Digital Assets are Coming of Age, w/ Adrien TRECCANI (#34)
Bitcoin is the best performing asset in 2020. There is growing institutional interest in crypto and broader digital assets. Tokenization is poised to be a huge market opportunity. In light of all this, we’re inviting you to a masterclass on all things crypto. We’re sitting down with Adrien Treccani, CEO and co-founder of METACO — a provider of security critical infrastructure for financial institutions that enables them to safely enter the digital asset ecosystem. Adrien is a leading software engineer specialized in high-performance computing and financial engineering and an advisor to banks, hedge funds and associations on distributed ledger technology. So today, you are going to learn about the difference between cryptocurrency, digital currencies, stable coins, you’ll hear about the evolution of blockchains, what will happen to commercial banks if we start seeing Central Bank-issued Digital Currencies, and more.
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The next step is for the trusted companies on the market — which are the banks — to actually get in and start offering professional services around the management of digital assets. And for that, infrastructure is needed.
[00:01:24.17] Ben: Adrien, normally, on Structural Shifts we don’t do a whole lot of bio. We don’t cover a lot of biographical information, but I think it might be useful in this case. So, should we start there? How did you first enter the crypto space?
Adrien: You know, Bitcoin started in 2008 when the first paper was published by this anonymous creator called Satoshi Nakamoto. And then, for a few years, it was only the playground of, let’s say, libertarians, anarchists, passionated software engineers, and cryptographers. But, let’s say around 2011, a lot of people started getting in either for speculation purposes or because of passion for the new technology and innovation. At this time, I was doing my Ph.D. You know, when you do a Ph.D., you have a bit of free time. I don’t like to say it, but you still have some free time to look for things which are not strictly speaking related to your Ph.D. research. One of these things was cryptocurrencies. I was completing my Ph.D. in mathematical finance with a specialization in high-performance computing and Bitcoin was not so far away from what I was doing. So, reading articles about it, I saw an opportunity to speculate or invest. I did not believe in Bitcoin initially. Like, I think, everybody, initially I saw a scam or something which I could not really understand. But after a month of looking around for information, and also missing out on incredible growth opportunities — I think Bitcoin tripled while I was just looking at it — I started investing a little bit and therefore, also getting into the details of blockchain. And this is only years later, in 2015, I realized that something had to be done to support the growth of the ecosystem. The industry was not ready at all to offer massive services around cryptocurrencies, tokenization, and all of these new use cases that are appearing today. In particular, we were still facing a lot of platforms getting hacked, losing most of their coins; investors like myself losing a lot of money in these horror scenarios. And so, I thought that the next step was for the trusted companies on the market — which are the banks — to actually get in and start offering professional services around the management of digital assets. And for that, infrastructure is needed and Metaco — my company — is specialized in offering such infrastructure.
cryptocurrencies have these incredible opportunities that you no longer see on any of the markets
[00:03:41.23] Ben: And you always saw that as being the opportunity you would pursue? Because I can’t remember when we first met, but you’ve been in this space for a very long period of time and you’re an expert. And you could have done anything, right? I mean, you could have set up an exchange, you could have been a trader — why did you start a custody platform?
Adrien: I could have been trading. That’s a good point. I have these several years in the hedge fund industry as a trader, and I think cryptocurrencies have these incredible opportunities that you no longer see on any of the markets unless you do high-performance frequency trading. And so, I think that would have been a possibility. However, at that time, the markets were not sufficiently developed, if you think in terms of market depth, about liquidity, to implement many of the strategies that today would be actually very interesting to study. I missed the opportunity at that time and that was also for me a way to get back to software engineering. And discovering Bitcoin when I was doing mathematics and finance allowed me to get back to programming. And so, when I was the victim myself of losing bitcoins, having one of the exchanges I was using that got hacked and then a second exchange that I was using got hacked, I really thought that the opportunity was in building the infrastructure of this new ecosystem. And today, well, I’m not saying that since we founded the company in 2015, we had this exact precise business plan. In fact, we slightly pivoted in 2017, but we always had this ambition to provide institutional solutions for digital assets.
[00:05:18.11] Ben: Is custody, do you think, the biggest missing piece in the institutionalization of digital assets?
