope they will vote and fight accordingly. Things are being taken away, but people are fighting against that. I don’t want to see any erosion of encryption/free speech. Encryption is an extension of people’s free speech, and this right needs to be fought more.
What is BEAM working on for the next few quarters? We are building BEAM as a privacy coin and first-layer protocol. Back in November, we released our atomic swap ability (being able to exchange BEAM for Bitcoin) in a totally decentralised step and our first step toward DeFi. This year our roadmap is to build a fully confidential DeFi ecosystem built on BEAM, and that includes bridges to other blockchains to be able to trade ERC 20 tokens on top of BEAM, eventually, with the ability to build lending and credit applications on BEAM and take privacy to the next level to the transactional privacy we have delivered to distributed privacy features. This is opening up the BEAM ecosystem to more kinds of value, interfaces to other blockchains and eventually DeFi applications on top of BEAM. This is responding to what people want; Ethereum has very interesting applications, but the state of Privacy in Ethereum is even worse than Bitcoin. You can see everything on Ethereum. It is kind of crazy. How long will it take to roll out? We hope we will have some things out this year according to our roadmap and it is hard to put shipping dates on software development.
About this episodeLearn everything you need to know about crowdfunding with Chuck Pettid, Principal at Republic.co. We dive into the potential effects of Covid-19 on retail crowdfunding, the coming changes to Reg CF and A+ that will affect non-accredited investors and the benefits Republic provides to its investors and portfolio companies.
Chuck is Senior Partner | CEO, Republic Crowdfunding Portal, a leading equity crowdfunding site, and co-producer of the international television show Meet the Drapers. He is also GP of micro VC fund RainmakeMe and sits on the board of Ruby Love (aka PantyProp), RidersShare and CrowdSmart. Chuck has an MBA from Fordham Gabelli School of Business and a BS from the University of Nebraska-Lincoln.
Chuck's LinksTwitter | Crunchbase | Linkedin | Republic
Republic's Homepage
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What to listen for* Why the fire in the forest clears the undergrowth for new plants to grow afterwards, and this is what is happening now in the current crisis. * How Republic creates a network effect for founders which propels their business forward. * How this 'word of mouth' network support is hard to measure effectively through Republic. * Why most portfolio investors in Republic are looking for returns on their investment, usually through equity but also because they believe in the product or the founder's vision. * How Republic has lobbied the SEC for Reg CF and Series A harmonisation which will come into effect in September 2020 which will benefit start-ups by raising the limit to $5 million and investors through removing the $107,000 annual investment limit in crowdfunding. * Why this is great for investor protection in crowdfunding going forward. * Why Republic Crypto brings in deal flow to the business and how they came into this space through consulting in 2018. * How Republic's regulatory work has brought companies and businesses to their door because of their history and work in this area with the SEC. * How Republic educates companies on crowdfunding campaigns and on-boards them through systems they have built. * Why due diligence and partnership matter most to Republic in their choice of companies. * How Republic does not geographically concentrated in Silicon Valley or New York, but looks at start-ups from across America and why this benefits everyone. * How this current crisis will make people more focused and professional in their dealings, and this will create better companies in the long run.
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About this episodePatrick comes back for another great episode with host Samuel McCulloch and discusses the recent price collapse, Bitmex conspiracies and the soon-to-be-launched Tradelayer.
Patrick's LinksTradeLayer: tradelayer.org
Twitter: https://twitter.com/duganist
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why interest rate arbitrage is all about the basis point, and this is its day to day liquidity mechanism. * How Bitmex is the solar system of these trades and flipped the switch when the market seized up completely. * Why when Bitcoin is not correlated to the stock market and is left to its own devices, God help us all. * Why the Asian open hour is always a good indicator of flows and market structure. * Why the conventional markets are correlated to bitcoin when there are liquidity demand spikes. * Why when they flash crash Bitcoin, the loss is so great systemically that it crashes the market and this is what happened with Bitmex. * How Tradelayer would create trade channels to execute trades and create liquidity with oracles and without an order book dependent on co-located market makers. * Why the dollar will be the trade of this decade and how its strength will cause problems across the world.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
- Help keep this show going by sending us $5
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SHOW NOTESPatrick was one of the first guests I had on the show that talked about interest rates, and this was almost a premonition of what was to come in DeFi and the year that came after.
I want your thoughts on what happened in the markets over the last few weeks and today is 20th March. Bitcoin has ripped back up to 6600. I guess there is a conspiracy put forward by Sam at FTX (bank man), it seems that the overarching theory is: On 11th March there was a catastrophic market push of 287,000 Bitcoin that was sold off by professional traders where the price as 9000 and after this, it took the price on 13th March to 3500. If you can move the market with 1/3 even of spot quantities, then you are actually a derivatives position. The pricing on Bitmex has no correlation to the spot market.
If the spread is blown out, then you have to pay the rate (pushing the rate negative). This incentivised short spots on the market, and this got so dislocated from the rest of the futures market it was ridiculous. Around sub 6000 things started really dislocating. The spreads started getting wider and wider; it started getting destroyed and a rolling margin call. There was no liquidity; nobody was bidding. The total combined interest in Bitmex in total are many be 3-5 million. A lot of those future positions are people who are shorting it and then buying the swap. Those guys are working a few percentage points on their accounts. Therefore, it is not supposed to go negative 6.
Interest rate arbitrage is all about basis point. That is the day to day liquidity. People are taking advantage of these movements. Bitmex is still the solar system of these trades.
On 12th March, as soon as we passed under the 5000, we had the first dump in the morning. This can be a full episode for the twilight zone.
I was fully hedged and short perps. It is the most popular world religion. As we had a clean break under 9000, Deribits tend to stay at zero. This was a normal break. There was a 1.2 million volume. That is a lot of money. The other thing we have to factor in here is that a black swan event, Tether is a swap market also it just doesn’t have an interest rate, so it is a perpetual future they have written themselves. There are some fractional reserves in it, but it is not fully collateralised.
Re: the Bitmex scandal. I got liquidated both sides, and the slippage was worse than the liquidation fees. It was a curved position which was working for me. There was a little delta slippage. The climax of this story is that I took advantage of the Apex of this story, and we had a strong reversal, 3.6 sigma rally. Do you think these people could have pushed Bitmex to $1? Phase 1 happened when it broke 9000, 7th March. It was pretty clean from there.
If we had a better market structure, that might have been, it has more to say about when Bitcoin is not correlated to the stock market and is left to its own devices. God help us all.
The Asian open hour as I like to call it is often good for short term positions and trades as you will see one or two hours where there is a move up or down and flows in futures, Tether, derivatives etc. My time it would have been 4 am-5 am in the morning, that is when we had the big dip down. Do you have a chart of S&P/Bitcoin price comparison?
Now we are at 2740, and we are on the low end of the range where we have been early February. It is what it is. This is a decent range until we get to a net inflow. Do not lose your coin trying to leverage it. This is the ratio between Bitcoin/SPY.
The real fun started with Bitcoin when it broke down past 4000. We have a one-hour candle. Some of this stuff happens in one minute. The relocations started to happen at 6 pm New York time, and there were these giant margin calls. It was a little bit more orderly than it could have been. It really started to get disconnected at this point – from the micro-structural viewpoint. We completely exhausted all the bids. What we had in the evening is a lot of spot buying and retracing. In a sense there was a functioning market, I was buying/selling and quoting in September. There were $200 spreads in the order book. Bitmex is still fine at this point in the story. The evening session it just got destroyed in a 5-minute candle. The conventional markets are correlated to bitcoin when there is liquidity demand due to events. This structural volatility limit collided with the structural volatility limit; in theory, you could have a perpetual swap that goes as wide as the market takes it. It is kind of crazy to think about it. If a guy is 100x leveraged in this, they make the max funding event so big that he will not get liquidated. If you were thinking about this as a short, we would have spot inflows hedging it is the spots pay. Negative rates don’t matter that much.
The spreads blow out between BitMex and CoinBase and all the other exchanges. Things just go haywire for roughly about two hours. There is a massive sell-off – liquidation wall in Bitmex, and it seems unstoppable. There was a point where it just went over the edge. That is when things got extremely dicey. I was repositioning seeing the flow, and I was booking some bitcoin as profit. It was a quick, quick move.
When the market spreads like this, at the extremes it is, it is really shitty for market makers. They are not able to provide liquidity into the markets at these times. They are supposed to keep the spreads tight and when they get fucked like this, completely run out. Liquidity dropped to zero. But what happens if they can drive it down and it disconnects from the spot market, and push it down for just a few seconds. That is all it takes. In that scenario, when they flash crash Bitcoin, they would be in a situation that the loss is so great systemically that it crashes the market. Only so much volume is going to execute at that level. I did not hold the leverage; I do not have enough pirate in me to say that leveraged.
Whatever the scale is, the pattern is the same. It is like a wave five down. It was one of those. We got the deviations, and I saw the push above 4500. I was saying to a friend of mine, relax this is looking like a bottoming move. The way bottoming move get moving is that they get this pump and then it is like over the next forty minutes it moves up very quickly to another support. Do you think Bitmex pulled the plug at 3500? Of course, so I can’t say that, and I can’t quit. Bitmex has a lot of responsibility for other people’s money and assets. They are calling it a DDoS attack on Bitmex on the queue to the book. Instead of doing rollbacks later, they may have just turned off their system for a minute. Maybe they did; maybe they didn’t.
Let’s look at the counter-argument, and I will plug my thing. With Tradelayer, instead of having all the liquidity makers co-located in one hard location, the stack is processing things in packets, there is latency there. Then there is the sequence flow through. EMX and Deribit had a freeze up in this time too. Everybody kind of went down in this half an hour of extreme volatility and joy on my part.
