Blockchain Insider Ep. 1 Ongoing Token Madness FILE DETAILS Audio Length: 00:55:09 Audio Quality: Good Number of Interviewers: 1 Number of Interviewees: 4 Start of Audio ST: Welcome to the first ever Blockchain Insider, in its own stream. Thank you for all your feedback and downloads when we did this as a special, in Fintech Insider. This, of course, is brought to you by the folks at 11FS, this show is designed for all your blockchain and DLT needs. And, of course, in blockchain and DLT, there’s more happening than ever. Today, we’ll talk about the ongoing token madness, some blockchain news, and then we have two first class interviews for you. The first interview, the founders of Tezos, Arthur and Kathleen Breitman, the power couple of all things blockchain, have some exciting token sales happening, and they’re going to tell us all about it. And then we have Stefan Thomas, the CTO of Ripple, the famous startup promising to revolutionize payments. But for now, on with the first story. Cool, alright, Colin is back with us. Colin Platt, how are you, sir? CP: Doing very well, thanks for having me back again, Simon. ST: You’re welcome. Just the two of us covering this week’s news. There are some interesting stories we’ve got happening in the blockchain and DLT space. The first one is, of course, Tezos, who we’ll be speaking to a little bit later on the show, but they’ve-, they’ve started a token sale. So, what’s a token sale, and what’s Tezos, in your view? CP: Yes, so, what’s really interesting about Tezos, and about this token sale, so in short, what a token sale is, is basically a way for people who are interested in a new idea to go out and fund it, using a cryptocurrency like bitcoin or Ethereum, and what Tezos wants to do is actually create somewhat of a competitor to Ethereum. They’ve, so far, today, we’re recording this on the 4th of July, go America, raised over $200 million, which is quite impressive, in a combination of bitcoin and Ethereum. They want to create a new smart contracts platform that is, and we’ll hear more about this later, self-amending. So, basically, when we want to upgrade the ledger, we can use their own technology inside their blockchain to do this. ST: So, I think, we’ll go on to how it works when we speak to them, but the thing here is that they’ve raised nearly $200 million in how many days? In three days, four days? CP: Since Saturday, and we are currently, what? Tuesday. ST: Wow. I mean, this-, that is a trend that is phenomenal, and it doesn’t seem to be slowing down, even though the price of some cryptocurrencies has gone down, these ICOs keep happening. CP: Absolutely-, ST: Ah-, token sales, sorry, for the purists. CP: There’s definitely a lot of demand for these currencies, whether they’re going up or down, to put into new ideas, new projects. There’s a lot of excitement. Just before the show, we looked at the Wikipedia page for crowdfunding. Eight out of the top ten crowdfundings ever, on the face of this planet, are blockchain related, token related, and that doesn’t include Tezos, or the next thing we’ll get into, EOS. ST: So, that’s pretty interesting, because I thought I’d funded the best things on Kickstarter ever, and it turns out I hadn’t. It turns out everybody’s funding these cryptocoins right now. So, you mentioned EOS. EOS, like, E-O-S. Like, this-, again, do they all have to have these cryptic names? “Tezos”, “EOS”, like, what’s with the naming of these things? CP: Well, we call it cryptocurrency for a reason, don’t we? ST: Yes, yes, you’ve got to be cryptic with your cryptocurrencies. Again, EOS, so these are more people that have come along and said, “The type of blockchains and DLTs that are out there now are wrong, we’ve got a better idea, and we’re going to raise a lot of money”? CP: Yes, absolutely. So, again, this is another one, and this is really interesting, as well, because it’s changed dramatically, from what we’ve seen before. This is another Ethereum competitor, so very much on the same vein as Tezos, it wants to come up and set up a new way for blockchains to run, because they’ve looked at something like Ethereum and they’ve said, “I can improve on that, I want to raise money and build this.” Interestingly, they used Ethereum to bootstrap that, and have raised $185 million in the course of five days to do that. ST: Can you think of a startup that raises this kind of money, at this kind of pace? I mean, there’s definitely going to be some winners and losers here, right? CP: Absolutely. I mean, there has to be some winners and there has to be some losers. I think a lot of people have found a lot of excitement from the returns that early investors were getting, not only out of the 2010 investments in bitcoin, or subsequently, but some of these things in the last year that have been getting 30,000 plus, in six months, return. It’s incredible. I fail to understand the economics, if you’re raising north of 100 million, how you’re ever going to turn that into a trillion-dollar investment to get any kind of amazing return on these, but maybe. ST: It’s interesting, as well, that the folks behind this, you’ve got Brock Pierce, I believe, who is also Blockchain Capital-, also was a star of the Mighty Ducks-, CP: Absolutely. That’s what I think of whenever I hear his name [laughter]. ST: Sorry, Brock, if you’re listening. But this is somebody who’s been around the blockchain space for a while, has seen some of the flaws, they’re working with the folks from BitShares, I believe Ian Grigg is working there, so there’s-, some very smart people behind this project have basically gone, “Hm, the blockchains you’ve got out there aren’t quite finished, we think this one should be better,” and they’ve got some serious amount of money to give that a go. CP: Exactly. And one of the people, as you said, Dan Larrimer, who’s put together a lot of the technology on the EOS-, interesting character, did BitShare, has been involved in a lot of other projects-, ST: He was behind Steemit, I believe, as well. CP: He was behind Steemit, in some capacity. He has a fantastic knack for creating very complex technology, that is beautiful in its own right. ST: That says to me that we’re in this phase of let many flowers bloom, right? Surely, what we’re seeing here is evidence of more fragmentation in this space, and actually, rather than converging a round, you know, Netscape, or Internet Explorer, we’re actually getting people popping up with lots more browsers, but that’s no bad thing, because in time, you end up with Chrome and Safari and things move on. CP: Yes, I think this is really a sign of the stage that we’re at, which is still very immature. I mean, we can look at this, on one hand, and say, “Well, wow, there’s over $100 billion invested into blockchain/cryptocurrencies, not even counting VC. That’s a lot of money.” But we’re still very immature, because we’re not sure what this technology should look like. To me, what’s very interesting is even the older one that we hear about bitcoin, if you follow this at all, there’s a lot of discussions about small, fundamental changes, that if you’re not overly involved in the technology, probably don’t seem very important, but there are still a lot of little niggly things that need to be fixed in the more established ones, and these new ones are just coming out with ideas left, right and centre. ST: So, who are the people investing in this stuff? Is this just-, is this mom and pop? Is this by the geeks, for the geeks? What’s happening here? CP: That’s a really good question. It’s hard to tell you with any level of accuracy. I’d say 12 months ago, it was pretty much for the geeks by the geeks, and a few other people who were either VCs, or wealthy people who thought this was a good idea. Now, we’re definitely seeing a lot more anecdotes about individuals coming into it, I don’t know how many people have come up to me and said-, I was at this event, nothing to do with blockchain, fintechs, anything, and, you know, the guy cleaning the tables or serving drinks, said, “Hey, how do I invest in this Ethereum thing?” Maybe that means it’s a bubble and it’s time to get out, maybe that means that this is the start of something real. I don’t know, but it is really interesting to see that more and more people have started to go, “There might be something to this.” ST: It’s often a sign that when your taxi driver’s got a great insight into this amazing thing that’s going to increase your investment, it’s time to worry. CP: That’s what they say [laughter]. ST: Yes. But there might be a (? 