Adrien: Well, I think custody means slightly a different thing with digital assets than it does in traditional banking. When we think about custody in traditional banking, it’s often about storing pieces of paper, and potentially, you know, having corporate actions and not doing much about it. When we say custody in the crypto ecosystem, what we mean is much more than that. It’s obviously key management, the management of these — what we call — secret keys, which secure the assets, but it’s all of the interaction with the blockchain or the distributed ledger. It’s not just about storing and moving assets, it’s also about interacting with smart contracts and corporate actions, managing the whole lifecycle of digital assets — things which are much more dynamic than what one is usually used to with custody in traditional banking.
We’ve seen this big trend of central banks speaking about creating not just physical cash, but getting into digital cash — what is called today, a CBDC. The principle behind it that you can store and transfer a currency peer to peer, from person to person, with no intermediary is something that we see today indeed central banks are moving to.
[00:06:13.12] Ben: Many of the listeners will have different levels of understanding of all these different terms. So, if you’re okay, to maybe just take a step back and just maybe see if we can define and come to an understanding of some of these terms, and then we’ll delve in a bit more deeply. So, can we start with what the difference is between a cryptocurrency and a digital currency — or a central bank digital currency?
Adrien: Yes, sure. So, I would say that Bitcoin created this new way or proposed a new way of dealing with assets. These new ways to think about the solution were, there are less central parties. You can completely decentralize the payment network or currency, and make sure that there is no single point of trust — you don’t have a CEO, you don’t have a chairman or a company or a government that has full control over the assets or its infrastructure. And so, Bitcoin was the first to provide a scheme that actually works and that has been verified now for almost 10 years. However, what was invented by Satoshi Nakamoto in this context can be reused for many new applications. Some parts of its invention can be reused in different contexts and sometimes, almost exclusively, everything that is invented can be reused for other assets. When we speak about digital assets, we generally think about taking the blockchain technology that he invented in this context, extracting some parts of it, and using it for different asset classes — let’s say securities like equities, fixed income, and whatever, bonds or loans, real estates, arts; you know, anything that you think could benefit in being tokenized or put in a digital form on the blockchain.
Adrien: Then once you’ve gone through this tokenization process, your asset benefits from the same properties as Bitcoin itself. It can be stored and transferred efficiently, it can be divided into small particles, it can be controlled through what is called a smart contract so, sort of automated software, which can simplify the application of contractual clauses. What we’ve seen recently is that this technology could potentially also be used by more traditional assets like currencies. We’ve seen this big trend of central banks speaking about creating not just physical cash, but getting into digital cash — what is called today, a CBDC: Central Bank-issued Digital Currency. I’m not saying here that they would use exactly the same principles as Bitcoin. I think that the Bitcoin blockchain or the Bitcoin technology will not be adapted for that, it will not scale enough, it would be too open or too transparent in different ways, but the principle behind it that you can store and transfer a currency peer to peer, from person to person, with no intermediary is something that we see today indeed central banks are moving to.
[00:09:04.10] Ben: At the moment, I can pay you in Swiss francs, I can make an online transaction, it’s digital, right? So just again, what would be the difference, then, between just a digitally-exchanged Swiss franc and a digital Swiss franc?
The idea of the Central Bank-issued Digital Currency is that you can have a direct link between you and the Central Bank, but it is now digital rather than physical
Adrien: Well, think about the difference today between cash and something that you hold on your bank accounts. When you have cash, it’s guaranteed by the Central Bank that you will have some purchasing power tomorrow. So, if you have this banknote in your wallet, then tomorrow you should still be able to buy your bread in the morning with this banknote. Because it’s backed directly by the Central Bank, this claim, this promise is made by the Central Bank itself. Any other entity in between, an intermediary, I don’t know, defaulting, going bankrupt, could not break this promise by the Central Bank. I’m not saying that this is perfect. Of course, the Central Bank, we’ve seen many examples where they hyperinflate the currency and potentially, even though it doesn’t go bankrupt, you still lose all the purchasing power that you’re supposed to have and you start having packs of banknotes that are worth nothing, that are good to light the fire, for instance. But you know, this is still a claim that is direct between the consumer and the Central Bank.
