Blockchain Insider Ep. 26. Holiday Interview Special - Tim Swanson, & Somil Goyal Adjoint FILE DETAILS Audio Length: 00:59:12 Audio Quality: Good Number of Interviewers: 1 Number of Interviewees: 1 Start of Audio ST: We are… not here at 11FS Headquarters, because it’s the Christmas break, so we’re bringing you a Christmas Special, an Interview Special, and Colin G Platt, G-Sass himself, spoke to the one and only Tim Swanson about 2017, what happened, and a year in review. Colin, can I lead you and Tim to an interview? [Break] CP: So, I’m here with Tim Swanson, the founder of Post Oak Labs, and ex-R3 employee, as well as world renowned commentator for everything that is cryptocurrency and blockchain. Thanks for coming on, Tim. TS: Thanks for having me. CP: So, Tim, you and I were having a few different discussions about what’s been going on in the industry, and, kind of, what’s happened in 2017, 2018. You put out a couple of interesting blogs about cryptocurrencies, but you’ve also talked a lot, and you’ve had a lot of experience within the permissioned blockchain, or DLT, world. Can you tell us, kind of, briefly, what do you think’s happening in the industry, specifically within enterprise-type stuff with blockchain, and then a little bit about what happens in the cryptocurrency world? What are the startups out there that people are looking at? What’s interesting? TS: Sure, and, yeah, for the listeners that have been just diving in to this, the last month or so, if you’re not familiar with this “blockchain” related ecosystem, it’s really bifurcated in to two distinct groups. You have those working on enterprise, or institutional related activities, and that’s typically the automation of-, of infrastructure, IT infrastructure, and there’s about a dozen or so vendors in that space, if you want to call it, even, a space. It’s still very small. And, just so, I could-, you know, I’ll rattle off some names, again, I’m not endorsing companies, I’m just saying, these are the players that are worth looking at in three specific cities. And obviously there’s-, there’s more companies outside of these cities, but I just wanted to point out those, for people looking to do homework over the holiday break. So, let’s start with London. I would say SETL, SETL.io, Cobalt DL, Clearmatics, and Rise Financial (ph 02.15), would be four out there, and, full disclosure, I am an advisor to Clearmatics. In New York, I would say that Symbiont, Axoni, DAH, or Digital Asset, and R3, are four companies worth looking in to, and, again, full disclosure, I am an advisor to R3 still. And then, in-, in San Francisco, because everyone likes talking about the west coast, I would put PeerNova, also include Chain, although my understanding is they are likely moving away from enterprise to-, to look at some other market segments, and then Ripple also has a series, or a set of products, focused on enterprise institutional use. So, that’s 11. The 12th company, actually, is ConsenSys, in its subsidiary called ConsenSys Enterprise. They are not just based in New York, they have, you know, their headquarters, basically, in Brooklyn, but they’re global, they have operations around the world, as do some of these other companies, as well, but if you-, yeah, if you look at headcount of those 12 entities, you’re maybe just under 1,000 people altogether. Collectively, they’ve raised, maybe, $450 million or so, so, even though you’ve had a lot of interest and hype in the enterprise side of things over the last couple of years, you haven’t seen the amount of investment, at this stage, that maybe one would expect, and part of that is because of maturity, and we-, you and I could probably spend all day talking about the different platforms that these vendors are building, and it wasn’t until, just, you know, basically a couple of months ago, that most of these platforms hit, or at least self-, self-certified that they’re version 1.0 mature (ph 03.58). In fact, Gideon Greenspan has a new article out today, from CoinDesk, talking about where did all the private blockchains go? Gideon is the CEO of a company called Coin Sciences, based in Israel. You know, I could include them in this, and I should, but, again, I was just talking about the three cities, the three large cities. So, he’s based in Israel, they have a company that’s building a product called MultiChain, and it’s-, I guess, the direct competitor, in terms of-, as a vendor, would maybe be something like Chain, because they both were based off of Bitcoin. Anyway, he made a good point, you know, in that article, that it’s been really tough and difficult for, you know, vendors to be able to walk the walk. You know, it’s really easy to go on stage, and make a lot of noise about how market operators will be removed from the entire, you know, chain of custody, or chain of transactions, in the financial markets today, but, to be able to actually do that, assuming that that’s a good thing, or legal thing to do, trying to actually do that in practice is much more difficult than most vendors probably anticipated. So, I’ll pause there, before we go in to the cryptocurrency world. Did you have any-, any follow ups on that point? CP: Yeah, no, you said a couple of really interesting things in there. So, the first is, kind of, that last point you made, which is, Gideon talked about, you know, what’s happened with all this, and this is something we noted on the show a few weeks ago, that a lot of-, a lot of that may just be people putting their nose down to the grindstone, and trying to get to work. We saw the fantastic announcement from Blythe Masters, about a week ago, or, sorry, two weeks ago, that they’re going to go ahead and build something with Digital Asset. We also heard something in early December, with David Rutter coming out and saying 2018 is the year of production. It seemed like 2016 was the year of the noise, really, so everybody was talking about raising money, and what they were going to do, and, when it really comes down to it, a lot of the things that these companies are building aren’t-, aren’t scary, per se. They may change things, and that may result in some people losing their jobs, or needing to move around in what they do, but we’re not fundamentally talking, in enterprise, about wholesale removing of intermediaries, which runs kind of counterintuitively to a lot of the notions that cryptocurrency people, who are promoting things like Bitcoin, talk about. How is it that enterprise blockchain has come to really be, how to become more efficient, rather than, how do we completely disrupt, for lack of a better word, these intermediaries? TS: Yeah, no, it’s-, it’s interesting you mention that, because I remember, distinctly, in 2015, talking to various people, including, you know, Robert Sams over at Clearmatics, obviously the R3 team, and some of the other vendors that are-, that are still around, that have managed to, you know, weather this noise storm, if you will, and really, you had a spectrum of, then, as you do today, of views, in which some proponents said, “Hey, we are going to not only use these tools to automate and improve existing infrastructure, but we will remove intermediaries.” Complete groups of intermediaries. And, like, I don’t want to put words in his mouth, but I guess Robert Sams’s view would be most aligned with that, and-, but even if that’s, kind of, what your long-term, at least, prediction, or view, may be, in the short run, institutions, including something like a clearing house, CCB, or something like that, is not going to disappear, simply because of legal reasons alone. Like, in order to-, only certain entities can hold securities, only certain entities can do actual settlement of cash. So, if