07.16) there. But then, people often talk about the regulators’ reaction to this, so we-, we live-, whenever you’re dealing with large amounts of money, you’re dealing with people who could lose out, in a big way, and people possibly are losing out, but the regulators have done some interesting things in recent weeks. We saw that in the US, the CFTC chief asked Congress for more money to oversee blockchain. This was Chris Giancarlo. Do we think that the regulators are coming for this token space, and actually it’s all going to get shut down? Or are people being pretty savvy here, with which lawyers they’re working with, and how they’re managing stuff? CP: Yes, so I think there’s two big things here that are often confused because they’re so closely intertwined. There is the technology, blockchain, DLT, whatever you want to call it, and then there’s the cryptocurrencies, the tokens, everything that goes along with that. Obviously, the currencies rely on the technology, but not necessarily the other way around. A lot of these new regulations, regulators getting in, especially Christopher Giancarlo, who’s been looking at this for a while, to his credit, have looked at this and said, “Maybe, maybe not, with the cryptocurrencies, but what we’re really interested in is figuring out how the companies that we regulate, banks, clearing houses, things like that, might use blockchain technologies in their day to day operations, to move things like futures on gold, or stocks and any kind of registration around that.” And they see the need to invest in that technology, in a similar way that the Bank of England and the FCA over here in the UK have done. ST: So that’s pretty, pretty interesting, that they’re seeing a need to regulate a type of technology. We wouldn’t normally see them regulating Cloud, we wouldn’t see them regulating “insert database technology here”. You make a really interesting point, that that conflation between currency and financial instrument and technology is kind of creating a lot of confusion. CP: It is definitely creating a lot of confusion, and I think, again, this goes back to the immaturity of the technology, and our understanding about it. A lot of people will argue that you can’t have blockchain without a cryptocurrency. A lot of people argue that you can absolutely separate those things. I think as far as the CFTC, and some of the other regulators are looking at, it’s not so much purely regulating the technology, but more if this future changes to look more like a blockchain, or even a cryptocurrency type world, what does that mean for all of these typical controls that we have around existing businesses? Because they may not exist in the future. ST: Very interesting, and speaking of businesses existing in the future, there’s a story from Coindesk, that says the Delaware House has passed some historic blockchain regulation. What’s this one about, Colin? CP: Yes, so, really interesting. Delaware has been very forward thinking, in an odd way, a lot of people look at Delaware as kind of a tax haven, a bit like a Jersey or Isle of Man, and look at blockchains as being kind of a bastion of transparency. So, they don’t necessarily see how these things fit together. Basically, what Delaware has done is they specifically put together a rule talking about different blockchain-related things, and how they will be allowed. So, basically, giving a green light to say, “If you have a company, and you want to list your shares, you could do it on a blockchain.” ST: That’s pretty interesting. So, Delaware, of course, is the state in the US in which most companies are incorporated. So, if you’re going to build a company in the US, you’re probably going to incorporate that out of Delaware, there are lots of good tax reasons why you might want to do that, but also, there are lots of administrative reasons. It’s just easier to do business there. So, the fact that they’re saying, “Okay, now your company’s going to be registered on a blockchain, if you want it to,” what does that actually mean? CP: I think what that means is, effectively, this is a good legal regime, because obviously, a lot of these things are actually done in a boardroom in New York, or in an office in LA, where you can pay them a fee to list it on this thing, and they will legally recognize it. ST: But what does “list it on this thing” mean? Because typically my-, I would go to incorporate a company and I’d have a bunch of legal documents, right? And those legal documents would be signed by a bunch of people, and kept in a drawer somewhere, or something else, and then eventually, they work their way into somebody else’s database. Like, what’s the difference here? CP: Right, so, okay, let’s take the example, we’re in the UK, Companies House registers all of the companies in England and Wales. They have a database to do this, and you can go onto their website, and you can actually look up 11FS, and you can find the registration in there, and a bunch of documents about it. That holds the authoritative record, and what they’re saying is, we have this decentralized technology, and we’re going to put a marker in this technology to say, “Alright, this is 11FS and their blockchain registry of proof of their existence,” effectively. ST: So, the proof of their existence is useful, but I guess what would be really useful is if I could start making changes. So, there’s a company out of Singapore, Autonomous, and Symbiont have talked about doing this, t0 have talked about doing this a few times. A number of companies talking about-, it’s nice to register your company at that Delaware state level, or at the Companies House level in the UK, or the Singapore equivalent. What’s really nice is every time somebody invests in my company, can I also capture that digitally, rather than having to go through term sheets, and lots of different bits of paper, so that I can actually manage my entire company digitally, rather than lots of different people with lots of different paper? Because otherwise I just end up with a paperwork nightmare. CP: Absolutely, and I think this opens the door to that, without explicitly having all those things worked out. Obviously, laws move very slowly. Government, administration moves quite slowly, and this is a good first step, that’s actually quite quick on it, to start moving that direction, but it’s still going to take a while for us to be able to trade like the New York Stock Exchange, or the London Stock Exchange, to put money in and out of a company. ST: So, this is an interesting one. When I remember talking to the Delaware guys in 2015, and I asked them, “Well, why don’t you just make your database bigger, to store all of this information?” and their view was, “Well, it’s actually not our place, to store all of a company’s books and records. Sometimes that should legally live with their accountant. Sometimes that should legally live with their bank.” Sometimes it should live in lots of different places, and the fact that it must live in different places means that centralizing it is hard, so therefore having something where it can live in lots of different places and still sync up is really useful. CP: And I think this is one of the really interesting things, when you get into the nitty gritty of blockchain, that you’re absolutely opening up a lot of these things that we would keep behind closed doors, in the past, and putting it out in the public domain, to