Adrien: Now, if you think about banking money, that’s very different. In fact, when you have money in your bank account, this is not a promise by the Central Bank, this is a promise by this intermediary that is your commercial bank. If this commercial bank goes bankrupt, if it wants to apply special fees on every transaction, any model, any business model or risk that this bank is facing, potentially, you’re going to be subjected to it. It’s not a direct claim or a direct connection between you and the Central Bank. So, this whole chain of intermediaries, which sometimes is much more than just one commercial bank — it can be multiple commercial banks, it can be payment processors, it can be custodians in between — this whole chain could be completely reduced to a direct link, similar to what you have with the cash, but in a digital form. And so, the idea of this CBDC, this Central Bank-issued Digital Currency, is that you can have an equivalent direct link between you and the Central Bank, but it is now digital rather than physical, and you can use it to process transfers on the internet as efficiently as you would with Bitcoin — probably much more efficiently than you would with your bank transfers where sometimes you cannot transfer during the night or off business hours, sometimes you cannot transfer outside of your country, or it takes multiple days, it can be very expensive depending on where you send the money. With the CBDC, the promise is that it would be relatively similar to Bitcoin, you could send this money anywhere, anytime, frictions would be minimal, and you would have the guarantee that even if there is a complete collapse on the financial industry, as long as the Central Bank is relatively stable, your purchasing power should remain the same.
[00:11:54.15] Ben: In the event that we do see Central Bank-issued Digital Currencies, what becomes the role, then, of commercial banks?
I wouldn’t be surprised if in the future, we start seeing fine art, Picasso paintings being tokenized, so you, as an investor can finally invest in it, even if you’re not a billionaire, through tokenization, and that you can start diversifying your portfolio in many different classes of assets, that today you don’t have access to.
Adrien: Well, I think it may change dramatically. I don’t think banks will disappear. In fact, you know, some people expected that post offices would disappear when the internet was adopted. This is not what happened. In fact, Swiss posts in Switzerland are louder than ever. They just had to restructure to find new business models, new opportunities. And we see that what they used to do may have changed slightly, but it’s still relevant. I think the same is going to be true for cryptocurrencies or Central Bank-issued Digital Currencies. I believe that banks will still be relevant. If you think about it, even today with cash, you have the ability to store cash under your mattress. Now, do you do so when the amount is relatively large — let’s say if you store more than a couple of thousands — are you going to put that under your mattress, or are you going to put that in a vault somewhere and potentially with a bank? You probably will do that with a bank. Even though you don’t have to, it’s just an option, at some point, you realize that you prefer paying a professional third party that knows what it’s doing, has all of the measures, the infrastructure, the processes than doing it by yourself saving a few hundred bucks per year, but potentially being fully compromised. And I think the same thing is going to happen with digital assets. Even if you have the option to work with the Central Bank directly, it would be a very practical option to have for small amounts, you know, fast transactions to not be fully dependent and reliant on the commercial banks and payment processors. But in general, when you want to work with a trusted third party that removes some part of your fees and your anxieties, and you will get back to working with a bank. And this is pretty much our assumption also with Metaco. You know, we could see a future where banks completely disappear. In fact, we could go one step further and think about a situation where even central banks disappear and are replaced by Bitcoin, Libra — which in a way is a central bank — Ethereum, etc., and where commercial banks simply are no longer relevant. I think that’s not gonna be the case. And our approach at Metaco is that most investors in these cryptocurrencies and digital assets, will still want to work with a trusted partner that knows what they’re doing, that advises them — and for that, infrastructure will be needed.
[00:14:17.06] Ben: Do you foresee that everything will go digital or crypto and therefore they just have to find a new role than the new decentralized financial world? Or that there’ll be a little bit of a bridge between the old and the new?
If you think about a world where some of the regulations adjust to this new digitalized ecosystem, decentralization, I wouldn’t be surprised that new competitors that would never have considered getting a banking license due to the costs and, you know, frictions could suddenly become relevant and capable of operating a regulated business in this field.
Adrien: I think the transition is going to be very long, first of all. So, even though we speak about tokenization as being a hot topic today, I think tokenization is going to take years to become a new standard, and that is going to take even more years until the legacy approach is completely replaced by tokenization. Now, whether it’s going to be fully replaced at some point, I wouldn’t be surprised because if you think about it, everything is digital today, except monetary considerations. Everything can be digitalized: information, communication. You no longer send telegrams, right? You use the Telegram application, which is a messaging app; you use WhatsApp, you use Facebook; storing pictures — you used to print them — well, you no longer print them, you keep them in a digital form. So, what’s missing today is the notion of money or value of equities, which is partially digitalized but it’s still in a very centralized ecosystem, which doesn’t give you as an investor direct control over what you own. So, I wouldn’t be surprised that in the future, we start seeing fine art, Picasso paintings being tokenized, that you, as an investor can finally invest in real estate, even if you’re not a billionaire, through tokenization even if you’re not a billionaire, and that you can start diversifying your portfolio in many different classes of assets, that today you don’t have access to.