you’re a central bank, or if you’re a CSD, those are your, I don’t want to say babies, but that’s what you will do for the foreseeable future, irrespective of whether or not there’s technology that can do those functions and remove you. So, again, I don’t want to say-, I’d like to think I’m fairly neutral, in the sense that I’m not saying what will happen, I’m saying that you have these different views, and you have those that are trying to be pragmatic in their approaches, and those are the ones who have basically survived to this stage, because they’ve been able to, effectively, work with regulated institutions that have those, you know, custody relationships, or services, themselves, that aren’t going to disappear. So, if you’re a two-man startup here in the bay area, I’m, you know, based in San Jose, if you think that you could build infrastructure, or FMI, financial market infrastructure, to-, to replace these institutions, maybe you could, from a technical standpoint, but from a relationship standpoint, from a legal standpoint, from all these different-, all these different stakeholders that you need to-, you need to talk to, before you do that, most are probably too late to that game. And that’s not to-, I don’t want to dissuade people who are listening to this, that they shouldn’t be entrepreneurs, trying to improve, or-, or even replace existing infrastructure, but it’s a big game of snails [laughter]. It’s not something that goes by very quickly, on purpose, because you don’t want to replace infrastructure that hasn’t been tested with experimental stuff overnight, otherwise it could break, and you have, you know, upwards to several trillion dollars. Just to give a figure, the Federal Reserve published a paper last year, last December, on distributed ledger technology, and they said that there’s, in the US alone, there’s 600 million payment clearing and settlement transactions, worth around $11 trillion. So-, and that’s in a given day. So, disrupting that, as people like to say in the bay area, it means something different than, you know, accidentally breaking it. If you break that, you end up with law suits, people end up in poverty, potentially, because their life savings are destroyed. So, you know, there’s a very meticulous approach that these vendors have had to go through, they can’t just break things fast and ask for forgiveness, like Uber and these other-, other, kind of, companies out here have tried to do. They truly have to work hand in hand with regulators themselves, and those that they work with, such as regulated financial institutions. CP: And I think that’s a really interesting point, that a lot of people, kind of, glance over. I mean, the model of Silicon Valley of, you know, running and breaking-, breaking things, is okay, when it’s, you know, you might lose all the data in your app, or you might not be able to order a taxi today, but it’s different if you’re talking about your grandmother’s life savings, or you’re talking about your company’s ability to pay-, pay its staff every month. The stakes are very high here, and we need to think about how we do these, and a lot of-, a lot of intermediaries in the financial industry exist for a good reason, and aren’t just a cost on society, they actually provide a lot of beneficial services. Now, one thing that I’m really curious about is, having worked in this-, you know, a variety of different companies, and advised companies on this, permissioned blockchains. We know they’re not for disruption, they obviously aren’t cryptocurrencies, in themselves. What is it that they do well, and why are we interested in them? Why can’t we just use a regular old database? TS: [Laughter]. Yeah, it’s funny, it’s still-, I wrote a paper, for the listeners that are interested, I wrote a paper over two and a half years ago, called Consensus as a Service, and it basically popularised the term “permissioned blockchain”. But that term actually came out the month before, so, I wrote that paper April 2015, Robert Sams is actually the guy who coined the term “permissioned blockchain”, he gave a presentation, I believe at an event, a meetup in London, in March 2015, and the idea is this. Richard Brown does a really good job articulating this. In fact, I would say the CTOs of most of these vendors typically do a pretty good job articulating why-, why there’s a need for these-, these platforms, if you will. The bottom line is this. From a political and security standpoint, most banks would not feel comfortable with allowing one entity, or a bank, such as a competitor of theirs, to run a database in which all their information is stored, or managed, or operates on top of. So, as a result, you have-, well, there’s a lot of reasons why you have the current market structure the way it is, but, fundamentally, if banks aren’t going to allow one specific bank to run everything, and the current infrastructure looks the way it does today, how can you, in the meantime, before this nirvana world that everyone’s always speaking about, how do you get to a stage in which you can still use pieces of this technology in a very practical way? So, that’s to say that, if you could create a shared ledger between institutions, then they could have the optics, and the transparency that they all have been talking about the last couple of years, but without having to necessarily depend on, you know, one entity to run it all. So, you know, again, Richard Brown has posted a number of articles on this, on his website, gendal.me, and, for those who are very sceptical of “permissioned chains”, you can be as sceptical as you want. Bottom line is, if there’s a way to automate and create better transparency and visibility in to transactions, and how the entire flow of processing takes place, banks will spend the money to get there. They’ll spend $1 billion to save $2 billion, or something like that. And we could talk about numbers all day long, the post-trade world, but, if you guys are interested in seeing that sketched out in, kind of, the post-trade world, I also recommend looking at some of the things that Axoni’s been talking about, or at least that they’ve been actually doing. I’d say that they’ve been very quiet, overall, but they’ve probably been doing quite a bit more work than, if you look at 2015, for certain, a lot of the people putting out press releases, that haven’t been able to actually build out the infrastructure. So, the short answer is, anyone that is building databases at large scales is also looking at the-, or trying to build out utility, using this technology, SAP, Oracle, IBM, Microsoft, all the large enterprises have teams dedicated to working on this, all the large Cloud providers, like Amazon and Microsoft, also have teams dedicated to this. At the end of the day, maybe this all falls under the database category, and I’m not religious about the actual terminology, it enables companies, and especially regulated institutions, to be able to continue to exist, and, in the current world, provide better optics. And again, that was just a really, really, you know, really short way of trying to describe what someone like Richard, or Robert, have done really well in the past on the show. CP: No, and I-, I would encourage anybody that’s curious, and trying to understand that, to go read what Robert and Richard, and what you, have put out about that. I guess, what you said begs one question to me, is, do you see enterprise blockchain being, kind of, the end? Or is it a means to an end? What I mean there is, are people talking about moving in to DLT for the next 10 to 20 years, and eventually they’ll move on to permissionless, like a cryptocurrency-type blockchain? Or is this, the holy grail is the DLT, the