My plug is let’s run our own Bitcoin derivatives on Tradelayer and build our own clients, run the transactions on the blockchain, run this on our own computers (get more RAM) and control our own assets in cold storage to process trades between each other using hotkeys. We can create bilateral liquidity channels where we are high-frequency trading with each other using the underlying signature feature of Bitcoin. I am just adding logic to things in the channel and in the trade logic layer. There is no order book. This is ten times worse for Bitcoin. On-chain order books are screwed for this – a trade channel would just put a higher block height expiration for its unsigned trades. I am working on open source javascript and trade channels are very good for this. It doesn’t propagate to Mars. Bitcoin Mars is going to be big – Elon Musk will be the CEO. There is always going to be latency.
C++ logic will become relevant to trading algorithms. We can play this like it is an option. You can keep trading during this time regardless of volatility. We might be paying a big spread or a large miner fee, but this is life. This is my humble marketing structure to Bitcoin. We will have insurance funds of USDC in TradeLayer in order to make sure that we have liquidity regardless of what happens. Bitmex takes everything instead of Fees, allegedly. Deribit had to chip in BTC during this event.
We have black swan events across DeFi, and this won’t be the last one. DeFi has just exploded since we last talked. The ETH guys made a retail investor version of what you are talking about. By creating a retail version, you can create something in a couple of clicks that has driven people to build in DeFi. Yes, it is something that Bitcoin does need to catch up here. Synthetics is a Ponzi scheme. I am Pat Dugan, and I am doing a decentralised derivatives structure without a banking system.
Can you create dollars through TradeLayer? Yes, this is simple with an Oracle to create USDC. You will create a dollars with enough Bitcoin to create meta coin, what I would call DUDs, not Dugan dollars, but Digital US Dollars. We are trying to get some dollar issuers on TradeLayer. I want to talk about a company, Valiu – in Colombia, and they are going to have a dollar savings wallet where people in Latin America/South America can use. There will be no interest rates at first. I heard of this company, but they are doing it with Bitcoin. They are dollarizing it for transfer and then selling the hedge. The customer does not know that they are using Bitcoin. Brave New Coin has an ETP tradeable on ETH and KYC – a proper investment product. They take your money, and they buy a basket of DeFi things, they buy this coin and hedge it so they get yield there. They are dealing with operational risk through their blockchain and staking yield. It is a different kind of collateral. There is a very liquid derivatives market while you are in this bull market.
When there is Deribit decentralised, I would like to get them on TradeLayer. Are you going to release TradeLayer soon? We raised some money, we got the KYC logic ready, and we have been working on this for two and half years, but we are hopeful of releasing oracles first and then a test net release to get some people trading on it. We will be starting on LightCoin and then moving to BitCoin next. Then we would like to do an options version too. Everything is done in trade channels OTC. These are going to be European style, and the ROI is a real thing in DeFi. Cash settled European is fine. I have made several design choices to make this as simple as possible.
The ultimate exchange trading product: short negative bond rates buy an interest rate floor, and you hedged the short principal. You take the proceeds and buy bitcoin and sell that with a derivative for positive yield. You make an index between two indexes. Aren’t you scared by what has been happening in the RePo market of late? Giving them a business model to get their yield on these bonds?
What Hitler did, he went full MMT for Germany. That is why everyone loved him. What this means that they will never let the banks go bust. I am reticent that they are going to be able to keep it under control. I think the Fed has underwritten banks in America. The Euro-Dollar market is already getting weird. What happens if we get a 20% increase in the dollar to the Euro? I see that bailing out people in Europe.
Now people are going to have to cover their dollar holdings with currencies that are getting killed. You would think Gold and Silver should be going up, but they are being sold out… all commodities, platinum, gold, silver, oil, palladium, etc. Look at some of the currencies – they have all fallen apart in relation to the dollar. This is a global dollar increase, and this is a dollar shortage. They are just running the same playbook again and again.
If the trade of this decade is the dollar, the dollar index will top out in the near term. And it is also the least bad place to put your money. If we are going to see an additional 20% in the dollar over the next two to three years, there is going to be a huge movement of money into dollar-based assets. The Fed and Trump will issue as much longer-dated debt as possible.
You will see credit risk, but it will be less than it is today. Patrick is not a big fan of DAI. I have not launched yet and failed systemically considering I have not launched TradeLayer yet, so we will see what happens. The point is that everyone needs to do their due diligence and be safe; only invest what you can afford to lose.
It is possible that these stimulus checks could end up in BTC. If 5% of Americans hold Bitcoin, they take $250 out of their $1,000 cheques which equates to $3.75 billion, and they invest this into BTC that could be more people in the market as a result.
About this episodeIn this Episode Dan Elitzer joins host Samuel McCulloch to discuss the growth of Ethereum & Defi, different approaches to coding languages, liquidity and modern business systems.
Dan's LinksTwitter | Linkedin | Medium
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Whether building on each other in DeFi creates fluidity between apps when it comes to Ethereum, or does it increase the fragility of the whole ecosystem? * Why how we approach building smart contracts needs to be different from software coding, and more akin to hardware design. * Why formally verified smart contract languages need to happen. * Why we are moving from an infrastructure phase to an application phase right now in Ethereum, and this requires cross-chain protocols that work. * Why liquidity is more important than long-term price stability, and this is liquidity maximalism in action. * Why greater control over our data is going to take more ‘moon math’ to make this happen. * Why we help our portfolio companies focus on their user experience and design first. * Why DeFi projects need robust go-to-market strategies, not just traction through creativity and technology execution. * How East Coast/West Coast viewpoints within Crypto differ depending on the narrative arc and why San Francisco is still the centre of innovation in the US despite its regressive land-use policies.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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Show Notes
I wanted to address something that we have seen with the evolution of DeFi: platforms and apps being built on each other. You have Maker which is used in Compound, which is used in bZx which is then used in a whole host of other programmes. You begin to see multiple derivatives of single products being built out. The safety and the security of those products are tied to the underlying products and programmes they are using.
One of the things I have been wondering is this fluidity between apps when it comes to Ethereum, or is it just an increase in the fragility of the whole ecosystem? In some ways, it is both. A year ago, I wrote a piece about superfluid collateral where I wrote about how we were going to see a lot more interaction between these protocols and the apps, with assets flowing through multiple protocols and the idea of C token before they were created. We have seen these play out and this what we refer to as these money Legos but at the same time, it is a weakness. There are a lot of dependencies, and these can be scary when pretty much every major smart contract has had some flaw in it. Security researchers have been crushing contract after contract; do I think these things are safe yet for the general public? Most of them probably not. Certainly, once you start compounding this risk together, I think we come to a place where we have to start hardening this.
We really need to think about Nick Szabo, who wrote a great piece about the fiduciary code. The approach to how we are building these contracts needs to be different from normal software. It needs to be akin to designing something like hardware; the difficulty of modifying it after it is set in stone, thinking through how this is running and so many tasks through situations. This is not just people’s money; if we are successful, this is about the whole financial system. If you are trying to build a whole new financial system, and you are building a critical piece of hardware for the structure, then a failure in your code or a piece of it could bring down the whole system, so we really need to be applying a very high bar to how we are auditing these things and what we are doing before launch.
Is it a weakness in the coding language when you are not using formally verified languages? Tezos is very focused on this. There have been attempts to formally verify on Ethereum. It is a step in the right direction. People should be looking for some kind of formal verification on the contracts when we get to a certain size. Couldn’t that be added into Ethereum in some way?
Yes, people are working on this in Ethereum to see how this issue is addressed. We are moving towards superfluid protocols, and Bitcoin is coming to Ethereum this year. Is this an argument or a good multi-chain environment? Or is this a monopolistic play where Ethereum will suck liquidity from other chains?
I think we are moving from an infrastructure phase to an application phase right now. We need cross-chain protocols that work. There are lots of interesting things happening in Cosmos to be able to move across chains. I think when one Chain like Ethereum becomes dominant, we should see consolidation onto Ethereum, which will make cross-chain platforms less appealing. Bitcoin is a separate thing as it is meant to be just money.
Why is there a sub-case for Bitcoin? If there is no other use for these other coins as ‘money’ or as a user application layer? I think because those things are out there and they are saying use our platform to build out your applications, and value will accrue there. This means that there is value that will follow, or that is the assumption.
Bitcoin started off with historic value approach, and it is different in that the power of money is people’s belief in it. You can fork Bitcoin, but it is about people’s belief in the social contract around that asset, and that is hard to overcome. Bitcoin is the ultimate thin protocol, which is a differentiator. Globally, Bitcoin is leaps and bounds ahead of Ethereum. I am hopeful we can build useful applications on Ethereum. Ethereum was the first to create dollars out of other things; this is much more powerful than a store of value. I am more of a dollar maximalist.
The ability to have a stable asset like a stable coin is so much better than any regular cryptocurrency. I find much more interest in these trustless stable assets rather than Layer 1 solutions themselves. There are more use cases for these assets; however, it also layers on additional risk on top of these protocols by building on them. Do you want all the logic handled on-chain or do you want to keep this off-chain instead?
Liquidity, in some cases, may actually be more important than long-term price stability when you are talking about flows of money. This is my liquidity maximalism in action. Yes, I would also classify myself as a liquidity maximalist; we need to get more activity happening in Crypto rather than on legacy rails and we are all going to win if we can move more stuff into the system.
Micro-payment options are useless without being able to move into dollars. Any payment system only shines when you get people in there and keep them there. I came into Bitcoin as an open-source payment rail; rather than its anti-government anarchy thread. I am really concerned about our monetary policy and at what point we hit hyper-inflation?
There is a clear path to accepting cryptocurrencies without getting involved in the cyberpunk/libertarian religions surrounding Bitcoin et al. There are still a lot of open questions. I have worked as a signals intelligence analyst in the marines. We worked with the NSA to work through metadata to find people and send special forces to hunt them down. I can see the use cases when applying them to Crypto.