see, inside of a blockchain, to anybody that’s looking. And if you go all the way up to, like, a cryptocurrency type blockchain, like a bitcoin blockchain, or Ethereum, you really are putting absolutely every line of your account, including, you know, who you’re paying money to. ST: Very interesting times. So, watch Delaware, I think, is the takeaway here. CP: Watch Delaware. ST: Watch Delaware. Who knew? If anybody remembers the Friends reference, it’s the state that Ross forgot, and it seems to be the one to look at now. CP: The first state to ratify the Declaration of Independence. ST: Ah, he had to make the July 4th reference, didn’t he? We’ve got some fun stories before we move up to our interviews. The first one up here is, there is a pot-friendly bitcoin startup that has raised $1.5 million. Colin, what’s happening here? CP: Absolutely, and again, I think this one’s really interesting for three reasons. First, it’s because it’s my home state of Washington State, it’s out of Seattle. We have legal marijuana. The companies out there have a big issue, because at the federal level, it’s still illegal to buy and sell recreational marijuana, which means it’s very difficult for them to have bank accounts. A lot of people have put together the idea of, “Well, you can use bitcoin.” Well, that’s not something that everybody really understands. It lets them get out of the problem of holding a bunch of cash, which obviously, the other thing that’s still legal in the US is to have lots of guns. You can imagine, lots of cash, lots of guns, in the areas where marijuana may sell, is not always the best mix, so bitcoin is interesting. This company, POSaBIT, has put together an offering for several hundred marijuana dispensaries across the state, and across other states, where it’s legal, to actually accept bitcoin, and not even have to manage anything else. And it’s a bit like some of the other things, where you could eventually convert it back into a US dollar. What’s really interesting is we talked earlier in this show about raising these hundreds of millions of dollars. These guys raised $1.5 million and have actual clients and actual business, from actual normal investors like the Digital Currency Group, amongst others. So, I mean, on one hand, you have these fantastic sums for unbuilt products, and on the other hand you have a working business that has actual clients, and they raise much more modest sums. ST: That is interesting to me. It turns out that having revenue and having a business makes you less investable in this case. It’s kind of odd, isn’t it? We live in bizarre-o world, we really do. CP: It is, and I think it will be very interesting when some of these projects, like Tezos, or anybody else, actually start seeing their first real revenues, to see what happens with the valuations. I mean, it could be anything. ST: Well, because they’ve effectively floated, but not officially, so their valuation is really hit by data in real time. This kind of stuff always strikes me, though, that, like, bitcoin kind of had a grey reputation with the bankers anyway. Now it’s being used, kind of, in this, okay, legalized marijuana setting. Do we need to get bitcoin away from drugs, and is there an ironic factor here, that, like, actually this is being used to reduce the likelihood of crime? Even when it was used on dark markets, it’s actually reducing the amount of crime that’s happening in communities, because people are buying them safely, at a distance, rather than from a dealer on the corner, and you’re kind of-, so I think there’s a perception thing here, that’s (? 16.26). Like, if I was running PR for bitcoin, I would be wanting to just go end it all right now, because the PR around bitcoin and cryptocurrencies still isn’t great. CP: It isn’t, but I think it’s really interesting here. Washington State actually had a bill to potentially ban taking bitcoin for marijuana payments. Not for anything else in the state, just for marijuana payments, and it was very interesting that that was ultimately not taken in, and part of it was really around they wanted to make recreational marijuana something that was very above board, and something you pay taxes on, like going out and buying a beer. It was ultimately overturned because, amongst other reasons, it wasn’t really seen to be the issue, any worse than cash. It’s actually much more traceable than cash. So-, ST: That’s a really good point, right? So, the people-, I talk to banks a lot on this, I’ve talked to central banks, and they really struggle, day to day, with the fact that their existing systems, they can’t trace cash, as it exists today. They can’t trace money, particularly effectively, through the existing financial system. And yet with bitcoin, I can see every transaction ever, and even if somebody’s using, like, one of these mixer services, I can actually probably still figure out where the money ended up and where it got to, because it’s this perfect digital record. So, then, the argument that it’s kind of all anonymous, and it’s not-, we’re kind of seeing the opposite come through now. CP: Bitcoin is absolutely not anonymous. It’s pseudonymous, you don’t have to attach your name, in the same way with, you know, a £20 note you don’t attach your name. Unlike the £20 note, it actually gets marked at every stage that it stops at, which is really interesting, if you ever want to start running some of these KYC analytics on top of it, and there actually are a couple of companies out there, Elliptic, to name one of them, looking at this type of stuff. ST: Elliptic, Chainalysis, Scorechain, there’s good companies out there. Alright, so we are up against it on time, Colin. So, we’re just going to cover off one last story. There’s one here where the-, Port of Call: Blockchain's Impact on Supply Chains is Broader Than It Seems. This is a story on Coindesk. First up, what’s a supply chain? CP: Right, very good question. So, effectively, when things get sold from point A to point B, or get mixed in to build other products, so I receive wheat out of Canada, and I use it to make bread in London, it’s got a few different gaps in there, because of course you don’t just grow wheat out of the ground, you need to put in fertilizer and all that great stuff, and there’s lots of steps in there. A lot of people probably recall when we had a horsemeat scandal in Europe, relatively recently here, and a lot of people found that we didn’t really know where our food came from, or the ingredients that went into it, so a lot of people have said, “Okay, there’s a couple of problems we have in supply chains,” and interestingly, supply chains are much less regulated than financial services, which is odd when we’re talking about the stuff we put in our bodies. ST: Yes, it is a little bit odd. And then that concept you talked a minute ago, about I know where every bitcoin has been since its inception, since its beginning. If I can trace it, no matter where it’s been in the system, but I can’t trace a piece of meat going around the world, maybe the same technology could help me with that. CP: Absolutely. And you can also facilitate, you know, potentially, when something arrives, put in a check to say, “Well, this has arrived in a port in London, and this has gotten onto a truck, and it’s now going up to Manchester.” All this is quite interesting, you can make sure people get paid, you know, as they do their part in the supply chain, it’s a little chain here, and we just put that inside of a blockchain. ST: So, what’s interesting to me is this has been-, there’s a document called the bill of lading, that’s 2,000 years old, hasn’t really changed, and it’s effectively a piece of paper with a list of handwritten signatures on it, and that piece of paper is legal title of the goods inside a shipping container. And I could forge a piece of paper relatively easily, but it’s much harder to forge a digital signature from a mobile device in a particular location, and actually, a series of digital