permissioned blockchain itself? TS: I-, I’d like to say both, in the sense that, a lot of the reasons people are-, are building this type of tech, isn’t because they don’t want to, you know, experiment with something that’s like a cryptocurrency, assuming that that’s desirable, but it’s really because of the legal and political, I guess you could say containerisation, that these enterprises operate under. So, like, I remember reading William Mougayar’s book, a couple of years ago, and he had this diagram on one of the pages in the middle of the book which showed how constrained thinking that financial institutions had, because they’re playing around with permissioned blockchains, instead of, you know, working around in the cryptocurrency world-, look, the problem is, is they-, from a settlements perspective, alone, they need settlement finality, and you can’t get settlement finality under existing , you know, proof of work based cryptocurrencies. It’s always going to be probabilistic, and that’s not good enough for institutions that are legal-, and from a regulatory standpoint, have to have definitive settlement finality. So, I mean, if you-, CP: Can we break that down really quickly, for-, for the listeners that don’t know what that means. So, settlement finality is effectively, if I were to send you something, at this given point, because we’ve passed this step, that thing I handed you is no longer mine, and it’s now yours. And when we’re dealing with large sums of money that’re moving very quickly around the globe, that, you know, split second, and that step of finality is very important, because if I am moving money every second of the day, if, at some point, I go bankrupt, you want to make sure that money’s in your account, and I can’t take it back. TS: Exactly. CP: Blockchains-, permissionless blockchains can’t necessarily promise this, because even if it is a theoretically very small risk, the fact that your transaction doesn’t settle, or confirm, in to a block, or maybe that block’s overridden at some point in the future, leaves that up in the air, so we can’t say, “At this given point in time, there is a definitive, this thing has passed from my hand to your hand.” TS: Yeah. That’s-, that’s a great way of describing it, and, in fact, some of my clients right now-, so, I have this advisory company, and about half of the clients are doing enterprise related stuff, but the other half are doing cryptocurrency related stuff. Either they’re, you know, buying, selling, trading, they’re interacting somehow with existing cryptocurrencies, or they’re working on building some of their own, and one of the clients right now that I’m working with is a regulated institution in the UK, and they have a whole fork policy in their documents, because of all the different forks that have taken place in the past year. I remember, up until the Ethereum, you know, hard fork last year, you know, you had a lot of people saying, “Oh, forks will never happen, because the minority chain will be removed,” but what happens-, and obviously that’s empirically untrue, we’ve seen Ethereum Classic continue, Bitcoin Cash, and all the different Bitcoin, you know, airdrops in the last couple of months, but the-, if you had a, you know, a derivative, or some kind of-, some kind of financial instrument that matures after 30 years, and it ends up on a minority chain, what happens to the financial performance of that? Do you have to reissue it? Do you have to cancel it? So, these aren’t, like, simple, like, you know, handwavy issues that the cryptocurrency community has resolved. In fact, they’re still having issues. Look at the Parity, you know, wallet issues, in which you have over $100 million stuck on a-, stuck on a contract that was killed by some random guy on the internet. So, where’s the accountability? If you had $1 billion, $1 trillion worth of assets that were put on a contract that ends up being killed by some random, unaccountable guy on the internet, who’s-, how does legal recourse take place? So, again, we could spend all episode talking about the enterprise side, and why it’s-, it’s been so slow, to get to where it’s at, you know, relative to the expectations that were promised a couple of years ago, but, you know, it’s not an easy process, you have to do the requirements gathering, and then, eventually, you have to build an ecosystem of independent developers, otherwise you’ll just be vendor-dependent on one group of people, and maybe they could do that, but it seems like, you know, ecosystems, just like in the regular software world, will decide who wins in this world, too. Maybe, obviously, there’ll be multiple different ones, but, at the same time [laughter] if you have to rebuild all the applications yourself, with a team of, like, 20 people, you’re just not going to be able to do that. There are so many different types of financial applications out there. CP: No, and I think the other thing in there is, a lot of the ways that you build these things are very new, and very different, from something else, and the stakes are much higher. I was talking to a company recently that was saying, you know, inside of banks, they’re very used to building everything in house. Well, in a bank, if you get a risk model wrong, yes, you may, you know, accidentally send a message that you didn’t want to send. Most likely, that won’t cause an issue. Maybe, that could make a trader do-, make a wrong decision, but there are still some stop gaps in between there. But if you, all of a sudden, lose your private keys, because you’ve coded something wrong, you could potentially lose millions, if not billions, of dollars inside of these things. So, it’s very scary on-, thinking about trying to recreate these with very small teams, and it, as you say, until you, kind of, have an adoption in the developer community, it’s going to be very hard, in my opinion, to see enterprises move in to this technology, in any really meaningful way, outside of a few little spots here and there. TS: Sure, and I guess we could kind of segue in to, you know, the cryptocurrency side, at this stage, because you talk about private key management and stuff, but, before I get to that, though, I think it’s worth pointing out that, you know, some people may comment saying, “Hey, there’s already existing market operators that everyone already trusts, to service that counterparty.” So, CLS, you know, Continuous Link Settlement, provides FX for, you know, dozens of commercial banks. You obviously have all the different clearing houses, CSDs, central banks themselves. One argument is, “Why can’t they just-, why don’t they just run the system in which everyone else trusts, and does it?” They do, and maybe, in fact, they do become the operators of these types of, you know, “blockchain networks”. That’s obviously all speculation, and I-, I can’t, you know, guess about, you know, whether or not these entities will be replaced, or will change-, change their own operating model, but, you know, that’s something that, obviously, you’ve spent a lot of time looking at, with ÐPactum, but, to the point where people say, “Hey, why don’t-, well, how is this any different than a database?” at the end of the day, I don’t think that we should, you know, spend time arguing about, you know, in a religious way, about what the actual term is, if it is a database or not. Bottom line is, who operates, and who has optics in to it, and who has control of those keys, and the ability to-, to reorganise transactions, and so forth? And so, I think that the utility that comes from that is a very much separate discussion, versus the terminology that everyone likes to spend time on Twitter yelling about, which then ties again in to the