We really need much stronger privacy solutions within Crypto going forward to address how we make financial transactions private. My question for Crypto in the 2020s is, can we break the business models of surveillance capitalism by the FAANGS? I think there are benefits of ad-based businesses. Google takes all your communications and processes them through algorithms, to come up with new ways to sell you stuff, and they extract value from you.
What do individuals care about and what Google the company cares about? I don’t think they are about extracting value from you to sell to other people. If they are not providing value to you and me, for our information, we are not going to give it to them. I am not sure if the way the value is accruing is fair, I don’t know. I am not convinced the model of giving users things without paying for them in exchange for their data is broken. Having the cost of delivering those services being subsidised by advertising revenue is not necessarily a bad thing. I think you can strip out the surveillance aspects of this system by giving them ownership of their data. If you have greater control over what is given out, that is going to take more moon math to make this happen.
I will store this data locally and then get an app to verify that they are not extracting a copy of that data. Google/Facebook should be data guardians and not show it to anyone else. They should act as a shield between all those advertisers who want our data and us.
Do you think it is time to democratise them? Should there be an oversight panel that is elected and oversees them? I find this idea uncomfortable, and we do need to fix things we see in big tech companies. I think this is not somewhere Crypto should be heading in the next few years. If we can’t get digital money, assets that are not centralised, then we don’t have a chance on any of these Web 3.0 issues. I think the bigger questions are about implementation and how you are going to go to market. There seems to be this mindset in teams across the space that they get lost in the technical and philosophical questions of their project rather than actually talking to users and who they are trying to serve and getting their feedback. There seems to be this assumption in Crypto that if you build it, they will come, but we know this is not true. You really need a go-to-market strategy.
I guess this also ties into what you are doing as a portfolio company, and how do you position yourself with the companies you are working with? What kind of operational support are you giving them on a day to day basis? We are trying to make sure our portfolio companies stay focused on their users and that they are interacting with them on a daily basis. In some cases, we are very hands-on with some projects to help them at the user level, and with others, we are pointing them in the right direction. Our help can take many different forms. Just technical creativity and execution is not enough, and it hasn’t been enough for years. What we need now is that folks are thinking from the beginning, how are we going to get users using our project. There is a lot of liquidity hacking stuff that we are going to start seeing that will let these DeFi projects get that initial traction and their go-to-market strategy.
You need to get over an initial liquidity threshold to make these protocols really useful for a large number of people and in order for them to be successful, this threshold is necessary. One of the projects you are working with Handshake has just launched. They have a really interesting token distribution model – including 80% token distribution in the form of token developer grants. It needs to be in the hands of developers and users. We need to give it to the people who are going to use and develop it. They are optimising for adoption. Did you have any hand in helping them structure their token? We helped them design their logo, front end and onboarding. We helped them with some technical issues too. Their token structure was already their idea.
What is the process of finding new companies to add to your portfolio? It is not a one size fit all kind of process. Our funnel is based on myself and other team members knowing builders in the space. We are based in San Francisco and the beauty of the space being distributed around tech and Crypto. Our process for vetting companies is focused on DeFi and other aspects of Web 3.0. We all bring different backgrounds to the table. The design has always been a part of the conversation rather than just the technology itself. Our team has been working together for the last five years. We have developed our expertise together. We haven’t gone out and added people to the team at this stage.
Do you see differences between what is being built East versus West here in the USA? Yes, I think this is accurate. There is an East Coast/West coast view of Crypto. The East Coast is more bitcoin oriented, and the West Coast is more Ethereum focused.
About this episodeIn the midst of a market collapse as a result of the Coronavirus, Andrew Keys joins this episode with host Samuel McCulloch to discuss the current situation. Even though millions of dollars in capital has been wiped out, the fundamentals of Ethereum remain strong.
Andrew's LinksTwitter | Crunchbase | Medium
DARMA Capital
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What to listen for* Why we are currently living through a 'Black Swan' event that no one could have predicted. * How this creates a risk-off bear market that will be hard on everyone. * How Crypto went through a two-year bear market, but the good building continued at protocol, tooling and application layers. * Why this development in Ethereum was really about building the 'moat' over the past two years. * Why there is no quick monetary or fiscal policy fix for the global drop in demand across all asset classes. * Why Andrew can't get comfortable with risk-return at the application layer right now because of the protocol risk that the 'protocol roadmap' won't even be built. * Why Web 3.0 in its entirety is a play on the future of work. * Why you can't just send value across the network; you need smart contract functionality that works and programmability in order to have functional business logic.
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Show NotesThis is a black swan event this market turmoil. The media is exacerbating the epidemic through their coverage. We are now finally seeing this in Crypto markets now. People are scared.
When I saw what they did in China, locking people in, I am in Florida in the south with you. From what I read, the difficulty is in the ability of hospitals to take care of everybody. Obesity and heart problems make you more susceptible to the virus. We only have 2.8 ICU beds per citizen in the USA.
There are serious side effects of having coronavirus. The best thing Puerto Rico could do is close their borders.
Has your market view changed over the past few days? There are two hats Darma wears. As a fund, we do a lot of evidence-based modelling. We basically chop the market into daily weekly monthly quarterly annual risk regimes, and we look at those in the context of fundamentals. Everything on the fundamentals side I am extremely bullish on; I am completely bullish on the core stack. You are like J Powell. The American economy is strong; ETH is strong. I would say that it just went through a two-year bear market and corporate treasuries had declined; but a lot of very good building has been built at the protocol layer, at the tooling layer, at the application layer, and I honestly thought what the last two years was really building a moat. I am not yet sold on any competing smart contract layer 1. There are trade-offs, and nothing is completely decentralised yet. I have been very bullish on the developer and investor ecosystems and their growth over the past two years.
ETH has taken a beating in this black swan event. If you have three to six months, that is a long time. We have seen the destruction of the idea of Bitcoin as digital gold because it has not held its value. Gold has not fared well in all this either. Gold typically declines in recessions; it is down 4 to 5%.
The engine of the world, China, has stopped. China shut down for the last quarter, and they are still shut down. You can see this in their traffic rates; there is no rebound yet in China. They are not back to work. I think when you have this kind of closure of the global economy. I think this is a bigger issue than in 2008. It was limited to the banks. Most people did not see the carnage in the banking structure. This is a much more tangible fear that people are going to have to get used to.
What is the appropriate monetary and fiscal policy for the next three to six months? That is the magic question. When the bond yields when under 1% the other day, to see the 30year US treasury bond trading at .8 was just incredible. I never thought I would see that in the next few years. It went there in a day, and it declined 40% in one day. I don't think any level of monetary support or stimulus will do anything at this point. What we need now is a combined governmental response, essentially what South Korea did, inputting everybody into quarantine and shutting down the whole country and making it easy to get access to testing kits. The CDC has only tested 500 people in the USA. We can pump more money into the system; where is all this money going to do? This brings up my stagflation worries for me. I have always thought, call it libertarian, or anti-central banker, our $4 gallon of milk will be $8 in the next five years. The worst part about this, the systemic hedge funds were out cash three weeks ago. Main Street freaks out, and they go into cash. They lost 20% of their net worth. I worry about the husband and wife who is living on $200,000 a year and the analytics and research that sophisticated investors do. I am on a base worry for normal people. Schools get shut down for six weeks, and you have to stay home with your kids, then that spells disaster and bankruptcy for minimum wage workers.
We are already working from home. We have strategy meetings and risk meetings weekly. We are already working remotely. This will further the evolution of working remotely and the future of work. We can sync via Zoom. You used to be at Consensys. They are cancelling their New York event. Consensus the CoinDesk conference is still going ahead. Sam: I think both of them will be cancelled. There are already cases in New York. The doubling rate is five days.
Across all asset classes, the global drop in demand will affect everything. I guess the only counter to that is looking at China; China has been able to contain this. Infection reporting there is going down. The USA is capital. We should be able to learn through WHO; there should be a playbook. You have the summer months, and hopefully, there is seasonality. If there is one year, we needed global warming; this is it.
When it comes to Web 3.0, I want to buy a lot more Zoom stock. Is there something in the Web 3.0 stack I should be looking at. What we are learning right now, the web 3.0 protocols are risk-on plays. There are still 100x left in ETH and Ethereum, and there is so much farther to go. Right now the pending transactions are 120,000. I made a withdrawal from CoinDesk today, and it still hasn't hit my private key. In a risk-off environment like we have now, investing in the application layer or in part of the protocol layer; I am not comfortable with risk-return at the application layer because you still have protocol risk. This means that I don't want to invest in the next Tesla or Ford because the road isn't even built yet. You don't get paid for the risk you are taking that the protocols that the application layer is built on will finish in a certain amount of time, or will finish without governance issues. We see the governance issues around protocols.
Something like Zoom I put in the enterprise/ SAAS/ application layer for investment. When I think about the value accrued for Web 2.0, your google, Facebook, Amazon, etc., I would think that we have similar to the fat protocol thesis, we will have a thinning at the application layer. If blockchains do really work, you should move the value that has accrued from the intermediary to the counterparty of trade. I believe in the evolution of crypto commodities in different layers of the protocol stack; we need to look into these layers.
I think Web 3.0 in its entirety is a play on the future of work: we will go to a decentralised peer-to-peer web, we will have more of a gig economy, and we have more of a remote workforce. But if there was one silver bullet, you may be better with Zoom, but now they are somewhat proving their valuation. I am surprised that google hangouts did not eat Zoom's lunch, considering how many people use the Google Suite of products. I bet right now there is a team in Mountain View: figuring out stronger bandwidth to go up against Zoom. I think you are competing against a much bigger tech company from Zoom's perspective.
I want to talk about Web 2.0 for a moment: The FAANGS have all built their businesses on surveillance, they track all of their user data to derive new products not for the users, but for their advertisers and other third parties that pay for that data that is being processed through Google Facebook etc.