signatures, in theory, gives me a lot more proof, a lot more trust, and I could have done all of that digital signature stuff without a blockchain, but then the additional opacity, transparency, of who signed it when and where, and who has access to see who signed it when and where, and who operates that, because with supply chains it’s a really interesting question of, like, if I was to do that as a centralized database, who runs that centralized database? For all of the goods, for all of the countries, for all of the regulations, in all of the world, who runs the centralized data for all supply chains ever? It’s kind of difficult. Whereas when it’s decentralized, the great thing about paper is I just stick it in an envelope and it flies around the world and somebody picks it up, and it’s as good as when it left. That’s not true for centralized technology. CP: Exactly, and I mean, consider the things of what happens if it gets on a ship outside of London, it’s due to go to New York and it sinks along the way. I mean, it would be great to have a record to know exactly what was on that boat when it sunk in the middle of the Atlantic, so that the insurance company could just write a cheque to whoever it needs to go to. ST: And to see that in near real-time, right? So, right now, you’re seeing that piece of paper three days later when FedEx brings it to you, or UPS brings it to you, and you’re sending-, I saw a stat that the cost of paper alone in global supply chains is $500 million a year, just in the postage stamps. Like, it’s insane how much money people spend on just moving paper around the world, to also move the goods around the world. Alrighty, so that seems like a strong old use case if you’re in financial services, and of course we saw Digital Trade Chain, an interesting project from the banks, which we don’t have time to cover this week, but we will cover in future weeks, I’m sure. Alrighty. Colin thank you very much for being on the show with us again this week. CP: Thank you. ST: Next up, we are speaking to Arthur and Kathleen Brietman from Tezos. [Pause] ST: So, I’m here with Kathleen and Arthur Breitman. Kathleen and Arthur, thank you very much for being on the show, how are you? KB: Very well, and yourself? AB: Very good, thank you for having us. ST: I’m much obliged to have you. We’ve known each other for some time, but it’s great to have you both on the show, because you guys have done something pretty interesting, recently. You guys have done a bit of a token sale. But before we get into that, can you just tell us a little bit about your background, how you guys-, how you guys met, what you guys did before Tezos, etc.? KB: I suppose it’s easier to put this chronologically. So, we met in 2010, we started dating, and then we got married in 2013. I was still in college when we met, I graduated in 2012, and then I went to work-, I worked at a VC, and I helped some distressed portfolio companies try to turn around. Then I-, I spent a bit of time at Bridgewater Associates, which is a large, macro hedge fund, and then I went into consulting, I worked at Accenture for some time, and then eventually, I sort of became a subject matter internally on blockchain technology, which led me to take a job at R3. Towards the middle of my tenure at R3, Tezos became really popular again, in sort of taking the mind space of people, so I left R3 to take on operations at Tezos full time, in September of 2016, so. AB: Yes. On my side, my background is in statistics and quantitative finance. I worked at Goldman Sachs and Morgan Stanley as a-, as a market maker, so essentially writing algorithms to look at price signals, and trying to decide, you know, what is the right price-, you know, right price to buy or sell a stock or an option. And I got interested in bitcoin fairly early on, you know, I joke, but it’s true, it’s-, the sad truth is, I heard about bitcoin very early on, before the network actually launched, back in 2008. One of my best friends, Perry Metzger, runs CER (ph 23.42) cryptography mailing lists, we had, you know, an anarchist, like, (? 23.46) meetup, and he told me about it, and then I didn’t look into it for years, so that was a mistake, but it actually, you know, I came to look at bitcoin, and I was extremely interested, and I was fascinated by the idea, but the one thing that struck me as interested was, someone made the point to me that, look, you know, bitcoin is the first digital ledger of its kind, you know, but what matters is the entries in the ledger, right? So the bitcoin algorithm doesn’t have to be perfect, we can make it better over time, as long as we preserve the ledger itself, it doesn’t actually matter. You know, it doesn’t actually matter. And that really resonated with me, because my worry at the time was, “Hey, this is fantastic, this is the beginning of something, how is bitcoin going to stay current with all the technological innovation that’s sure to happen in this space?” And so, that answer stayed with me for a while, and I started being a little disappointed when I saw that there were really cool innovations like private transactions that, you know, now Zcash has implemented, that didn’t seem to be of interest to bitcoin or smart contracts. Bitcoin didn’t seem to have a strong urge to adopt this new innovation, and in fact, I saw a sour grape tendency, where people were saying, “Hey, actually smart contracts are a bad idea,” or, “Actually, we don’t want private transactions because they have such and such feature.” So it got-, you know, it really got me thinking that even though bitcoin was an anti-political project in some sense, you know, it’s meant-, everything is meant to be ruled by one algorithm, it’s mathematical, there’s no subjectivity in it, I don’t think you can actually rule out the politics of a system, you know, I think politics is like hurricanes. You know, I don’t necessarily like them, but they exist, and you have to make-, you know, and you have to manage it. And so the idea of Tezos is that it actually takes the political element into account. It says, “Look, we’re going to have-, we’re very early in this space, there’s going to be a lot of innovations.” It would be great to have a protocol that doesn’t change, but if we do that, we’re going to stagnate, so we need a way to actually update our protocol, to stay current, but we don’t want to just have one person that says, “Okay, this is the new version of the protocol.” We need-, so the idea is to have a formal governance model, to, like, build in the blockchain, use the consensus making ability of a blockchain to make consensus over how it should evolve. So, it puts the stakeholder of the blockchain in charge of deciding how they want the blockchain to run, what type of consensus algorithms they want to run, what type of-, what type of tradeoff do they want between centralization and throughput? All these type of decisions can be put in the hands of the people who actually use the ledger. ST: I think that’s hugely exciting. You basically looked at bitcoin and said, “It’s really exciting that somebody came along and invented something that was decentralized. That allowed you to have consistency across lots of counterparties. That allowed you to do amazing things.” But actually, changing that was so impossible that you needed to think through, “How do I have a thing that’s consistent, and also how do I make changes to that thing whilst keep it consistent as it moves?” It’s a really delicate challenge that we’re now seeing, I think, in the bitcoin space, where they’re struggling to process transactions, they’re getting slower and slower, and when the retail world, you know, who get excited by the bitcoin price, come to this space and look at bitcoin, they’re going, “Oh, well, my bitcoin transaction didn’t clear for a day sometimes, sometimes two days,” and the same is happening in Ethereum, so it’s a bit of a response to that, almost, and maybe you foresaw some of those challenges. So what is-, what