cryptocurrency world. But yes, did you have any thoughts? I mean, since you-, since you, actually, if you don’t mind turning the table on to you, what’s your perspective on the intermediaries? If we have time for that. CP: I mean, I think, in my opinion, right now, the way I like to break it down is to talk about when-, when ecommerce first started moving from, what we like to call bricks and mortar, before when we had great buzzwords, in to virtual storefronts, and I think that we’re going to see something similar with intermediaries where, right now, a company like the CME, which is in the news, Chicago Mercantile Exchange, runs their frontend platform that clients can plug in to, they run the backend, they run a lot of technology, to effectively offer a few services and solutions to their clients. In the future, you might be able to outsource that out to either a syndicate of companies that work together, offering exchange and clearing house products, or to, potentially, these open blockchains, the cryptocurrency type networks. You know, I don’t necessarily have a timeframe on that, and I don’t know whether you’re going to go all the way up to the cryptocurrency network, but I think it is an interesting idea, where you say, you know, for the same way that stores don’t need to go out and rent or buy a building, and house everything on a very expensive street in New York, they can just have it in a warehouse someplace in New Jersey, or in Milton Keynes, in the UK, that sells to clients and delivers straight to their home, through infrastructure like the Post Office, they don’t need to operate all these things themselves, and deliver things themselves, they can use things that are already there. TS: Yeah, and speaking of that, and I know that we’re probably going to be running short on time here, in a bit, but I wanted to plug a paper that you actually co-authored a few months ago, it was called-, the title is, “Implementing Derivatives Clearing on Distributed Ledger Technology Platforms,” and you co-authored it with Peter Csoka, out in Hungary, and one of my favourite guys, Massimo Morini, out in Italy, and, again, we don’t obviously have time to dive in to it, but, I want to make a plug in for-, for Colin, for having done some real thought leadership, on how you-, how you can use this technology with existing intermediaries. And, again, you can find that for free, R3 has a website, R3.com/research, I was head of the market research team, and worked a lot with a number of these papers, that I’m really proud that-, that exist out there, I wish there were more entities publishing-, publishing this material on a regular cadence, but I think it’s time to just jump quickly back in to the cryptocurrency side, if we have time for that. Is there a specific area-, CP: Well, we started talking about religion, and faith, on how these things work-, TS: [Laughter]. CS: And the probability of immutability actually being immutable. What are you seeing? What are the trends in 2017 Bitcoin? Obviously we talk a lot about the price, but the price is only one small, kind of not important factor. We’ve seen headline news like the CME and CBOE in Chicago, big exchanges, offering futures on Bitcoin, a lot of banks have-, have strong feelings, generally negative, towards Bitcoin. What are you seeing, in Bitcoin and Ethereum? What’s changed, what’s happening, what’s interesting? TS: Yeah, so, I guess the takeaway for me this year is that there’s no point in building anything. You should just buy coins, hold them, and, you know, sit there on Twitter, saying how everyone else should buy them, so that way other people come in and-, and prop up the price, and make it go even higher. Honestly, if you look at investors-, if you were an investor that invested in anything that wasn’t an exchange, or entity that touched coins and traded them, you probably did not see a return on investment that was on par with Bitcoin or Ether, or any of these cryptocurrencies. And that’s not to make fun of, or say that, you know, everyone’s-, you know, that there’s Tulip Mania that’s going to blow up, or something like that, I don’t think I ever would want to go on the record saying something like that, but there is a mania, for sure, taking place, and we see that in the coin prices. So, I don’t see why that would necessarily stop, at this stage, it’s become its own, you know, self-propelled, multi-level marketing entity, and, you know, people calling it Ponzis, that’s not quite-, you can’t call it a Ponzi, because there’s no one entity directing it-, CP: Well, I guess, my issue on Ponzi here, just to jump in, I think it is-, you’re taking away a lot of credit from Charles Ponzi, and what he wrote, or what he-, what he built. It’s-, I mean, look, at the end of the day, Bitcoin, and all these other cryptocurrencies, at their base, are a free-of-payment system, essentially meaning there’s only one leg. I send you something, you receive it, end of the story. Now, if there’s a second thing that happens on the other side, we can talk about that. What a Ponzi does is, it directs money from somebody else, to directly pay off somebody else. So, imagine we have a tube, I push a dollar bill in one side, and it comes out the other side. Now, in Bitcoin, I have a Bitcoin that I get, somehow, for a low price, let’s call it $1 dollar. I hold on to it, and at some point in the future, I find you, and you say, “Hey, I’m willing to buy that Bitcoin for $10, or $100, or $18,000. The fact that you want to pay me more for something, well, that’s your own prerogative. That’s the market’s free hand, I guess. And I understand that, you know, there may be things, market abuse, like pump and dump, and very unsavoury scams happening out there, and there are, in fact, Ponzis involved around Bitcoin, that are using Bitcoin, but Bitcoin, itself, in my mind, cannot be a Ponzi. It could be a whole lot of horrible bad words, but, in itself, it would not ever meet the definition of a Ponzi. It’s very different. Much like gold [laughter]. TS: Yeah. Yeah, sure. I think Preston Byrne called it a-, what was it? A Nakamoto Scheme, or something like that, and he wrote an article, like, two weeks ago, or something like that, on it. So, well, I mean, the one-, the one take away, aside from, you know, just buying coins, holding, and just shilling for them on social media, that I had, is that there’s fewer-, there’s less data available today on actual usage than there was, say, two years ago. I frequently get asked, “Tim, why don’t you write more posts on data,” if people are interested, I have a website, called ofnumbers.com, in which I used to do that, but there’s actually-, for example, Coinbase removed their transactional information, as did several other websites, and maybe that’s because they just want to keep competitors from understanding that, but I think it’s-, it’s largely because people don’t actually, you know, spend these things, they just sit there and hoard it, and that’s fine, it’s a rational thing to do, I fully understand. But, I think the other-, the other issue, and I have a draft of an article that I might be publishing soon on this, is, the-, is for all the bluster the cryptocurrency world has had towards the traditional financial system, it is fully dependent on it for liquidity and for pricing. And the best example of this is with miners. Miners, in any kind of proof of work network, depend on basically the foreign currency that they’re domiciled in, to-, to liquidate in to, in order to pay their bills, because there is no circular flow of income in, you know, whatever that cryptocurrency that they’re mining. Like, the utility company does not accept, or typically, does not accept, a cryptocurrency to pay