My questions for someone like yourself that sings the praises of Web 3.0 does Web 3.0 break the cycle of surveillance economy and is it even necessary? I hear a lot about the different positives of owning your own data; I just don't understand the transition process moves away from this process where companies are making trillions of dollars off of extracting user data.
First and foremost, none of those companies are going to give that user base or revenue away; they will continue to extract that value indefinitely. For Web 3.0 to work, there is a small amount of extremely intelligent people that are betting and creating an environment for the user experience to be as good if not better than Web 2.0. 99.9% do not care about self-sovereign identity versus logging in through Facebook. If it takes extra time to hail your uber, and especially in times like this, that user experience will not satisfy commercial users of the internet. The user experience has to be as good as Web 2.0. The only thing that is going to nudge people from Web 2.0 to Web 3.0 is behavioural economic incentives. Bond yields are less than 1%, but you can get 8% versus 1% return; until you get paid by Facebook to pay attention to advertising, people will choose BAT. This is a ten-year play; we are at year zero now. Facebook will continue to seed their incumbency through their own advertising revenue. Where is the value creation for the application layer engineers to build a business? Uber is not a technology play; it is about owning the fleet of the future so they can rent them out to us. We have a surveillance economy that has been built. These companies build algorithmic models about people, and they make predictive value judgements about them. They can drive them toward real actions in the real world like 2016 political value. I think it is scary we let so much power go away to these corporations. There is no oversight by we the people.
There is a certain endpoint; lots of people are stupid and cannot care for themselves. They don't know any better. Big Tech is feeding off of these people, without a code of conduct to be fiduciaries of the human race. I do think social media causes a cell phone addiction; in addition to the amount of money, they make off of it. I don't think we really understand what happens when you have a developing brain that goes onto Instagram 100 times a day. We don't know what that does to people's brains or employee efficiency etc. I think we need more empirical research, but there is no incentive to do this research.
Web 3.0 is transparent, and this is the long term factor that drags us away from these companies. There is a shift needed; like in the global reserve currency transition to the dollar, it took 50 years. It was slow and took a long time to happen. Maybe for Web 3.0, it is the same – it finally becomes the new normal. There is no one place where this was the end of Google, Facebook, etc.
You sign up using an email; you have no idea you are using Ethereum. A UI/UX developer could design their front end; you can trade assets which remain on Ethereum. This is where we are going; the user experience has to be as good as or better than Web 2.0 to get people to move toward Web 3.0 usage. This is the moat that Ethereum developers have been building for the last two years' bear market. Ethereum has a head start on moving value on-chain. If you are a business, you want stable expenses. DAI is a great first step. Its interest rate has fluctuated a lot in the past few days. I agree there are stablecoins. People, in the end, will need dollars to pay their rent and buy food for now. USDC serves a purpose. The one to one relationship between a dollar and a USDC token and its no-fee structure is very appealing. We made money on our last transfer from DAI to USDC. We are not doing that with large amounts. USDC is amazing, and I think it is the greatest thing Coinbase did in 2019. As a centralised exchange, you are an asset gatherer, and you want to get as many assets as possible. For them to be taking in all these dollars and issuing USDC, I am sure they are putting all these dollars into treasuries to earn a return on them.
Coinbase offering one-to-one exchange is great for us as a business; these fiat on-ramps are what I have been praying for. I am a liquidity maximalist; I want to move back and forth between assets with as tight a spread as possible. The cheaper you can make those transactions, the more possibilities you can create for payments, services, etc. Micropayments are interesting; if you can make it cheap enough for everyone to use it. The only variable is that I have not seen business logic embedded into the network yet. You can't just send value; to really make a material difference, we need to make smart contract functionality work and to have programmability. This is the long term argument for Ethereum, and the developers work in the community. The fundamentals are great, but we are at a black swan moment right now.
About this episodeAre you ready to learn about payments and fiat on/off ramps? Wyre CEO Mike Dunworth joins this episode with host Samuel McCulloch to discuss the future of payments, growing Wyre and the current market.
Michael's LinksTwitter | Crunchbase | Linkedin
SHOW NOTES FOR THIS EPISODE
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What to listen for* Why Fiat to Crypto on-ramps are so awful and how payment providers squeeze both sides of transactions. * How archaic payments rules punish crypto for being high-risk and increase transaction costs for fiat on-ramps. * Why payment providers are using data analytics (Googgle-style) to reduce fraud and underwrite risk. * Why everything comes back to device-based security and wallet security protocols. * Why changes in European payments regulation will make it harder to get credit as credit issuers become liable for fraudulent transactions, not your bank or merchants. * What Wyre will be focusing in 2020. * Why MakerDao should be more transparent about their near-term and long-term goals. * Why Bitcoin halving will create ‘buy the rumour, sell the news’ volatility as more people fight over reduced supply. * Why globally distributed teams are more productive than being in San Francisco.
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About this episodeThis is the third in a series of interviews with Dave Collum. Recorded Mar 11, we dive into the Coronavirus, bond apocalypse and the top of the market.
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Coronavirus is a catalyst for the house of cards coming down. * Why vaccines work and how antibodies released through live vaccines amplify survival rates and adaptive systems beyond our immune system. * Why the Federal Reserve cannot save us and has no control at all over anything as far as Dave is concerned. * The global financial system is not only too complex but also artificially engineered to such an extent it has lost its Darwin evolutionary ability to ‘cull the herd’. * Dave’s theory is 2015/16 was a recession, but Wall Street always has to put an adjective in front of problems. * Why controlled burns for forest management and for the economy are better in the long term for the forest and us. Recessions are necessary. * What is different now with recessions is how we qualify them, the term recession was invented so we could stop using depression. * You can get rid of potential energy either in one go or in small amounts, but either way, the energy needs to be released one way or the other. * Twin income trap and women entering the workforce has propped up total employment growth numbers since the 1970s. * If you want to shut down Coronavirus, what are you going to do after isolation? This is not a sustainable solution, and this is not an analogy to the flu. It will be with us for a long time. * When a Bear says to a boomer, 50% drop will take us back to normal market valuation; this means for Boomers, you will have 50% less revenue when you retire than you thought you would have. * Dave’s portfolio advice: pick a bond to equity ratio, and stick with it. * Why dumb money is destroying markets and good companies because there is too much money in the system. * Why CEO/Boards/Company Governance is an in-bred system, and this all needs to be cleared out in the great raging inferno we have now.
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About this episodeKain Warwick joins End of the Chain with host Samuel McCulloch to discuss synthetic assets on Ethereum, the growth of Defi and the future of crypto assets.
Kain's Links
Linkedin | Twitter | Crunchbase
SHOW NOTES
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What to listen for* Why Synthetix's end goal is to give people the ability to have price exposure to other asset classes while remaining on Ethereum. * How Ethereum solved the volatility problem in the crypto markets and unlocked its true potential through composability. * Why we all live with the tail risks inherent in these regulated stablecoins and the kill switches built into them. * How all on-ramps come with trade-offs and why these risks need to be discussed in DeFi. * Why Synthetixs wants to stay as permissionless as possible. * Why the challenges of providing security and guarding value are much much greater in DeFi than in centralised systems because of the lack of legal/regulatory system to fall back on. * Why Flashloans will take out protocols and platforms that are not robust or have weak points and how this is inevitable as DeFi matures. * How Synthetix’s implantation of a bitcoin bridge will be permissionless to avoid introducing systemic risk, regulatory capture and other attack vectors into the network. * Why a permissionless ERC20 tokenised version of BTC or Bitcoin will be a better user experience on Ethereum than just using Bitcoin today on a Layer 1 or Layer 2 solution.
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About this episodeStani Kulechov joins End of the Chain with host Samuel McCulloch to discuss dollarization on the blockchain, Aave, flash loans and the growth of Defi.
Stani Kulechov is the Founder and CEO of Aave, an open source and non-custodial protocol to earn interest on deposits and borrow assets. Stani was studying law at the University of Helsinki when he first got into Ethereum and he started exploring how it could impact the traditional financial system. In 2017, Stani released ETHLend, one of the first DeFi dapps ever. Since then, he has made it his mission to create tools for an open, transparent, and equitable financial ecosystem through Aave Protocol.
Stani's Links
Linkedin | Twitter | Crunchbase
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How the historical creation of banknotes mirrors the creation of collateralized dollars in DeFi. * How the integration of real-world assets into DeFi may reduce volatility in the long run but create systemic linkages to centralization. * Why Ethereum is a liquidity aggregator, and the next logical step is to create NFTs which represent real-world assets in DeFi. * Why DeFi is currently undergoing something similar to hardware format wars, ie. Blue-ray versus DVDs. * Why illiquid NFTs will need bigger baskets in order to create loan to value ratios. * Why DeFi is going to have to solve the question of how to provide under-collateralized loan problem with more than one transaction. * Why establishing a credit money system on Ethereum should be the holy grail of DeFi. * Why the ethos of open source, collaboration, and composability creates innovation on Ethereum and the network effect growth we are seeing in the DeFi space. * How Aave is working on governance in 2020 and beyond to create a truly decentralized protocol.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeBrian Kerr, Co-Founder and CEO of Kava Labs joins the End of the Chain podcast with host Samuel McCulloch to discuss cross blockchain liquidity provisions. Brian makes a great argument for why instead of protocol maximalism, we should all be "liquidity maximalists".
Brian Kerr is the CEO and Co-Founder of Kava, a cross-chain DeFi platform offering loans and stablecoins for crypto users and traders. Brian is a serial venture-backed entrepreneur who previously led a prominent esports and gaming company called Fnatic. Brian also serves as an advisor to several blockchain projects including Snowball, Akash.network, and DMarket.io.