[00:15:59.23] Ben: One more question on the role of banks. So, what about things like issuents? Do you think that they just become custodians or do you think they keep some of their historical roles in, for example, issuing new securities?
Adrien: I think they will keep this role, however, they will be facing more and more competitors coming from IT. So, security firms, IT firms, or, you know, some of the big techs today: Google, Apple, Facebook, Microsoft of this world. If you think about this, it’s already the case that Apple is getting very strong in payments. Alipay, obviously, and many of these other protocols are getting traction to a point that you can ask whether banks and payment processors are going to remain relevant in this field. So, I think yes, banks are gonna keep this role and are probably going to be natural service providers in this field. However, they’ll start facing competitors that they don’t see today on the market. A big part of the reason they are still so strong in this market is because they’re protected by regulations. If you think about a world where some of the regulations adjust to this new digitalized ecosystem, decentralization, I wouldn’t be surprised that new competitors that would never have considered getting a banking license due to the costs and, you know, frictions could suddenly become relevant and capable of operating a regulated business in this field.
[00:17:16.10] Ben: So it seems that a lot of the promise of digital currencies, cryptocurrencies, Central Bank-issued Digital Currencies, is about democratization, is about making everything to do with finance cheaper, easier to access, having less friction. So, is that where you see the benefit? Do you see that finance becomes open to everyone because you don’t need a bank account — you can diversify your assets for, you know, very small holdings? Or do you think it’s something bigger? So the reason I ask that is because, on the way here, I re-read the classic article by Chris Dixon, “Why Decentralization Matters?” And for him, it’s much more than just democratization. It’s about introducing new, better incentives for digital commerce. Do you see it as big as that?
Adrien: I see it even bigger than that. It’s much more than finance, it’s much more than payments. It actually can have dramatic consequences, in my opinion, in a good sense. But beyond this obvious industry that is finance, one example is governments today or the way we operate a company. Let’s start with this simple use case. Today, a company, if you’re in Switzerland, you create your company, you say, “Oh, I’m going to inject 100,000 Swiss francs for the capital, I’m going to be the shareholder of this company, I’m going to be subject to specific laws that have been established. I can set up a shareholder agreement.” All of these things, if you think about it, they are arbitrary. It happens that through history we’ve defined that this is the way it should be in a country, and every country will have a different way of operating with companies. But in the end, it’s nothing more than a series of contracts. And all of these contracts can be fully digitalized on the blockchain. This is exactly what these so-called ‘smart contracts’ are about. They’re not just for tokenizing things. They’re also for digitalizing companies where you can have an algorithmic Board of Directors, shareholders that can vote, you can pay dividends to anonymous shareholders that you don’t know anything about, except that they hold a part of this abstract company. You can take decisions and vote as a Board of Directors, not because you all meet in the same room, and you have the law of Switzerland backing you, but because you just vote with your token, in a smart contract on the chain. So, a company is something, if you see it this way and you do the abstraction that is nothing more than a set of contracts, I see a future where this simple concept may be completely digitalized and even the government here would become less and less relevant in regulating and controlling how companies operate.
Adrien: That’s just a tiny example, but if you push this further, you can start thinking about many laws that exist today, and are enforced by the centralized governments. You know, we have a centralized government, we speak about democracy, but in the end, there are a bunch of people that vote to elect legislators, legislators create laws that do not always reflect what do people want, these laws are then enforced by judges and courts that may even interpret the law in a different way than it was written, which was different from what the people actually wanted — and you end up in a system where you have dozens of intermediaries and a very centralized system for politics, for law, for justice. And I can see a future where blockchain and smart contracts can be used to create new incentives where many of the laws that we have today become irrelevant because they are already backed by some form of smart contracts, and the protections that the law offers us today can be enforced by algorithmics, by codes, by programming, and you no longer need to have armies of lawyers, judges, courts, and politicians creating laws because it trades into code running on the blockchain. So, that’s, I think, a very exciting future, obviously very disruptive — I’m not sure regulators will be happy about it, because it takes away some of their power — but I think it also can create a world with much more certainty, where, when you sign a contract, which in this case is digital on the blockchain, you’re not fearing that law may change in the next two years, or that the courts may interpret your contract in a different way, that the counterparts in the contracts are maybe dishonest. You agree on a contract, you don’t ask the lawyers and the judges to agree with you. You just code it in a specific way and you get the two parties of the contract to agree and to let the blockchain execute it with no ambiguity.