the bills. The wages of the employees-, the employees may not accept wages denominated in a cryptocurrency. Some might. Taxes, and the machines themselves, and so forth. So, like, maybe at some stage that does happen, but I would say that, you know, in 2017, for all the people that are out there on social media, bashing, you know, banks and so forth, you can do that all you want, but you don’t really have-, intellectually, you don’t actually have a leg, because in order for the labour force, the actual network providers, as it were, to actually operate, they’re fully dependent on being able to cash in and out of-, of these domestic fiat currencies, as it were. So, I don’t see that changing, and, at the same time, these entities with large margins, the Bitfurys and BITMAINs of the world, they’re effectively just printing cash, because they-, they have really good margins on both the energy side and the manufacturing processes, because that’s what they do, you know, build from the ground up, to-, to shipping these products. So, I mean, I don’t give investment advice, but I don’t see why, based on the current mania, why it would stop, and why some of these guys, these miners, or the exchanges, would, effectively, stop being able to print money [laughter]. It’s-, it’s a good-, good revenue source, at least over the last year. CP: [Laughter] no, and I think there was a really interesting blog post that I saw, and you and I went back and forth on this, previously, from Rusty Russell, who is a developer at a company called Blockstream, which is a very well-funded company, whose mission is, essentially, to, kind of, bring Bitcoin to mainstream, and further develop Bitcoin in the opensource. So, what Rusty said was, essentially, he-, he views Bitcoin as having three economic eras, and I think you could extrapolate this in to every cryptocurrency. He called the first one Bitcoin as Satoshi’s Free Offer, which is basically the first five years of Bitcoin, he characterised this as being, essentially, Bitcoin-, everybody talked about how, when I first was getting in to this, Bitcoin was really cheap, you could do-, you could move money around the world, it would be very quick, and cost you nearly nothing, so you had a proliferation of companies whose service model was built around lots of transactions going through the blockchain. And then the second era, which is where he says we are now, he calls Satoshi’s Subsidy. And he says, essentially, we’re starting to see shifts in economic policies, where transactions are more expensive, but there still is money spewing out, as you said, these miners are able to print 12.5 Bitcoins every 10 minutes. That’s going to eventually dry up, and he’s pinned it in about 2028, hopefully, that we’ll get in to some area of self-sufficiency. What was really interesting, I think, inside of this, is, he talked about the types of businesses being transaction that right now are the ones fighting things, and help pushing along either altcoins, or they’re pushing along Bitcoin Cash, as potentially solving that, but his view in this was, essentially, that’s just kicking the can down the road, and, eventually, if there’s ever a lot of usage in a LiteCoin, or anything else, Ethereum, those fees will really go up, and you won’t be able to have a lot of transactions. So, my read across on that was really around this kind of ethos of HODL, or, you know, “I hold on to my Bitcoin because the price goes up,” is almost inevitable, if these things ever take off, and when you can move them in things they call about second-layer technologies, or level two. And you and I can debate all day and all night whether these things will ever come across, Lightning Network being, kind of, the most bandied about one, which has, I think, been in-, in the pipeline for the last two years, and it should be ready in the next two weeks, is what I’m told every two weeks. But, you know, I think-, I think underneath this, there’s a really interesting theme, which is, when we talk about cryptocurrencies, the notion that these things are cheap, that they’re free, that they will be cash, personally, I find very hard to believe to be anything near credible, if they ever get even the most faint amount of adoption. And what I mean by that, I mean less than 1% of the population using it blows up Bitcoin’s ability to operate in the way that it did when I first got in to it. I don’t know if you have any thoughts on that? TS: Yeah, sure, so, like, there’s a massive seen and unseen set of issues going on here, and the seen is, obviously, you see this price rise, and stuff like that, but, what you don’t see is the other side of that, which is, you’re effectively pricing out a portion of potential users, with an average fee of, you know, $10 plus on the Bitcoin network, on any given day, at this stage. You’ve basically removed any of that cross-border remittance use case that everyone talked about in 2014, you know, the Andreas Antonopouloses of the world, that bash Western Union, for charging certain fees, but there’s a real cost structure that goes in to, you know, remittances, including compliance, and so forth. But, you know, the bottom line is, from a-, from a mining perspective alone, these-, these-, these guys aren’t operating on charity. They run huge farms, at times, they require actual energy, at large scales, and that requires installing transformers, and having full-time electricians on hand, in order to pull out power supply units, and you can see-, you know, there’s lots of videos, this is-, none of this is a secret, or anything like that. Although, I guess some of the locations are fairly secret, because you’re basically-, you’re basically a minting press, in the middle of rural China, or, you know, somewhere in northern Russia, or something like that. But the-, the-, yes, the unseen cost of this is, if you have a $20,000 Bitcoin, in the long run, if that was ever stable, it would be-, about $13 billion a year would be spent on mining just that one coin alone, and that’s actually driven up the prices of DRAM, it’s-, there was a presentation, in early November, by a chip designer, who said that roughly 5% of all transistors now are being consumed by miners, or the mining process, and, obviously, as prices increase on any of these proof of work coins, the-, the more resources will be brought to bear, because, in order to-, or, because of the seigniorage, because people want to, basically, (? 35.34) on that extra bit of cash, between the cost of mining versus the face value of that coin, they’re going to bid that up, to where the marginal cost equals the marginal value. We see that throughout the commodities industry, too. But, bottom line, I guess I use that phrase quite a bit, don’t I? [Laughter]. I-, I don’t necessarily agree with Rusty’s thesis that that’s the way it had to be. That’s certainly one way of going about it, again, I’m not involved in, you know, the block size debate, in the sense I take one side or the other, but the subsidisation that’s taking place, where miners, you know, receive 90% plus of the revenue through the block reward, versus transaction fees, you know, all that’s going to end up happening is, as that transaction fee becomes more expensive, people will all-, as long as there’s free entry, people will create their own alternative, you know, payment rails, in this case, you know, Bitcoin Cash, or any of the forks thereof, in order to have cheaper, or at least relatively cheaper, fees. Whether or not, you know, Rusty’s vision, or at least prediction, comes true, I don’t know. I’m very sceptical of the Lightning guys, because they’ve literally been promising, as you pointed out, you know, something in production every two weeks, and