did that lead you to? What insights did that lead you to, and then what is-, what is Tezos, and how does that try and help address those? AB: So most-, you know, people were discussing bitcoin’s capability at the time, you know, in 2014, when the Tezos papers came around. Of course, people were already discussing bitcoin scalability, but they were discussing it purely as an engineering problem. “Okay, how do we address that?” It was not discussed as a governance crisis, you know, the governance crisis came after. So, in that respect, I think that the paper foresaw the governance problems. And, you know, the thing is, from an engineering standpoint, there are solutions to the scalability problem with bitcoin, and in fact, bitcoin is considering two, it just can’t decide. One has more transactions on the blockchain, but can lead to more centralization, and so, you know, decentralization is an important aspect of bitcoin, so that can be problematic. The other one has more option transaction, doesn’t necessarily lead to more centralization, but it changes the nature a little bit of the transaction on bitcoin, and people just can’t agree on which one they want to go with, and it creates this huge political deadlock. There’s also other solutions, which are a little bit more out of left field. There’s something called Bitcoin-NG which has great scalability, doesn’t introduce more centralization, it’s a fantastic solution, and it’s barely being considered, because it’s just so different than bitcoin that I think that the idea of saying, “Hey, we’re going to have a radical change,” is just out of the agenda for anyone involved in bitcoin at this point, and that’s too bad. I think that it-, it ought to be radical. There’s a tendency to treat it as already having arrived, you know, bitcoin has made it, and all it needs to do now is survive, is not commit a single mistake. ST: Yes, it doesn’t need to change, it’s ready, it’s finished, so long as it survives it’s done, but then you could say the same for Netscape. You could have probably said the same for Myspace. They worked, but were they ready for the big time, and were they not vulnerable to-, you know, there’s something about network effects that people say a lot, where it’s because it’s the biggest, it will be around forever, but actually, being the biggest doesn’t guarantee you success. I mean, Yahoo! and Lycos, again, are other examples. So, who is Tezos for, and what does it mean if I am either a developer with an idea, or what does it mean if I’m in a bank, or what does it mean-, what does it mean to-, to have this platform, and who should use it? AB: Well, I mean, I think in-, in terms of its usage, it’s in the same category as bitcoin and Ethereum, and there’s been a tendency to say that bitcoin and Ethereum are complementary. So, you know, like, “Oh, well, bitcoin is a store of value, it’s made for transacting. Ethereum is meant-, you know, it’s meant to power (? 30.05) smart contract.” You know, people were-, have been saying, “Oh, bitcoin is coal, Ethereum is gas.” I think that it might be the intention of the Ethereum developers to do that, but de facto, I think the overlap is much greater than-, than people imagine. There’s nothing about the bitcoin use cases that are prevented on Ethereum, right? There’s nothing that actually prevents you from storing value using Ether. So, in that respect, we’re blockchain in the same vein as these other blockchain. We’re a base platform, we have smart contract applications and tokens. You know, the idea behind it is anyone who wants to use it is supposed to be-, it’s supposed to be accessible. Now, of course, these are the early days of the technology, so early adopters are going to be the first people to use it, but we want to make an effort to bring in more people. I think the main scalability challenge is not just scalability of the technology itself, but social scalability. You know, how do you grow it to a much larger community? You know, it’s interesting that people still talk about-, you know, they talk about the bitcoin community, the Ethereum community, but no one talks about the Facebook community. You know, no one talks about the Amazon community. Because at some point, your-, you know, your audience becomes so large that you’re not about being a community, you’re just, you know, you’re about being a product with a lot of users. ST: And I think that’s hugely significant. That’s where the focus is, you really don’t want to focus on the infrastructure if you’re a developer, you want to focus on, yes, being a product, I think that’s-, that’s a huge point. So, you guys have now built something that has attempted to address, I think, some of those concerns of the earlier platforms. It can do all the things they could, but it’s got additional capability over the top, and the governance is changeable over time. Would you say that your approach, then, from a token sale perspective, was one to try and get that governance off the ground? Or what was the goal of the token sale? Because I know that your token sale has gone quite well, maybe you could tell us a little bit how that’s gone, and why you did it, and also how you view more traditional forms of funding, as well, in that ecosystem. AB: So, you know, the fundraising that took place over the past few days, and it’s certainly gone on for a-, for a few days. So, this is actually being led by the Swiss Foundation, so it’s-, we helped set up a foundation in Zug called the Swiss Foundation, and it’s headed by Johann Gevers, Diego Ponz, and Guido [Schmitz-Krummacher]. This foundation, essentially, is dedicated to promoting the protocol. You know, the idea that we-, so, we have a private company in the US who has been developing this ledger, but if you want to launch a ledger like this, and you want it to be used by many, many people, it doesn’t necessarily make sense to do it as a private company, because a lot of what you’re doing is essentially benefiting anyone who uses the product. So, you don’t really have a commercial relationship between, you know, the producers and the customers, when you’re delivering an opensource project. So, it made more sense to have a non-profit foundation, which, as a non-profit foundation has been conducting this fundraiser. And it serves several purposes. One is that, you know, it’s going to endow the-, the foundation with a budget that can help it promote the use of the protocol and development, and interest in the space, and the other one is that it provides a way of distributing tokens. The way that bitcoin was initially put in people’s hands is that people would mine it, you know, they would add their computers to the network, and they would spend some electricity, and then they would receive, in return, some-, some bitcoins. There’s no mining in Tezos, Tezos uses a proof of stake system, where the people who validate the network and contribute to the network in terms of creating blogs and checking transactions, are people who hold tokens. So, as a result, you need an initial distribution mechanism, and you need one that’s going to go far and wide in introducing this token, and this was an opportunity to do that. ST: That’s hugely significant, that people can take it from the beginning, and that you’re using different consensus mechanisms. So, your incentives are different, your economics are different and your governance is different, and I think people should definitely pay closer attention to that. So, I’m running up against it on time, so, I’m going to ask you two questions to leave listeners with, which is, one, what are your ambitions for Tezos? You know, what do you see in its future? What’s coming down the line as the token sale rounds out in the next week or two? And of course, where can people find out more? KB: well, finding out more is quite easy, so Tezos is a made up word, so we’re, as far as we know, the only Tezos, you know, thing that pops up on the internet, aside from scams for Tezos. So, Tezos.com is