[00:21:32.25] Ben: You mentioned Libra, right? When we think about Central Bank-issued Digital Currencies, they are decentralized to a point, but they’re not completely decentralized, because you still have, I guess, one per country, one per nation-state. Whereas, it seems that Libra is trying to do something which is truly global, right? So, do you think that Libra is therefore the best medium of payments that could be or a better form of that?
Adrien: I think the ambition of Libra is very different from the ambition of a central bank. You know, a central bank, by definition is central. Why would a central bank aim for decentralization when even its name includes the word ‘Central’, you know? A central bank wants centralization, it wants all of the power to decide on what’s best for the economy. Then, we can debate whether it actually does what’s best for the economy and I would argue that it does not. But I think there are as many opinions as there are economists on the market. The point is, a central bank is not here to decentralize. It is here to provide a service which is systemic to the economy. I’m pretty sure, although this is obviously a market that is immature today, that any platform that a central bank deploys for Central Bank-issued Digital Currencies like a digital Swiss franc, is going to be rather centralized than decentralized. What is going to provide as a benefit is that it’s probably going to be peer to peer. So, you will have the ability to store and transfer these Swiss francs person to person with no intermediary — but through Central Bank, of course — however, I don’t expect that they will build and provide an infrastructure which is maintained by dozens or hundreds of thousands of different users or companies. I think this is not necessary for what they aim to do.
Adrien: However, Libra has a different ambition, which is to provide a neutral platform, which can host, then, a lot of different initiatives. It could potentially be used by a central bank to issue its coin on the Libra network, it could be used by a private company that wants to issue its coin — whether it’s a currency, a stable coin, or whether it’s a commodity token or something else — on the Libra platform. So, I see Libra more as infrastructure or as really an open platform than it is about providing money. Of course, one of the main use cases of the Libra platform is for this consortium of private slash public companies or entities to jointly control and potentially issue a stable coin. The Libra Foundation or Association is responsible for managing these stable coins for different currencies that they announced and this can look very much like what a central bank would do. But to me, it’s just a specific use case that they could have achieved with this Libra platform. And I wouldn’t be surprised that in the future we’ll see hundreds of new use cases like this one on the Libra platform the same way we see so many different applications of smart contracts on Ethereum.
[00:24:28.13] Ben: To pick up on that, you introduced the term ‘stable coin’. What’s the difference between cryptocurrency, digital currencies, and stable coins?
Adrien: So a cryptocurrency, at least if you think about Bitcoin and the ones that get a lot of inspiration from Bitcoin, a cryptocurrency is a fully decentralized currency. And by this, I don’t mean just that the blockchain — which is the ledger that stores every transaction and wallet and balances — is decentralized, I mean that the currency itself is not controlled by any central party. So, who is responsible for creating new bitcoins on the network, managing the monetary policy of Bitcoin? Well, it’s no single person. It’s actually the whole network itself that has to agree on the terms of the next bitcoins to be created in the network. And so, the management of Bitcoin itself is therefore fully decentralized. What it means also is that there is no central party that can decide whether it would make sense to create more bitcoins today or less bitcoins today. It’s fully algorithmic. This is very different from what the central bank does. If you think about the Central Bank, it looks at the economy, it looks at the exchange rates of the currency, and based on this, it will decide, “Well, should we print more Swiss francs? Or should we print less Swiss francs?” This will be a dynamic politically-based, in a way, or economics-based decision process that defines how many Swiss francs are in circulation. So, that’s very different. This is how the central bank is capable of keeping this stable, because depending on the status of the economy, it can decide to print more or print less, so that the purchasing power and the exchange rate with other currencies is relatively stable. With cryptocurrencies, you cannot do that, because they are fully decentralized, nobody controls them, so they cannot adjust to the exchange rates. This is why you see Bitcoin rising so much or Bitcoin crashing so much, suddenly. It is not adjusting to the demand of the market. So, that’s the main difference between cryptocurrency in the traditional sense and a stable coin. A stable coin is generally managed by a central party, or has, at the least, if it’s not managed by a central party, some form of algorithmic pegging to the value of something that is stable in the economy.