maybe-, maybe it’s just really hard stuff that has to be solved, and to their credit, yes, it is, but I think that they’ve gotten a lot of undeserved free press for something that actually doesn’t exist yet. CP: Yeah, and I-, I think that there are certain segments of the “Bitcoin community” that-, that give a lot of leeway to certain developers, certain figures in the community, to-, to be able to really run these deadlines out, but, at the same time, are very quick to point out, relatively minor failures in others. So, I mean, politics is a massive part of this, and I think having faith in the people that you want to follow, and believe their thesis, is another massive part, and, in my mind, partially describes exactly why we’ve seen the price run up in Bitcoin, and other cryptocurrencies, so much in 2017, and we’ll see if that continues in 2018. TS: Yeah [laughter] well, yeah, I guess if there’s any-, if there’s a take away for 2018, it’s don’t bother building-, like, entrepreneurs-, it’s actually funny, I know that we’re closing up here, I don’t usually measure the popularity of my own, you know, tweets and stuff like that, but, sadly enough, I think the most popular one I did this past year was a comment, I said, “Entrepreneurs, at this moment-,” something to the effect of, “Entrepreneurs at this moment, I’ve realised that it’s better to just buy and create coins, rather than build real utility people want to eventually use,” because, you know, the market’s rewarding those with this HODL mentality. And it’s unfortunate, too, because there’s a lot of really clever, smart entrepreneurs, doing some really genuinely interesting things, but they’re not seeing the-, the liquidity, or the capital coming to them, because there is no coin involved. And, again, I’m not anti-coin, or anti-cryptocurrency, I think these things have a place, but the mania, certainly, is creating so much noise that legitimate entrepreneurs, trying to build real utility, are probably still going to struggle throughout 2018. Ignoring even the ICO stuff, I think that-, that, if you’re trying to build technology in this space, as much as it would make sense to build applications now, on more mature platforms, the ones that hit 1.0 in the past few months, it’s still a struggle. If you have the tech talent yourself, why would you, you know, go for, you know, a few million dollars of revenue, when you could go out and build some kind of altcoin and get, you know, tens of millions of dollars, conceivably, if you could solicit it on the secondary market? Again, I’m not endorsing that’s what you need to do, I’m just saying, that’s-, that’s-, that seems to be what is the opportunity cost that entrepreneurs, and especially the CTO side, have to-, have to look at and weigh. So, no, thanks-, thanks so much for having me on the show, Colin, it’s always great talking to you, and I hope you guys all have a great holiday. CP: Yeah! Thanks for coming on, great talking to you, and thanks for coming on here at Christmastime here. So, everybody should check out Tim’s blog, ofnumbers.com, Post Oak Labs, obviously, your consulting business. Thanks-, thanks for sharing all that information, tonnes more, so I encourage everybody that’s interested in knowing more, to reach out to Tim, find you on Twitter, of course @ofnumbers. Thanks for coming on, and, anything else people should be looking out for here, in the next coming weeks, from you? TS: I will try to post very funny memes and gifs on social media, for everyone’s holiday enjoyment, so-, CP: I would expect nothing less. TS: Thanks-, thanks again, Colin. CP: Thank you. Talk to you later. [Break] ST: Alright. Thank you very much, Tim and Colin, for that interview. Next up, we have Somil Goyal, from Adjoint, talking about their platform for smart contracts. [Break] CP: I’m here with Somil Goyal, COO of Adjoint. Thanks for coming on, Somil, how are you doing? SG: I’m good, Colin, how are you? CP: I’m doing fantastic. So, Adjoint, tell me, who are you? What do you guys do? SG: That’s right. So, Adjoint is a startup, we are about 14, 15 months old now. We were formed in Boston, in the US, although over the course of the past year, we have moved a lot of-, a lot of our team, a lot of our centre of gravity to the UK, that’s something that we are in the process of doing. We focus on smart contracts for the financial enterprise. So, we work with enterprise clients, we work with startups in the finance domain, so, we work in five key sub-verticals in finance, banking, capital markets, insurance, asset management, and commodities trading, and we help these companies, or companies in these sectors, create smart contracts, for achieving better efficiency, for achieving better compliance, for targeting new business models, and suchlike. CP: And can I pick in to a few things you just said there? Because I think there’s a lot very interesting, but first, I’ll be a bit tongue in cheek. Why are you guys moving to the UK? I mean, a lot of companies talk about starting up and moving to the US. You guys have gone the other way. What prompted that? SG: That’s right. So, as I said, you know, we focus on five sub-verticals in finance, banking, capital markets, insurance, asset management, and commodities, and, if you look at it, pretty much in all of these sub-verticals, London is a top two, top three location for-, for our clients, really. Any other city in the world, any other country that we would be in, we would-, we would probably be able to talk to people in one or two sectors, but not all of them. So, that’s something that, sort of, increased the charm for London, for us as a location. But, that said, you know, we continue to maintain our base in Boston, you know, we get access to a lot of people in the private banking, asset management and insurance sectors in Boston. Boston is very close to New York, so-, so, again, with the banking, capital markets, community in New York, that’s something that we continue to-, to stay close to, and we will, even-, even in the future. We’re not moving wholesale to London. We’ve been participating in DigitalSwitzerland, a kickstart, accelerator programme being run in public private partnership, in the last couple of months, in Zurich, we are getting some really good traction out of that, too, and we are very seriously considering setting up some form of a base in Switzerland too, perhaps focusing on insurance, private banking, and such like. But yeah, to-, to your key point, the number one reason which is, sort of, pulling us to London, is the fact that in almost all of our clients’ sub-verticals, we can actually be close to the top two, top three companies in all of them, really. CP: Well, that’s fantastic, and I know, for a young startup, as yourselves, being able to be in those important places when you’re dealing with these big companies is tricky, so, bravo on getting that done, especially within financial services, that’s a-, that’s a pretty diverse scope. Let me get in to where you guys really see the future, as it pertains to blockchains, and how you’re using blockchain or DLT technology in offering your products. SG: Right. So, I’ll mention a little bit about my background, and-, and why, out of my background, I, sort of, see the value of distributed ledgers and smart contracts. So, I worked in, in financial services, for most of my career, I worked for Deutsche Bank, in foreign exchange, in bonds, in treasury, cash management, in OTC derivatives, listed derivatives, and commodities. And we saw a lot of use cases which were really around-, we, kind of, tackled a lot of challenges, which are really around, you know, improving straight through processing, improving the efficiency of our processes, not