the main address where you go. But in terms of, like, where we want this to go, obviously we have a bit of a lull between the fundraiser and the launch of the network, so we’re going to be working on announcing some partnerships and some people who want to use the protocol, moving forward. I like the idea of having a way to distribute business logic in this decentralized fashion, I think it’s a really powerful idea, and a number of people have approached us to-, to start using the technology more critically, so I’m excited to get that off the ground. That’s more or less what we’re going to be focusing on over the next year, is building up the network, releasing it, and also launching some use cases that hopefully will validate our hypothesis that this is a really awesome piece of technology. ST: Hear, hear. The amount of people I speak to that tell me that they really like Ethereum, but they wish they had something that was ready, on a weekly basis, is increasing all the time, so people should definitely go pay attention to Tezos as a project. Arthur, Kathleen, thank you very much for being with us on Blockchain Insider. [Pause] Simon: Great, so I am here at Money 2020 with the CTO of Ripple, Stefan. Stefan, thanks for being with us on Fintech Insider, how are you? Stefan: I’m doing good, thanks for having me, I’m very excited to talk to you. Simon: Likewise, great to have you on the show. Ripple, you guys have been around for a little while now, you’re kind of old hat at these conference things now. Stefan: Well, yes, I joined in 2012, pretty much when the company started, September. Simon: That’s a good while, and in that time, you guys have kind of gone through some changes. There’s been caterpillar versions, there’s been butterfly, back to caterpillar, back to butterfly. Like, how would you describe what Ripple is today? Stefan: So, I think today we’re a software company that’s making solutions for banks, to make cross-border payments easier, faster, cheaper. Simon: So, when you say cross-border payments, cheaper, faster, better, like, who’s that for, then? So, you’re a solution for banks, and they’re finding cross-border payments too expensive. Is that all banks? Is that the tier one banks? Is that the smaller banks? Like, who’s the ideal customer? Stefan: So, I think it’s that banks are finding it harder and harder to serve their customers. So, this could be corporates that are trying to do disbursements around the world, trying to pay out to vendors, etc., and they’re trying to provide a better product, because their customers are slowly moving away to alternative solutions, and so for the banks to keep their customers around, they need a better infrastructure, so they can actually give the same kind of user experience that you would get from some of their competitors. Simon: So, when you talk about better infrastructure there, you’re not talking about changing what’s inside the banks, you’re talking about the connections between them, right? Stefan: Yes, exactly, the-, the way that banks connect to each other, especially. Simon: So, how do they do that with Ripple, versus how they used to do it? Stefan: So, today, they’ll usually have messaging systems that are kind of one-way, so they’ll shoot a message off ,and then not get any feedback, not get any reply right away, and with Ripple, what we can do is we can actually see the entire cost across a payment pass, so if it goes through a bank, to another bank, maybe even to another bank, we can see the cost across that path, and then also, like, the FX rates, you know, if it’s going to take a long time, how long it’s going to take. Basically, all the properties of the payment we can see up front. Simon: So is the metaphor here that, like, I send an email to Bank Number 2, and Bank Number 2 then forwards that email to Bank Number 3, but doesn’t include me? Who forwards that email to Bank Number 4, but doesn’t include me, and I have no idea what’s happening to my payment? Whereas with Ripple, I’m cc’d in the whole thing? Stefan: Exactly, yes, yes. It’s actually, you know, a lot of payments actually fail because of this. So, something like 10%, depending on who you’re talking to, of wires, international wires, fail because some part of the destination information is wrong, like the account number, maybe, or the address, or the bank name, or whatever the case may be. And you know, we’re addressing that by being able to verify that information right away. This is just another example of that end to end communication being really key to providing a good user experience. Simon: So, I understand it that Ripple then comes along and says, “Okay, you’ve got your big system sitting inside a bank, it does all of your payments, all of your customers are using that millions of times a day to send money both domestically and internationally, and this system, we’re going to connect it to a whole bunch of things, and now you’re going to connect it to Ripple, and because you’ve connected it to Ripple, it can make payments faster, cheaper.” But if that system itself is slow, is there anything you guys can do to make that system go faster? Or are you still reliant on the banks being faster? Is there a benefit still, to using Ripple, even if the system itself is slow? Stefan: Yes, so, I think the visibility is still there. So, actually, before we move any money, we can still do that end to end communication, so we see what the costs are going to be, what the speed is going to be, even if the systems themselves are not real time. In fact, I would say, from what we hear from our customers, real time isn’t the biggest issue. I think the biggest issue is the failure rates, it’s the-, the customer service issues that that causes. It’s the number of APIs you have to integrate with, if you want to do global payments. So, those are some of the issues that we hear from our customers. And real time, I think, a lot of banks are upgrading their internal systems, and then they find out that there’s no place to integrate that cross-border. So, like, you’ll see more and more countries, like the UK, having very good domestic real-time systems, but then having trouble connecting with other countries in real time, so that’s kind of where we see a lot of benefit and a lot of (? 40.10). Simon: So that’s interesting me. People often talk about faster, cheaper, but actually, just more transparent, less failure, is a message to a banking audience that I think makes a lot more sense, which is, “I don’t want these payments to fail, and I need to know where that money’s got to, otherwise I’m on the hook with the regulator.” So, to have somebody to give me the transparency to that could be huge. But how do you balance, sort of, transparency and privacy? How do you keep that balance? If you’ve got, like, this shared ledger, if everybody’s using this network, and everybody can see everybody’s transactions, how do you guys think about privacy in that setting? Stefan: So, that’s a really good point, so, the technology that we use today is a protocol called Interledger protocol, and in that protocol, the only parties that are actually privy to the details of a transaction are the banks, the financial institutions that are involved in that transaction. So, it’s very different than both our own solution-, our old solution, as well as solutions that a lot of other vendors are out there with, where you do have a shared ledger that everyone one can sort of see. So, with Ripple, it’s not even the consortium that can see it, but it’s actually just the particular participants of that transaction, plus any regulators. Simon: So explain the interplay between Ripple and Interledger. Because I think there’s-, there’s a lot of people hearing “Interledger”, there’s a lot of people hearing “Ripple”, and they’re kind of struggling to separate the two. So, what is the difference? Because one’s, like, a traditional shared ledger with gateways around the edge of it, and the other one’s this network for doing