Brian's Links
Linkedin | Twitter | Crunchbase
SHOW NOTES
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What to listen for* Why DeFi is so important because it creates digital dollars and allows for hedging positions. * How the biggest story this year is: DeFi found interest rates. * How Kava’s evolution will grow rates and on board cross-chain liquidity into their protocol as a result. * Why Kava has sovereignty over USDX and anything that is bridged into their protocol regardless which chain it came from. * Why we haven’t seen a flight of assets from one chain to another YET. * How Kava is creating a new monetary supply on top of the base layer that never existed before and in theory, why this should be more efficient than the base layer itself. * Why this credit layer built on top, made up of Kava and others, enables fungible assets to be created and how this is a game-changer for Crypto. * Why liquidity begets liquidity, and there is nothing more liquid than the US dollar. * How privacy should be the default in a perfect world but currently, only a small number of users will go through the extra steps needed to secure privacy within protocols.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeAndrey comes on the episode of End of the Chain with host Samuel McCulloch to discuss Incognito blockchain, a sidechain built for transactional privacy. He gives the run down about running a node, on-chain privacy and the growth of the network.
Incognito's Website
Products
SHOW NOTES
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What to listen for* How the idea for Incognito came about from a payroll use case for creating private transactions in stable coins. * Why Privacy should be an option for all digital transactions, regardless of which chain or protocol you use. * How Incognito works as a privacy sidechain that runs in parallel to the Ethereum network. * How its mint/burn proofs make transactions untraceable and prevent malicious attacks. * How Incognito decide to design ‘smart’ hardware and 'build' its validator network. * Why Incognito built a physical plug and play node and made this open-source for other projects to use. * What the team has planned for 2020 and beyond. * How DeFi makes privacy and the ability to shield financial transactions even more important as more and more assets move on-chain. * Why facial recognition will eventually allow your physical and digital identities to be completely traceable in a cashless society. * How Incognito’s newly created PDEX can be a sidechain to any protocol providing privacy to all.
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About this episodeDave Collum joins this episode of the End of the Chain with host Samuel McCulloch to break down his 2019 Year in Review. Dave is our most popular guest so far and for good reason. His witty writings are the highlight of my December. Dave and Samuel spoke for 5 hours and so this podcast will be broken up into a series of 3.
SHOW NOTES
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What to listen for* Why we seem to be stuck in 1984 and partying like it is 1999. * How Dave’s conclusion became an extrapolation for social change. * Why the Bond Market is in the biggest bubble in recorded history, but it doesn’t mean that the equity markets should be there too. * What the succession of financial bubbles never taught us and why the 2008 property bubble is still alive and well, and distorting the REPO market. * Why REPO madness matters in 2019 and beyond. * How Powell started washing US$ 100 billion into the system a day but it’s not QE. * Why the means of protesting around the world is changing and becoming leaderless through the organisational power of social media. * Why Dave believes the Epstein scandal is the biggest cover-up in US history. * Why every time the parties fail to take down Trump, he gets stronger.
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About this episodeDave Collum joins this episode of the End of the Chain with host Samuel McCulloch to break down his 2019 Year in Review. Dave is our most popular guest so far and for good reason. His witty writings are the highlight of my December. Dave and Samuel spoke for 5 hours and so this podcast will be broken up into a series of 3.
SHOW NOTES
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What to listen for Why markets are no exception to the chemist’s rule - when anything returns to equilibrium from a very unstable state, it does huge damage (you blow up the laboratory). * Why China’s massive debt to GDP credit bubble is hard to predict as there is no history of what happens in China when bubbles burst. * How 14% of the Fortune 500 cannot pay interest on their corporate debt with their cash flow, which means that they are insolvent and haven’t been downgraded YET. * Why if one entity owns all those loans left over from the financial crisis, and no one sells them on the open market, then this is distorting price discovery. * How MMT hasn’t a clue how to deal with inflation no matter what they say and that cutting the pie into different pieces is not wealth creation, nor is printing money. * How a sovereign state can actually save, in a world of long-running trade imbalances, and if that is even remotely possible. (Triffin's Dilemma*) * Why we are going back to the 1920's and the debate about whether we let the free market run society or whether we centralise decision making is coming back round again. * Why the battle is really between labour and capital; if you make capital free, you make labour cheap. * How this arbitrage drives the shortening product cycle and squanders resources. * Why the Fed does not have a shot clock for the economy and are burning up price discovery in their wake. * Why Dave thinks Bitcoin is only good for speculation in the background, like Dutch tulip bulbs, but the Bitcoin crowd is making progress with him. * Why Sam thinks DeFi is the best thing to be built on Ethereum yet and that it is an alternative to fixed income for better returns. * Why even when you have a really good idea, you still need confirmation bias. * How Dave was a bull in the 1990's, but the last decade was a washout because he didn’t even beat inflation. * Why there is no upside for Dave in taking big risks with his portfolio as he approaches retirement.
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About this episodeChris Roper joins this episode of the End of the Chain with host Samuel McCulloch to give the first official interview for Constant, a secured peer to peer lending site offering fix term loans for crypto. Constant is one of Samuel's favorite lending sites and he has written extensively about it before.
Constant Review
Constant's LinksWebsite | Twitter
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Constant became a P2P lending platform rather than just another project built on a stablecoin. * Why their mission to try to help people with their money and their assets has remained the same even as their platform has changed. * How Constant addressed the volatility problem in Crypto through over-collateralization, thus created secured loans. * Why Constant is truly a peer-to-peer customer-driven marketplace and how their fiat on-ramp sets them apart from their competitors. * Why new features like Pro and Flex came about in response to customer feedback and user experience. * How Constant developed staking as a service for customers and is support projects they are passionate about through staking. * What new features Constant are working on in 2020. * Why Constant believes in the need for transparency as a business for our customers who want it, and for the industry as a whole in order to get more people involved in Crypto.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeWhy is privacy so important for Crypto? Loong Wang, CTO of Ren Project, joins End of the Chain with host Samuel McCulloch to discuss the roll-out of his protocol. Starting with the topics of privacy and on-chain transparency, they explore what it means to conduct DeFi cross-chain. The second half of the show gets into why Ethereum will be an aggregator for liquidity, bridging other blockchains to access their liquidity and introduce DeFi products to all Crypto-holders.
Loong's LinksTwitter | Linkedin | Crunchbase
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Ren has transitioned from their initial focus on dark pools to functionality last year. * Why privacy seems to have so many layers and how metadata makes everything traceable in the surveillance economy. * How RenVM will allow Bitcoin to interact with DeFi, DEX or lending platforms in order to move value from one chain to another and why having shielded transactions through RenVM would preserve privacy. * Why the user experience should be protocol agnostic. * Why the price of self-sovereignty is the trade-off between understanding the security implications of holding your assets on different blockchain platforms and the risks being taken. * Why all the functionality is on the Ethereum network, but all the value and liquidity is locked up in Bitcoin. * How RenBTC will enable interoperability between protocols, DEX or centralised entities to transfer value between networks.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeThib brings his Bitcoin Maximalism onto the show to discuss taxes, regulatory arbitrage, central banks, and his company Kn0x.
Thibaud is currently VP Growth at KNØX, a Bitcoin financial services firm, focused on insured key storage with Initialized, and Fidelity Investments Canada amongst backers. Prior, he led portfolio services at Real Ventures, a $330M venture capital firm, and managed their national venture accelerator program. Thibaud created TechAide, raising over $300,000 for charity organizations with partners such as Google, Facebook and Samsung. Thibaud graduated from McGill University in Information Systems.
Kn0x's LinksWebsite
Thibaud's LinksCrunchbase | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why the market will always try to get around constraining regulatory frameworks and how taxation is not an exception to this rule. * Whether tax is necessary for a civilised society and how it could exist in a bitcoin-dominated world. * How central bank money creation has diluted money which distorts price signals for everyone. * Why there is not much governments can do about Bitcoin other than control Fiat on-ramps through KYC/AML. * How Bitcoin and DeFi’s approach to complex financial instruments and their creation in their network differs. * How Bitcoin can break the cycle of surveillance capitalism and create more transparency. * Why Bitcoin should be part of every millennial’s savings plan.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeIn this episode, Colin riffs on banking, defi and how crypto wasn't really interesting until interest rates came along. Colin popped up in Sam's fees when he wrote a great article about the inherent risks from Libra. Colin's background in finance gives him a great viewpoint on how this industry will develop over the next decade.
Colin has worked in distributed ledger technology and cryptocurrencies since 2013, launching efforts at BNP Paribas Global Markets, where he sat on DLT focused industry steering committees, including R3, the Post-Trade Distributed Ledger working group (PTDL), and FIX cryptocurrency working group. He became a technology entrepreneur in early 2016, initially working with digital asset derivatives. He has been the co-host of the Blockchain Insider podcast since 2017 (1.2m+ downloads). Currently an independent consultant for DLT and cryptocurrency, Colin works with a wide range of companies from start-ups to UK and US blue-chip companies, as well as government and industry consortium. He recently led a 40+ digital asset working group of financial institutions in Europe and North America, in collaboration with R3. Colin is a regular cryptocurrency conference speaker and panellist, and has been featured in the Financial Times, BBC Radio, the Block Crypto, Coindesk; quoted in Reuters, the New York Times, Capital (France), Risk Magazine, and Banking Tech. Prior to his involvement in cryptocurrencies, Colin held roles in business transformation, and structured product marketing at BNP Paribas in Paris, London and New York. He holds a Masters in Finance from EDHEC Business School in France, and Bachelors in Business Administration from Jönköping International Business School in Sweden.