doing the same thing twice, or thrice, not having to reconcile internally, or with our clients. And a lot of these-, a lot of these problems are something that blockchain, sort of, allow us to tackle. You know, we can move to a situation where, you know, we do not, kind of, have all our datasets and all our processing, as a bank, for example, inside our building, have our clients run a similar set of operations and systems inside their buildings, and cross-checking with each other, you know, every-, every day, every week, end of every month, and so on, to see, “Well, this is-, we’ve got X, do you have X?” and, of course, two times out of 100, it’ll not match, and that kicks off a whole amount of-, you know, a whole amount of-, of error processing, and things like that. These are the kind of things that-, that, classically, distributed ledger, or blockchain technology, allows us to avoid. And we’ve got an offer, in that regard, so, we have opensourced our distributed ledger platform, it’s called Uplink, it was opensourced about three-, three and a half weeks ago, to-, to some really good traction, initially. But, over and above that, what we are also building, is a layer that allows enterprises, and startups, to model finance processes, and financial products, as smart contracts. And that allows them not only to take the benefit of, sort of, hyper-automation, but also offer new, innovative products in the market, and-, and, ultimately, going through a revenue increase type of business case. So, those are the two things that we are really focusing on, sort of, efficiency and compliance, through better processing, and-, and new revenue, through design of new products, through smart contracts. CP: So, this is really interesting. So, you’ve built a platform which is opensource, Uplink, which is a blockchain or distributed ledger platform, and you’re offering a secondary product, which is also a platform, which helps companies model financial agreements. So, my question would be, on the first one, why have you chosen to opensource the blockchain aspect of it? I know a lot of companies out there are building these and selling them, or a lot of them, maybe, have built them using other technologies, or things like Hyperledger. Why have you decided to build one, and give it out for free? SG: Yes, so let me talk about these two parts, really. Why opensource? I think the answer to that is pretty straightforward. You know, in the technology domain, and this is not just information technology but, you know, a lot of peripherals, and hardware technology, what we have seen is, you know, over and over again, in the last 30 or 40 years, you know, the more-, the more successful platforms, the more successful approaches, are the ones that create a network, and-, and we basically believe that, by opensourcing, we are in a situation where we can create a network of users much faster, and much more-, much more actively, than trying to licence. So, that’s the main reason for opensourcing. Now, why did we choose to build a distributed ledger technology? Actually, initially, Adjoint’s plan was not to build one. So, our goal, really, was to create a smart contract platform which could be DLT agnostic, and that was-, that was some of the first implementation that Adjoint did, as a company. But, what we came up against, and this was towards the end of the last calendar year, the early part of this one, what we came up against were, you know, a number of issues around how some of these, sort of, readily available distributed ledger technologies treated smart contracts. You know, it, sort of, I would boil it down to one-, one simple thing. That, especially if you look at the financial sector, we’re not looking for smart contract languages to do, kind of, arbitrary computation, you know. I always use the analogy, we don’t want to write programmes that can play chess on smart contracts. We want to write programmes on smart contracts that’ll do pretty mundane financial things, like, you know, writing an insurance contract, or writing a swap contract, or something like that. So, what we really needed was, you know, a limited purpose, you know, in technical terms, a Turing-incomplete language, to write these smart contracts. Most of the-, most of the commonly available distributed ledger platforms did not offer it, so, therefore, we sort of said, well, to express the full power, in terms of safety, security, scalability, and fit to the financial use cases, to express the full power of our smart contract platform, you know, we had to first write a distributed ledger platform, which we did, and we opensourced it, but, still, overall, long-term, we would like to get to the stage where our smart contract platform can interoperate. Can interoperate, can work with-, with a number of other distributed ledger platforms. As of today, we can talk about integration methods, and things like that, and hopefully, in future, it will be a much closer form of interoperation, as well. CP: So, if I can, kind of, break that down, to make sure I understand it, because, sorry, I’m a bit slow on these things. So, something like Ethereum has a language inside of it that’s like a computer programming language. You can build anything you want, as you said, chess. Obviously, we-, we’ve talked about it on the show, there have been several hacks within Ethereum, going back to 2016, with the DAO, and, more recently, with Parity’s hacks, plural, where, because they’re using a computer programming language, somebody found something that wasn’t expected, and basically exploited that. Meaning, they found a hole in a contract, and they used that to break the contract, or make money out of it. And the other end of the spectrum is-, is Bitcoin, which has a, what’s known as a scripting language, which means you can only do about four or five things with Bitcoin, so think, like, a calculator, it’s only got so many buttons, and you can only do so many things with it, so, you can add, subtract, multiply and divide. You guys are looking at going somewhere in between, but more like that Bitcoin-type example, where I can do something like, let’s say, write a code option, or an option where, if the price of something goes up at some point in the future, I make money out of it, if it goes down, I would lose the initial premium, or investment I put in to it, but no more. That’s kind of the route you guys are trying to take, with your platform? SG: So, yes, you’re right, I mean, the Bitcoin scripting language is Turing-incomplete, and the approach that we are taking is also-, is also similar, but there are a couple of differences, too. So, one of the things is that, Uplink, by its very design, from ground up, is-, is a multiasset ledger. So, it does not have the concept of a cryptocurrency, which is, again, another difference to, say, something like Ethereum. So, yes, it’s-, it’s-, it is about using a programming language that allows a limited set of functions, which is sufficient to describe financial contracts, and nothing else, and-, and working on a multiasset ledger, without the use of cryptocurrencies, if that-, if that makes it clearer. CP: That-, that makes a lot of sense. Can I take us in to kind of a different area here? You guys told me that you were doing a project, before the show, with ISDA, so, the International Swaps and Derivatives Association. Why are you doing that, and what does this organisation do? SG: So, ISDA, just as a background information, is the premium swaps and derivatives association in the world. It’s got, I think, just under 1,000 members, 800 or 900, I’m not sure exactly. I mean, that includes banks, that includes asset managers. That also includes people who are not traders of derivatives