transactions, as you’ve just described? Is that fair? Or is it-, or-, Stefan: So, I would say that the shared ledger, we’re using it primarily for one thing, which is the built in currency, XRP, which is yet a third thing, so I can see how people might think it’s confusing, but the way I usually explain it is that I see it as stages, right? So I think the most immediate benefit that we can give to people is that transparency we were just talking about, right? So, that’s something that our product, it’s already in production with, already there are banks that are benefitting from this, doing payments today, and so that is something that-, that’s kind of the most near term opportunity. Simon: So, I think there are statements that appear to be contradictory that might not be, so I want to unpick them. Because there was something you said where, with Interledger, which is kind of my-, my gateway into Ripple, and gateway into other things, only the banks involved in that transaction can see that transaction. And on the other hand, you’re saying, when using Ripple, the benefit of using Ripple is the transparency. But if I-, if my gateway in is something that only I and my counterparties can see, how are you balancing that with the transparency? Is it just the counterparties to the transaction themselves that can see the entire flow? And nobody else in the network? Is that kind of the key here? Stefan: That’s exactly it. Simon: Maybe transparency’s a misleading word. Stefan: Yes, I think transparency, it always, like, depends on transparency of what, and for whom? And so I think for us, it’s the transparency to the user, in terms of what is the path, what does the liquidity look like, and that is something that comes up, it’s like, not every player is comfortable with sharing their rates, and being transparent about their pricing, but I think that that’s just a requirement, that’s just something that customers are going to expect in the future, and so the players that are willing to share their rates, those are the ones that we let participate in our network, and we think that those are the ones that are going to be the most successful. Simon: And I suspect regulators would enjoy that, as well, from a-, from a treating customers fairly perspective. So, build up the story for me, then. We’ve got Interledger, we’ve got Ripple, and then the third step, we’ve got XRP. Let’s solve one problem at a time. So, solving the first problem, why-, why I need Interledger, I want the transparency. How do I get Interledger, and how do I integrate it, and what do I do with it, once I’ve got it? What does it give me? Stefan: So, Interledger is basically an interoperability protocol, for payments. The idea behind it is that-, we want to apply the ideas from the internet to payments. So, taking the same sort of architecture, the history of it, and thinking about whether those lessons can be applied to money. And I think there’s a lot of people talking about internet of blockchain, internet of value, internet of money, internet of payments. But I think that a lot of those approaches don’t actually really look at the architecture of the internet, and try to apply the principles of it. They’re just trying to-, to get the outcome of it. Simon: So, would it be fair to say that the banking system, and payment systems, are sort of almost existing in a pre-internet age? It’s like, before the internet came along, we could all build networks, universities had networks, companies had networks, but getting those networks to talk to each other was always proprietary and kind of hard, and that’s exactly where the banking system is today. I want to solve that problem, and I need a way for those systems to talk to each other, but I can’t just use the internet protocols, I need a different type of protocol, and that’s where I might want to use something like Interledger. Stefan: Yes, so I think the best example that I always can give is-, is if you look at Visa, and you look at their slogan, it’s-, do you know what it is? “Everywhere you want to be.” And if you look at MasterCard, it’s basically the same thing, where it’s, “For everything else, there’s MasterCard.” Right? So, both cases, they’re basically advertising how large their network is, how many merchants can you go to, where can you spend with this-, with these cards, and so it’s-, the primary value proposition is reach. It’s not how cheap are we, or how fast are we, or anything like that, it’s, “We can reach so many merchants.” If you go back far enough in time, you see ads from CompuServe and, like, online service providers, where they also talk about, “We have the most members, we have the most services,” and it makes sense that, before you tie all the networks together, the biggest value proposition is always, like, how many people can you reach? But what happens is you get a couple of these sort of incumbents that are very large, and they have that global reach, but then all the smaller providers band together, and they kind of interoperate using some protocol, and that’s when you suddenly see them, like, starting to threaten the incumbents, right? And I think that hasn’t happened in payments yet, because it hasn’t been the right technology, and with Interledger, we’re trying to create a protocol that can do just that. Simon: And, of course, Interledger is a protocol, it’s opensource, so for you guys, that’s just step one. So, what problem do I have once I’ve got Interledger? Once my-, once my payments are interoperable? What do I then need to solve? Is it-, is this where we get into the transparency thing? Is this where we get into-, Stefan: So, the reason Ripple’s investing so much time, we have 11 full-time people working just on Interledger, the reason we’re investing so much time is because we think it’s going to be a big driver for our products in the market, because this is going to put additional pressure on the system to modernise, and to kind of, keep up with the technological change, because if people are starting to do these kind of payments that we envision for Interledger, where I can pay from any wallet to any wallet, I can pay, sort of, seamlessly in the flow, and I am no longer restricted by some of these expensive, slow networks that I have to go through today, once we reach that stage, banks are going to have to keep up with that, and so we are making solutions for banks that allows them to do that, so it’s creating, basically, demand for our products. Simon: Yes. So, in one sense, you’ve solved the first problem, which is payments aren’t interoperable. Once they do become interoperable, now I need faster, better systems-, Stefan: Exactly. Simon: So now you’re solving problem number two when you go, “Well, we’ve been working on a faster better system, in theory, so here it is,” and then number three is, when you want to do international FX you might need-, this has always confused me. I’m not sure why XRP is needed in the system. What is XRP? Stefan: So, the way that you do real time international payments today is by pre-funding funds around the world. Simon: Yes, so I’m a bank who’s in one country, and you’re a bank in another country, and I decide I’m going to give you a whole bunch of money, and you’re going to give me a whole bunch of money, in different currencies. Is that what you mean by prefunding? Stefan: Exactly, but it’s not just banks that do that, it’s corporates that do that, it’s payment companies that do that, and there’s actually a lot of money that’s tied up just for that purpose. Some estimates I’ve seen are $26 trillion around the world, this is, I think, a McKinsey number. So, that’s a significant amount of money for just to be sitting there as collateral for payments, or you know, reserves for payments. So, where we see a big opportunity is, if you had an asset that you could move globally, in real time, and you could do it-, it was reliable enough and stable enough to use as a solvent (ph 48.05) asset, it basically would become, kind of like