Colin's LinksTwitter | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why cryptocurrencies exist in a world of regulatory arbitrage and what is needed long term for institutional clients to move into the space. * What the best and middle case for Bitcoin is at the institutional level long term. * How middleware Fintech development in DeFi is about secondary markets and layers built on top. * Why we need to be able to identify/price certain fundamental aspects of value in cryptocurrency in order to create pricing models like every other one-dimensional asset class whether it be equities, FX or commodities. * Why Bitcoin’s price is a demand function; the supply is already hard-wired in. * How using interest rates to define the time value of Bitcoin or Ether would bring a lot more value into these networks, instead of developing new protocol features or making transactions cheaper. * Why DeFi 2nd, 3rd, and 4thorder products could start to look a lot like historical CDOs (Collateral Debt Obligations) and how eventually building more leverage will result in scary high-risk products being created that people do not understand. * Why people need to think about the fundamentals of the DeFi market, not the happy path which is what developers focus on, and what could go wrong in a stress-test scenario. * Why seemingly minor things can have huge butterfly effects on our interconnected financial system's design.
SUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeKyle joins the episode to discuss bZx, Fulcrum, Torque and how his tokens are fueling the growth of Defi. Kyle is the founder of bZx, a decentralized protocol for margin tokens and lending.
bZx's LinksWebsite | Fulcrum
Kyle's LinksCrunchbase | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What was the genesis of bZx and how has it changed since the beginning. * Why the decision to productise changed their focus from just being a protocol to building DeFi products on top of this. * How their grand vision for tokenising it all created Fulcrum and Torque. * What the three challenges to token governance are and how they plan to address these in their shortly-to-be released governance paper. * Why platform linkages and permissionless building amplifies levels of risk in DeFi. * Why composability and the incentive of higher interest rates could create protocol linkages that result in DeFi platforms virtually merging. * Why DeFi needs to reference assets outside of the ecosystem or blockchain in order to achieve its loftier goals. * Why circular use cases in protocols are just a room full of cryptocurrency users exchanging money between themselves and this does not create value.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeDeniz joins the episode to go way deep on Kyber and how it is becoming the lifeblood of Defi. We spend a good deal of time breaking down what Kyber has planned for 2020 and how it will adapt to market trends.
Kyber's LinksWebsite | Swap Tokens | Blog
Deniz's LinksTwitter | Linkedin | Crunchbase
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Kyber works on a technical level and why different projects want to integrate this into their DApps/DEXs. * What the differences are between Kyber and other liquidity providers/projects that are aggregating value and distributing liquidity. * Where Kyber’s growth has come from since inception and where they are heading in 2020. * How Kyber is built into the middle, enabling anything in DeFi to be built on top of it. * What the top tokens traded by volume are on Kyber and which DeFi projects they find most interesting. * How demand for dollarized assets is fueling growth in DeFi because people want dollars.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeDoug joins the show to discuss Kadena, a new American blockchain project built with proof-of-work consensus, a formalized language and a multi-chain public network. We dig deep into what makes Kadena special and why it will separate itself from other projects in 2020.
Kadena's LinksWebsite | Whitepapers | Block Explorer
Doug's LinksGithub | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Kadena is a complete layer 1 blockchain solution based on proof of work that solves the scalability issue. * How Pact, their smart contract language was designed from the ground up to be a formally verified language for smart contract development. * How they built Multi-Sig keyset governance into their blockchain with client operations in mind. * Why their contract governance determines whether or not the smart contract is upgradeable and how this is readable on Kadena. * Why ChainWeb solves the scalability issue through multiple chain block hashing. * How Kadena’s ChainWeb distributes the hash power among chains using degree diameter graph theory to make all chains interconnected and therefore immune to 51% attacks. * Why Kadena’s great company culture comes from having founders with both technical background and business experience. * How hybrid blockchains as a form of middleware between private and public transactions and why there is huge potential for applications in this area. * How the US government is a monopsony as the one employer in the Washington D.C. area which creates a more level salary scale and compresses inequality.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeMatthew joins the podcast to talk about Loopring and how they are implementing zkSNARKs to build a lightning fast decentralized settlement network.
Matthew's LinksWebsite | Twitter | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Loopring’s DEX protocol built on Ethereum differs from their competitors. * Why their unique order matching model creates rings or combinatorial matching across disparate trades to find greater liquidity. * How Loopring version 3.0 takes everything off-chain using ZkSnarks to address scalability for high volume, high-frequency DEX trading. * Why ZkRollups create Ethereum level security off-chain before settlement happens onto Ethereum. * How Loopring’s smart contract logic stores the account balances on chain in Ethereum in the smart contract even though trades/orders happen off-chain. * Why their trustless setup matters and the differences between OptimisticRollups (recently launched at DevCon)/ZkRollups (currently used in Loopring). * Why we need to do a better job of communicating and reaching out to CeFi (Centralised Finance) people to explain DeFi and its use cases.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episodeZerion is the UX/UI for decentralized banking and DeFi. COO Vadim joins the pod to talk about the long history of the company, his ideas on DeFi and why Zerion will be the primary app for DeFi into the future.
Vadim's LinksWebsite | Twitter | Linkedin | Crunchbase
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Zerion is the DeFi equivalent of a Swiss army knife that integrates all your DeFi project tools together. * How Zerion monitors the market every week to aggregate different protocols and why it does not want to be the gatekeeper of DeFi. * Why Zerion aggregates public blockchain product/protocol data but not data about its users. * Why the best DeFi teams in the future should combine programmatic and finance people to create the best projects not just developers. * How ETH 2.0 will bring human creativity and ideas to the market but should not compromise on the trustlessness of the system as a blockchain. * Why the 3 components of DeFi do not yet apply to the Bitcoin ecosystem. * Why we need privacy features on DeFi. * Why Russia produce some of the strongest mathematician and code developers in the world.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
Donate to our Gitcoin Grant
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About this episodeCaleb is the founder of Blocklytics, an on-chain data analytics firm. In this episode we dive into the his history at Poker Stars, why working with onchain data is so difficult and how privacy will strengthen Ethereum.
Caleb's LinksWebsite | Twitter | Linkedin | Medium
SHOW NOTES
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How his experiences at PokerStars made him passionate about data as a way to optimize user experience. * His Ah-Ha moment in Crypto and how this led to the creation of Blocklytics.org. * Why he believes Poker is a solid starting point for solving the scaling problem on the Ethereum network. * Why extracting blockchain data is so difficult and how their APIs help simplify this process. * How they work with web 3.0 application clients to help them with their projects and data visualization. * How we can use data to help participants do their job in networks through incentivization based on data. * Why privacy needs to be addressed on the network to avoid a dystopian future. * Why on-chain historical transaction data should be separate from future transactions to ensure user-specific information remains private. * Why UniSwap is his favorite DeFi project after Blocklytics.org because it takes a very complex problem and simplifies it. * Why holding tokens is basically a price game for both Ethereum and Bitcoin, and how the rules of the price game changes when you have DeFi products.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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About this episode Hen is a founding partner of AlphaChain, a blockchain advisory and investment firm. This podcast was recorded in Washington D.C. at the end of November and we discussed life and growing up in the nation's capital, open borders, and the Hen's role in the blockchain community.
Hen's Links Website | Twitter | Linkedin | Youtube
SHOW NOTES
Where to find the show iTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for * How the gentrification of Washington DC, over the past 20 years has changed the city’s demographics and maintained its housing affordability. * How the black community differs in Washington, DC versus other American metropolitan areas. * How Hen got into the space and his Crypto-backstory. * How CMT/Crypto-Explorers were unique investment groups in the space through the ICO mania and beyond. * How Ethereum has changed over the past few years and where it is going in the future. * Why DeFi will be the disintermediation of finance and the manifestation of tokens that actually serve a purpose and address pain points. * Why the principles of freedom and self-sovereignty are universal to the crypto-space. * How Americans love to talk about race and why being an immigrant from Africa has defined him rather than being a black man in America. * How America has an assimilation culture that promotes individual freedoms and is the best place to implement the ideas within Open Borders.
Reference Material
SUPPORT THE SHOW If you like End of the Chain you can help support the show by doing one of the following:
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About this episodeSimon Greenman is the founder of Best Practice AI, an enterprise consulting firm that helps executives and boards integrate the technology into their existing business structures. Simon is also the Chair of the Harvard Business School Angels London chapter and has made over 100 investments into startup companies.
Simon's Links
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What the hype cycle around AI is, it's Utopian/Dystopian narrative, what is real and what is not. * How AI has exploded because deep neural networks (large pattern recognition statistics) enable machine learning through data ‘by itself’. * Why autonomous vehicles are the mother of AI problems; you need to solve so many problems at once for them to work and something not far off human ‘common sense’ to make them work safely. * Why AI in healthcare has the potential to transform disease diagnostics and early detection. * What gaps or metrics to use for AI companies when angel investing. * How the life cycle of an AI startup is different than other startups. * How do we think about privacy in the age of AI? * Who is going to be dominant in AI, and will we see techno-nationalism – a Chinese versus US versus European platforms. * Why it is always the case of the unknown unknowns - the unintended consequences that will happen with AI that we cannot predict. * Why we need to manage and regulate the adoption of AI and fourth revolution technologies to help us improve human life for the good of society. * How projects need to focus on data wrangling and data access not just use cases. * Why the constancy of change and being adaptable is the most important skill, we all need to have in the future world of work.
Reference MaterialApple Card Gender Problem
Uber NTSB Report
Tesla Summon Self-Driving incident
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About this episodePeter is the Co-Founder of Augmint, a decentralized stablecoin pegged to the Euro. The project is still in its nascent stage and Peter spoke with me at length about how he sees the project developing over the next few years.
Peter's Links
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
Your browser does not support the audio element.
HTML5 Audio Player What to listen for* How Augmint creates a new money system backed by cryptoassets as collateral. * How credit money on the blockchain works and their unique token system which maintains supply. * How are the interest rates are calculated and set by their monetary board who are elected by stakeholders. * How fixed versus floating collateral loan products in Augmint work. * We have fiat gateways where collateral in Augmint can be converted into Euro. * How they are different from their competitor, DAI and how Maker is taking 100% of Ether loans and this is their niche market. * What is the difference between credit money system and a collateralized stablecoin? * Why the challenge of new money is the financial technology and making it convenient. * Why crypto should not start by competing with payments or micropayments. * How Augmint could be multi-chain at some point in the future, but plans to stay on Ethereum for the long term. * What their exchange listing strategy is and potential use cases for the future.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
Make a Tip - Send me an email after so I can mention you on the show.