themselves, but provide services in the derivatives market, so, law companies, accounting companies, and, ISDA recently opened a category for companies such as ours, who are offering, sort of, emerging technology, to help improve the efficiency, control, compliance etc., in the swaps and derivatives market. So, it’s under that category that we decided to become a member of ISDA. ISDA, itself, has got an initiative called the Common Domain Model, and what they’re trying to do is, kind of, you know, for those-, for those of us who are familiar with the derivatives market, when I say that I’ve got a derivative with a particular counterparty, a particular bank, or something, what I really have is, is a whole bunch of documents, legal documents, which are all signed god knows how many years ago, sort of, master agreements and annexes and so on, which are kept in PDF. What I also have is, is a short description of the trade, that’s typically seven or eight attributes long, which kind of describes, you know, under what terms, who will owe money to who. And then I have got about eight or ten different versions of the trade, which are operational versions, that are used for legal confirmation, that are used for settlements, that are used for collateral, that are used for regulatory reporting, and so on and so forth. And, obviously, as you can imagine, if I have got-, if a simple trade has got, like, six or seven, or even ten different manifestations, A) they don’t really agree with each other always, you know, because they’re being done by different people, at different times, and B) they’re just too many. You know, just keeping ten records is more difficult, in many different forms, is more difficult than keeping one record. So, what ISDA is trying to do is to develop what they are calling the Common Domain Model, which will, hopefully, span all of these domains, you know, from legal, to risk, and trading, to post-trade operations. And, you know, we absolutely want to-, to contribute to that thinking, because that’s what the concept of smart contract is. That you-, when you trade something, or when you transact, or when you sign a contract with the insurance company, then everything that’ll happen, as a result of that contract, is kept in that one place. So, whatever cash is due, you know, whatever documents are due, whatever external reporting has to be done, you know, whatever-, whatever cross-checking has to be done, as a matter of operational sanity, housekeeping, etc., all of that is-, all those rights and obligations are kept in one place. And if those rights and obligations evolve, because the market price changes, or whatever, then that-, that evolves, in the same place. So, that’s the concept of smart contracts. And, therefore, we saw a very, very good fit with ISDA’s Common Domain Model, and therefore we said, “Okay, we’ll join ISDA, and we’ll contribute to the development of Common Domain Model. That’ll be good for us, commercially, that’ll be good for us, in terms of enhancing and expanding our product, to make it more suitable for the derivatives industry, and I think it’ll be good for the market.” So, that was an absolutely good fit for us, to join ISDA. CP: That’s fantastic, and it’s great to know that ISDA has something out there that’s open to fintech companies, and innovative companies. When we’re on, kind of, that topic, I’d like to know, kind of, there are some very big, well-known companies out there, that our listeners probably have heard of, R3, Digital Asset Holdings, Axoni, amongst others. How do you guys, kind of, fit next to them, when you talk to your clients, or talk to your potential investors? SG: So-, so, you’re right, I mean, there are multiple service providers in the same domain, focused on the financial services industry, the examples that you mentioned, using distributed ledgers, and in some cases, smart contracts. Yes, I mean, a couple of things which I would say. One is, you know, the medium-term trend that I see is, and, you know, a lot of our potential investors and partners see, is that the distributed ledger economy will grow. So, as of today, how many derivatives are done as smart contracts? You know. The answer is probably, you know, less than one and greater than zero, you know, something like that. And in future, how many derivatives will be done as smart contracts? Well, the answer will definitely be a larger number, you know, on the back of things that ISDA is doing. As of today, how many insurance contracts are done as smart contracts? You know, it’s a modest number. It’s a small number, but it’s nothing as compared to the overall insurance market in the world. And, in future, that’s going to grow. So, so basically, as I see it, the distributed ledger and smart contracts economy will grow and, you know, multiple solutions, they will have different features, they will, you know, they will be more suited to a particular market, or sub-vertical, or less suited, you know, multiple features will compete, and-, and ultimately, there will be a place for more than one company. You know, that is-, that is something that-, that I am fully convinced about. So, the way I look at it is, that we are all collaborating in some way, you know, we are all working together, even if we’re not, sort of, meeting and talking about it, we are all collaborating in creating a larger distributed ledger economy, and then we will-, we will all compete, and gain our market share out of that distributed ledger economy. The biggest competition for us is not another distributed ledger company. The biggest competition is the classical centralised ledger way of doing things, which is what, you know, is used 99.99% of the time, or even higher than that. I mean, does that make sense? I mean, is that-, is that, sort of, sensible, from your point of view? CP: That makes a lot of sense. Having-, having paper as your enemy is a very good enemy. Just watch out for the papercuts [laughter]. SG: That’s right [laughter]. CP: Thank you very much for coming on. Last question. How do people find out more about Adjoint? How do they get in touch with you? SG: Yes. So-, so, the best place is to go via our website, adjoint.io, so, I’ll spell it out, a-d-j-o-i-n-t .io. You will have access to, you know, the white papers, the documents that we are doing, describing our conception, our thinking, around distributed ledger and smart contracts. You can download the opensource version of our Uplink distributed ledger. You can-, you can look at our product documentation, as well as what is the work that we are doing around industries? You know, we are-, we are thinking of launching, I mean, this is something that we are still developing, we are thinking of launching a sub-vertical, sort of, the five sub-verticals that I said, banking, capital markets, insurance, asset management, and commodities, you know, sub-vertical-specific centres of excellence, so, you know, all of that, we would really put out via our website. So, that-, that’s the best way. You will also find my contact details on the website, so-, so, for more specific questions for your listeners, absolutely, get in touch via the website. That’s probably the best way. CP: Great, thank you very much Somil. You have a great day, and thanks for coming on. SG: Thanks. Thanks, Colin. Good to speak to you. [Break] ST: Fantastic. Well, we hope you have enjoyed this Interview Special episode of Blockchain Insider. We hope you have had far too much festive food of all kinds of varieties, and we hope that, if you want to learn any more about who we are, and what we do, you can reach out to us @BChainInsider on Twitter. We’ll be back with a regular show next week, and until then, goodbye. End of Audio