a form of gold, a form of reserve, that you can almost, like, teleport around the world. And that would solve that problem. It would stop you from having to pre-fund everywhere, because you can actually move your collateral around the world wherever you need it, in real time, and so that allows you to free up those funds and use them for something else. Simon: Okay, but I’m assuming, though, that somebody else could do that, with another asset? It doesn’t have to be XRP, XRP is just one that you guys c hose and picked. Stefan: Right, so that’s a really good point. So, we want to look at what are the properties of an asset that you’d want, if you want it to be used in that role. So, you could use dollars, you could use-, you could use any kind of digital asset, like bitcoins, Ripples. The question is, what are the properties that you’re going to be looking for? And so when I look at fiat currencies, well, fiat currencies, until central banks actually offered a service, you’re always going to be tied to some particular counterparty, some particular issuer for that particular ledger that you’re using for the settlement, and I think the problem that banks have run into is yes, I mean, you can use Citi Group, you can use Barclays, but as soon as they have some amount of reach, they will charge you through the nose for that service, because they have that reach and other people don’t. So, it’s, again, that same problem of, once you have reach you get that lack of competition, because people are just entrenched. And so, I think there’s an opportunity for these neutral assets to be used for settlement where, you know, Ripple can’t charge any high fee for that, because we don’t control the network any more than any of our users do, and so the fees will always be low on Ripple, and so it becomes a-, a-, not a moat, it becomes a, you know, a freely usable system. Simon: It’s designed to create freedom in the system. But isn’t it true, though, that, like, the overwhelming majority of Ripple nodes are run by Ripple? Stefan: So, right now we are working with a bunch of partners around the world, including MIT, Microsoft, you know, Telindus, (? 49.58). These are all enterprise hosting companies, and basically what they’re doing is they’re running Ripple validators. Now, the way Ripple works is that it’s the users that are choosing which validators they want to listen to. So, they can choose us, they can choose these other partners, etc. Right now, what we recommend to our partners is that they use our validators, and the reason for that is because we are the only ones with several years of operational experience, and five nines of uptime, and other benefits that you might want, if you’re using the system commercially. However, in the future, some of these other providers will build up that experience, and they’ll build up that track record, and at that point, our customers will start trusting them, and also, we’ll start recommending that they trust them. So, that’s when the network become, like, a-, something that we truly don’t control. Simon: Interesting. And so what do you see the future, where do you see the market at, at the moment? Because I see there’s still a lot of confusion out there. There’s a lot of people charging in 100 different directions. There’s Corda, there’s Hyperledger, there’s people in the use cases, like trade finance and financial markets, there’s all kinds of stuff happening on the payments side, as well. Where are we at in the evolution? We’ve seen the cryptoasset bubble, recently. Where are we at, and what are people missing? Stefan: Well, I think that more and more people are understanding that the key challenge is interoperability. I think, you know, we were pretty early with Interledger, there’s lots of other approaches out there now, with Cosmos and others, and basically, what I would say is that, at some point in the near future there’s going to be, you know, some winner on the-, on the side of interoperability, and no matter which one that is, you know, we’re going to definitely support that in our products, and so one of the things I would say is that-, that Ripple products are designed so that can support any kind of interoperability protocol, and so for our customers, they don’t have to worry about which one of these many, many technologies is going to win out, because if they use Ripple’s stack, they’re going to be interoperable with it either way. Simon: So, they’ve kind of got that optionality in future. I guess, though, how do you guys see the transition coming, from where you’re recommending the majority of your customers use your service and validators, you guys have a large percent of the XRP supply, you guys are controlling how XRP supply is being released. Can you see why people might be nervous, given your current position? And how do you reassure people that that will, in fact, change? Stefan: Right. So, I think, like, a lot of the things that you’ve mentioned are also our biggest strengths. Like, for instance, when I was working on bitcoin, I wasn’t getting paid, and that’s, like, I think, a recurring theme that you see with some of these other digital assets, is that there isn’t a strong core team that’s fully dedicated to supporting the asset. So, for instance, in Ethereum, people often complain that there is nobody really working on the core anymore, and it’s getting difficult to, you know, meet the roadmap and meet the deadlines to actually get the important improvements out, and so, you know, for me, you know, as a holder of XRP, I certainly like the idea that there’s somebody that can step in if there’s, kind of, a regulatory challenge, or if there’s any kind of initiative that needs to be created to support the asset. So, I will say that. The other thing I want to mention is that Ripple actually decided to lock up, or commit to locking up, a significant amount of the XRP that we hold. So, I think it’s 54 billion that we’re locking up, to be released 1 billion a month, in sort of a rolling fashion. That doesn’t mean that we have to necessarily spend a billion a month, it’s just that’s kind of putting a cap on how much we can release into the market at once. Simon: Yes. I think there’s a damned if you do, damned if you don’t kind of situation. You’re kind of torn between the effectiveness of being the evil empire, and the loveliness of being the rebel alliance, and actually, you’ve always got to try and find that-, find that balance. And I guess also, there’s a lot of incumbent institutions that would look at what you guys do and say, “Actually, more transparency in the market is probably going to be difficult, when I have a large share, and lots of flow. Actually, having a system that hasn’t been used at scale yet is difficult. I want to see other people using it.” And you guys have got a few customer references now. What do you see the future looking like? What are the major next steps? Because a number of banks have stopped using Ripple, kind of, internally, you know, in production. What happens after that? Stefan: Yes, so right now, we’re very focused on setting up some of these key corridors, like India, we have a lot of traction in Japan. So, some of these most interesting remittance corridors, those are where we’re focused on right now. We think that it’s obviously going to take some time to build a global network, we have a couple of partners that can give us access into a lot of different markets, so I think it’s kind of building out that reach, and then building up the volume from there. Simon: Stefan, thank you very much for being with us on Fintech Insider. Stefan: Thank you. [Pause] ST: So, thank you for listening to the first ever Blockchain Insider. Thank you very much to Stefan and the Breitmans, of course. If you’re still listening, please do go and leave us a review, subscribe to our podcast, tell your friends about it, and if there’s anybody you want to hear on the show, drop us an email at podcast@11fs.co.uk. See you next week. End of Audi