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About this episodeBrandon is the Co-Founder of Ampleforth, an elastic supply money, which adjusts supply if price moves outside of a target band. In a market filled with crypto variants, Ampleforth separates itself from the rest with its novel supply mechanism. New seniorage is distributed equally amongst holders, like a stock split.
Brandon also worked at Google Search and so we jumped into his experiences there and how the company is leading the way in Total Information Awareness.
Brandon's Links
Crunchbase
Angelist
Github
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What the economic structure of Ampleforth is and how it differs from Bitcoin. * Why Ampleforth is the smallest change to Bitcoin that is economically interesting. * Why the Ample has a price target and how that affects supply. * Why Amples will be volatile for a long time until mass usage comes about. * Why Ampleforth has volatility of both price and supply * How Ampleforth changes the game slightly of asset accumulation. * Why Bitcoin has no value and cannot be captured by any existing financial models. * Why Ampleforth had to adjust the smoothing parameter to increase the speed price returns to the target price band. * Why the creation of new Amples is akin to a stock split. * How Ampleforth can adjust the global supply of Amples without heavy gas costs. * Why Ampleforth is not in the business of creating Layer 1 blockchains and are chain agnostic. * How Uniswap interacts with Ampleforth and why it's different than any other smart contract interaction. * How Brandon and Evan met in 2014 and started Ampleforth.
Reference Material* Total Information Awareness
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About this episodeDominic is is a British author, comedian and voice actor. He joins the podcast to talk about his new book "Daylight Robbery How Tax Shaped Our Past and Will Change Our Future." We discussed how crypto will force governments how they collect taxes and the history of tax collection. Dominic puts forward a riveting account of money and taxes in his book. The story of money cannot be told without accounting for the history of taxes.
Buy Daylight Robbery: How Tax Shaped Our Past and Will Change Our Future on Amazon
Listen to the Audiobook on Audible.com
Dominic's Links
Personal Website
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why cryptocurrencies could break the tax system. * How our tax system evolved and what the future has planned for governments. * Why Hong Kong is the best example of a tax system in the world and the Authoritarian Libertarian Scottish man responsible for it. * Why we don't have simpler, easier tax codes. * Why the Peasant's revolt is deserving of a mini-series. * How international corporations exploit the tax system and what can be done to tax it. * How the gig/freelance economy is making taxation harder to enforce and why there will be a billion freelancers by 2025.
Reference Material* Peasants' Revolt * Hong Kong Financial Secretary John James Cowperthwaite * Meet the invisible hand behind Hong Kong’s rise - Article on Cowperthwaite * How Google avoids paying its taxes and sticks you with the bill. * The gig economy goes global.
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About this episodeBryan Caplan is the author of Open Borders: The Science and Ethics of Immigration. In this episode he blows away all of the arguments Sam put forward for closed borders. After listening, you will probably change your mind on open borders as well.
Buy Open Borders: The Science and Ethics of Immigration on Amazon
Bryan's Links
Personal Website
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why open borders will increase global GDP by 200% * Why the idea of open borders covers all beliefs and political views. * What the Justice and Abundance story is for immigration. * Why the social science shows that immigration benefits offset any negative aspects. * Why the United States should let in Antartican farmers. * Where immigrants typically move when the immigrate and how they diffuse into the United States. * How many immigrants would move to the United States and Europe if there were open borders. * How we can design keyhole solutions that alleviate the fears and concerns of native populations. * How mass immigration has helped China become a global superpower.
Reference MaterialSUPPORT THE SHOWIf you like End of the Chain you can help support the show by doing one of the following:
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Ethereum: 0xDAb148614f22dDa800cF006Be7932eeEB75AC644
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About this episodeWhat are the difficulties of starting and running a crypto exchange? Marius sat down for an hour to discuss Deribit, its creation, working with his brother and what lies next.
Marius' Links
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Marius got into Bitcoin with his brother and how they started Deribit. * How he navigates running a family business. * What his personality is and how it complement his brothers. * How he preforms his role as Deribit COO and what his tasks are. * What are are some of the challenges of growing a company from zero employees. * How he takes more risk in running business for growth. * How Deribit views soon to be launched competition. * What some of the differences between East and West are regarding crypto trading. * What Deribits growth plans are for the long term. * How Deribit caters to institutional clients.
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About this episodeKelly is the author of Soonish: Ten Emerging Technologies That'll Improve and/or Ruin Everything. Kelly discusses the impact of her book since its been launched, what technologies have come to use and what are some of the consequences and benefits of the ten topics covered in the book.
Kelly's Links
Personal Website
Buy Soonish on Amazon
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why the next human overlords will be parasites. * What society can define as technology breakthroughs. * What are the technology breakthroughs of the future. * How modern life is prone to lower birthrates and higher resource usage. * How humans eclipse the pressures of carrying capacity * Why Kelly is an optimist about the future. * Why launching material into space with nukes is probably a bad idea. * Why Kelly doesn’t get jealous of other scientists and what field she would pursue if not a microbiologist. * How she responds to high schoolers who read her book Soonish.
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About this episodeProof-of-work secures the Bitcoin network, but its security requires massive energy expenditure. Alex deVries explains how much energy is used and e-waste generated for every transaction. Alex is the founder of Digiconomist, which created the first Bitcoin Energy Consumption Index.
Alex's Links
Digiconomist
Alex's Twitter
FULL PODCAST TRANSCRIPTION
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What the environmental costs for Bitcoin are. * Why Alex create Digiconomist and the Bitcoin Energy Index. * Why Bitcoin mining machines cannot be recycled or repurposed. * What is the relationship between Bitcoin energy consumption and price. * Why ASIC production is Bitcoin's hashrate limiter. * How much energy Bitcoin mining would consume at 1 million per coin. * How much energy is consumed with every Bitcoin transaction. * Why Bitcoin mining does not use green energy and how seasonality affects pricing. * Why Alex thinks 7% of all Iranian energy is devoted to Bitcoin mining.
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About this episodeWhat is the real state of Chinese AI technologies and are they poised to surpass Europe and the United States as the world leader? Nina Xiang, founder of the China Money Network sits down to tell about her findings which she presented in her book "Red AI: Victories and Warnings From China’s Rise In Artificial Intelligence."
Nina's Links
Red AI Book Buy on Amazon
China Money Network Website
Show Transcription Notes
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What the inspiration for creating the book was and why Nina started the China Money Network. * What 4S/3L is and why it's the best lens to view Chinese companies through. * Why China is still behind the US in AI by many years. * How Made in China 2025 is affecting AI companies. * What role the CCP plays in Chinese companies and the effect it has on technology development. * Her thoughts on companies operating outside of the tier 1 cities. * Why Chinese politicians hold so much power in each region and can help make or break a business. * Her thoughts on the US tariffs and the harsh treatment of Chinese students abroad. * Why the Chinese Social Credit Score is needed, but is prone to data privacy breaches. * How robust data privacy laws can be enacted in China.
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About this episodePatrick shares his huge wealth of knowledge about trading. We delve deep into current movements of Bitcoin, the overarching macro events driving the economy between the US and China and the coming dollar shortage.
Patrick's Links
TradeLayer: tradelayer.org
Twitter: https://twitter.com/duganist
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What the five levels of trading are and how you can progress through them. * How Tradelayer is creating a decentralized clearing house. * Why open interest is the most important value for crypto derivatives. * Why crypto derivatives are the future of banking. * Why the Ethereum Pump and Dump was a Divercion! * Eurodollars and Tether, there isn't much difference and why they 100% don't have the assets to back up USDT. * Why the future of banking includes Bitcoin.
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About this episodeAleksander is the founder of Amber, a Bitcoin dollar cost averaging app for Australians. We debate Bitcoin, it's impact and what the future holds for the cryptocurrency.
Aleksandar's Links
Amber: https://getamber.io/
Medium: https://medium.com/@AleksandarSvetski
Twitter: https://twitter.com/alekssvetski
FULL TRANSCRIPT OF EPISODE
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What his first principles for Bitcoin are and how they drive his business. * Why everyone should have some exposure to Bitcoin. * Why he thinks everyone should think about adding Bitcoin to their portfolio. * What the problems with Bitcoin custodians represent. * Why he thinks Bitcoin is digital gold and why holding physical gold is a bad idea. * How Bitcoin will provide privacy in the second layer. * What the benefits of a Bitcoin ETF will provide retail investors. * His rebuttal to my claim that Bitcoin has no intrinsic value.
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About this episodeThe host of MacroVoices Erik Townsend joins me for a discussion about his book Beyond Blockchain: Death of the Dollar and the Rise of Digital Currency. We discuss the coming implementation of Central Bank Digital Currencies and the effect they will have on the world.
Erik's Links
MacroVoice's Website
Buy on Amazon: Beyond Blockchain: The Death of the Dollar and Rise of Digital Currency
Book Description
FULL TRANSCRIPT OF EPISODE:
https://www.endofthechain.com/show-notes-erik/
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why the crypto crowd only half achieves their objectives. * Why Bitcoin is a weapon against the traditional monetary system. * Why programatic money is a boon for governments and how they will abuse it. * Why central bankers are just waking up to digital money. * Why Erik thinks Bitcoin and other cryptos will be banned. * What the dangers of Facebook launching Libra are and why it's such a powerful tool for Mark Zuckerburg. * The ins and outs of Libra as a new global currency. * The connection between Alfred Nobel, Bitcoin and Ethereum. * The history behind private money issuance in the United States and why it was banned. * A glimpse into the connection between the FAANGs and the United States government in their quest to build a digital currency. * How Bitcoin can undermine central banks. * The role of gold in creating a new global digital currency and why Russia and China are so interested in building their reserves.
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About this episodeIn this episode, Grant and Samuel chat about IEOs, ICO's, IDOs and every other three letter acronym connected with crypto. Grant tells how he became a crypto specialized lawyer and we discuss Kin, Tether and Libra coin. At the end we talk about China and its relationship with Crypto.
Grants Projects and LinksCo-founder & Producer, The CryptoLaw Podcast (http://www.cryptolawpodcast.com)
David Gerard has also been on this podcast too – so that is quite funny. I had no idea.
Co-founder, Tokenicide! Crypto Reviews & Commentary Site (https://tokenicide.com)
Co-founder, Antipodal Talent 美中人才 (http://antipodal.com)
List of links & published articles:
https://gulovsen.io/ieo-market-crash/
https://medium.com/valuetokenized/czo-e0d887003fce
FULL TRANSCRIPT OF EPISODE: https://www.endofthechain.com/show-notes-for-grant/
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How grant got involved with crypto law and ICOs * Why he thinks the actions of the SEC have been methodical and and for a reason. * Where the most friendly jurisdictions are for crypto companies and why they are so expensive. * Why he thinks IEOs are so popular right now and how they are looked upon by the SEC. * What his thoughts on the Kin legal case are and why they will eventually settle. * Why he thinks China is a driving force for crypto and the differences between East and West attitudes. * Why he hopes for the best and expects the worst with Facebook’s Libra coin. * Why he believes the PBOC is about to launch a cryptocurrency of their own and his skepticism about it. * Why Tether is the one topic all crypto people know is screwed up, but use it anyways. * His thoughts on the rise of China and the response of the United States. * Why he doesn’t see Bitcoin stopping and continuing on for eternity. * How his legal background affects his crypto investment analysis.
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About this episodeIn this epic interview, David Collum sits down to chat about his Year in Review. Moonlighting as a professor of Chemistry at Cornell, David keeps encyclopedic records of all events that occured through the year and then compiles it all into a massive review. Please give his 2018 review a read before listening to understand all of the topics that we speak about.
Year in Review 2018: https://www.peakprosperity.com/blog/114635/2018-year-review
Twitter: https://twitter.com/DavidBCollum/
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How community, social politics, and group dynamics are driving the mindset of today’s youth. * What David sees on the front lines of the culture wars at Cornell University. * Why heterogeneous groups are not cohesive and there is a price to pay for inclusion. * His theory on students post-2014: how their persistency is shortening, peripheral vision is narrowing, and learning is to know it, not to look it up. * Why infinite content is a problem. * Why the internet is the beginning of totalitarianism or the greatest instrument for democracy. * Why authenticity is what drives listenership for podcasts. * Why pensions are under-performing so badly due to criminal behaviour in pension funds. * What David would do to fix the Fed. * David’s demographic model and is it possible this time it can be different? * Equities are 2x overvalued, but does anyone care? * Why inflation is what destroys society and why food pricing creates huge unrest. * Why the bubble of everything makes asset ownership out of reach for Millenials. * Why the Fed has such aversion to deflation and why it’s the cause of all our problems.
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About this episode Neyma Jahan is the Founder of Unification, a distributed ledger technology designed specifically for real-world enterprise and consumer adoption. Unification uses a hybrid public/private blockchain design to enable easy integration into existing commercial and enterprise uses.
Unification's Website: https://unification.com
Unification's Whitepaper: http://go.unification.com/whitepaper
Neyma's Medium: https://medium.com/@Neyma
Twitter: https://twitter.com/neyma
Where to find the show iTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for * What makes Unification so powerful for enterprise use. * Why Neyma is not trying to create another Bitcoin or Ethereum. * How his previous experience in Enterprise technology led him to blockchain. * How he got into the market in 2018 and what he thinks about tokens. * How he started the company and why he's working in Thailand.
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About this episodeDavid Gerard is a crypto skeptic and author of the book, Attack of the 50 Foot Blockchain, an insightful read into the history of Bitcoin and other cryptocurrencies. Make sure to check out David's blog where he reports on the spectacular events surrounding the industry.
David's Blog: http://davidgerard.co.uk/blockchain/
Twitter: http://twitter.com/davidgerard
The book: http://davidgerard.co.uk/blockchain/book/
David's Patreon : https://www.patreon.com/davidgerard/overview
Additional Plugs
Amy Castor
Blog: https://amycastor.com/blog/
Patreon: https://www.patreon.com/amycastor/overview
What to listen for* How David found out about Bitcoin and how he started blogging about it. * What his biggest surprises are after reading the book. * Why the chapter on Bitfinex needs its own book. * How he came to write the book and his plans for the next book on ICO's. * What he thinks are the two worst ICO's ever to occur.
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About this episodeBeniamin is the CEO and Co-Founder of Elrond, a SPoS blockchain set for launch in the next few months. Elrond recently launched their testnet and they are implementing some very cutting edger tech in their protocol. We met in 2017 and it was great to finally get Beniamin on the podcast.
"Elrond is a novel architecture which goes beyond state of the art by introducing a genuine state sharding scheme for practical scalability, eliminating energy and computational waste while ensuring distributed fairness through a Secure Proof of Stake (SPoS) consensus"
Elrond website - www.elrond.com
Telegram (EN) - https://t.me/coinflex_EN
Elrond's Whitepaper - https://elrond.com/files/Elrond_Whitepaper_EN.pdf
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why Beniamin started Elrond and what its purpose is. * How he discovered crypto and his first experiences with being apart of the launch of NEM. * Why he thinks Elrond is the next big thing for crypto and blockchain technology. * How he got his brother involved with Crypto and who makes the ultimate decisions when things get heated. * Why the company is based in Romania and how it makes them a future tech powerhouse. * What his future predictions for Bitcoin are.
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About this episodeMark is the CEO and Co-Founder of CoinFLEX, a physically delivered futures exchange. CoinFLEX is a newly launched exchanged that will change the way miners, funds, and other institutions trade and interact with Bitcoin and crypto. We talked about why CoinFLEX is special, what Mark's growth strategies are and why Asia is the most important market for CoinFLEX.
"*CoinFLEX (Coin Futures and Lending Exchange)* is the world’s first physically delivered cryptocurrency futures exchange, developed for investors to hedge cryptocurrency exposure with zero index or settlement manipulation risk."
Mark's LinksCoinFLEX website - www.coinflex.com
Telegram (EN) - https://t.me/coinflex_EN
Mark's Linkedin
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why physically settled futures are such a powerful instrument and who will use these futures. * What the benefits of physically delivered vs cash settled futures are. * How Mark learned from starting the first UK exchange Coinfloor. * Why TT is so amazing for futures trading and how Mark formed the relationship with them. * Why Asia will be CoinFLEX's main client and what will drive adoption from the region. * What are the reasons for being a regulated versus unregulated exchange. * How CoinFLEX incentivizes their market makers, makers and takers on their exchange.
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About this episodeMatt is the CEO and Co-Founder of Dispatch Labs, a decentralized distributed enterprise focused protocol. We met back in 2017 and Matt has a great energy and outlook on crypto life. We talk about his newly launched protocol, current politics in the United States and the exploits of the crypto community.
Matt's Linkshttps://www.dispatchlabs.io/
Dispatch Labs' Whitepaper
Matt's Linkedin
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* What Dispatch Lab is and why it is built for enterprise use * What it is like for companies to integrate Dispatch Labs into their current architecture. * What Matt's views are on the similarities between the original tech bubble and the 2017 crypto bubble. * What companies control content distribution on the internet * What problems there are for content distribution and how Dispatch Labs is providing value at the analytic layer with zero knowledge proofs. * Why Dispatch Labs will be the biggest data broker in the world that holds no data.
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About our SponsorAdara is a security and utility token exchange, designed to make traders better. The world class technology of the exchange is paired with the Adara Academy, a place where traders of all levels can learn, teach, and interact with other community members.
About this episodeOleg is the founder of CB Capital and Crypto Bazaar. He has been working and investing in startups for almost a decade. We sat down and spoke about what his fund is pursuing, peculiarities of operating in Russia and his thoughts on the current crypto market.
Oleg's Linkshttps://cryptobazar.io/
Oleg's Linkedin
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for * How Oleg got involved with crypto and ICOs through Crypto Bazzar * What his initial impressions were of working with blockchain startups * What his opinion was on the difference in blockchain companies between 2017-2019 * What the problems facing Russian startups were before the ICO boom * What his views on the current trend of IEOs are * How he is preparing for the upcoming Russian crypto regulations * How Russia can become a developer power and the difference between working the in the USA and Russia
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About this EpisodeAlexandra is a former attorney for the SEC and currently provides consultation and legal services to crypto focused companies. She gives some very clear insight into what the SEC is thinking currently about crypto, ICOs, and other issues in the space.
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* Why the SEC already has given all of the tools to crypto companies. * Why regulations are clear for crypto companies to operate. * What the role of the SEC is and who they actually protect * Her thoughts on current regulations and future possibilities. * Her experiences working as a SEC attorney and how she is helping crypto companies now. * What her upcoming project is and why she is writing a book.
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About this EpisodeGrowth is a problem for blockchains. They don't scale well and are expensive to use. It's all part of the Scalability Trilemma, which forces blockchain developers to choose between Scalability, Decentralization and Security. Nick White, Co-Founder of Harmony blockchain sits down for a long interview in this debut episode.
Where to find the showiTunes | Spotify | Stitcher | Youtube | RSS Feed
What to listen for* How Nick met the Harmony team and how the project was started. * What his background is and how it led him to blockchain. * His first introduction to blockchain technology and why he dismissed it. * Why he thinks Harmony is going to change the landscape for blockchain technology. * Why FBFT is essential to Harmony and how it works. * Why he believes anyone should be able to run a Harmony node and what the requirements will be to do so. * How VDF secures their blockchain from attacks.
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