[00:26:52.03] Ben: Let’s also talk a bit about blockchains, the underlying ledger. So, do you see that the Bitcoin blockchain will always exist? Or do you think that gradually, these blockchains will evolve and become more scalable, more composable over time? So, is it just the first generation or is it a blockchain that will continue to exist, that has continued relevance? How do you see the evolution of blockchains? And how many can there be at any one time, since, you know, to be secure, it needs a lot of computing power?
Adrien: I think that the alternatives that you propose are not necessarily mutually exclusive. If you think about Bitcoin, I agree it is a first-generation blockchain, by definition. It’s the first one that was launched and that actually survived. Now, it is also true that is not going to be the only one and that it’s already outdated from a feature point of view. The feature set of Bitcoin is very limited as compared to many new distributed ledgers and blockchains that exist on the market. At the same time, this is also the main value of Bitcoin, it’s its stability. It’s not changing every week, it’s pretty much the same code and the same algorithm that is running now for more than 10 years. And this is because of the stability that people and investors have so much trust in it. You know that it’s not going to break because of a new bug that nobody knew about, that was brought during an update or in some new feature implementation. You know that you’re facing the same thing as the last 10 years. So, if it was robust until today, there are good chances that it’s going to remain robust in the next 10 years.
Adrien: If you think about alternatives like Ethereum, Tezos, and the many other ones that exist on the market, their goal is not exactly the same. It’s really to innovate. And they do innovate. In many ways, they do much more than what Bitcoin can do. But at the same time, it’s also a risk, because if you’re an investor, if you’re using that in production, and there is a massive update of the platform, what are going to be the consequences on your code? Could it be that a bug is introduced, a security risk is introduced? You never know, really. And I think this is why, as an investor, you may want to also favor these stability components — and this is also why we see Bitcoin being so dominant on the market in terms of market capitalization and traction. It’s certainly not because it has the most use cases. I think that Bitcoin is pretty much nothing more than a stable deflationary — or ultimately deflationary — cryptocurrency that is therefore a good investment opportunity. It doesn’t do much more than that today, it can be a great payment protocol, but not much more. Whereas Ethereum provides all of these so-called smart contracts, which can simplify contractual relations between investors and you have an infinite degree of flexibility: you can program any arbitrary software running on the Ethereum platform which you cannot do with Bitcoin. So I think that today, the question is more, “What do you want to do with these cryptocurrencies?” If what you want to do is revolutionize the future, replace what I call, you know, companies being digitized, you can’t do that today with Bitcoin; you have to go with a more modern platform. However, if what you want is you’re looking for a form of digital gold, something which has gained trust over the years and that has shown to be something that is attractive that people like to hold, and that tends to keep its value to some degree, then I would prefer investing in Bitcoin for that. It’s really its main value proposition.
At this stage, we are at the beginning of this industry, where you still have a lot of competition — healthy competition in a way — you have a reasonable amount of different ledgers that are all credible, but you have still a very strong dominance with Ethereum for smart contracts and Bitcoin for cryptocurrency.
[00:30:21.02] Ben: If we assume that the end state or future states where we have decentralized apps, decentralized companies, or maybe digital autonomous companies, decentralized apps, decentralized finance — so we have, you know, a tendency to have a very large number of companies, and apps, and so on, the opposite of centralization. Underneath it, we still have the force for centralization of the blockchains themselves, right? Or not? Because, I suppose the subsequent question is, you know, how many blockchains do you think we’ll end up having? The permissionless ones.
Adrien: It always depends what you call centralization. You’re saying that we have decentralization that is the blockchain. It’s a bit like saying it’s centralized because we’re all on the same planet. You know, we all live on planet Earth. Of course, at some point, you have a centralized standard, if I could say, or a relatively central standard. Now, it doesn’t mean that this standard is centralized itself. If you think about Bitcoin, sure, it’s a very centralized standard. So the specification of how Bitcoin works is now agreed over by thousands of users, thousands of companies. However, the Bitcoin network is maintained by these thousands of users. So, if you want to change anything, you can’t do it by yourself. You have to convince thousands of other users. I think that this is actually a very strong value. This is the network effect. The network is more valuable as you start growing its user base, the network that it can reach. Would you use Bitcoin if you knew that only a couple of people on planet Earth would agree that you send them to them and that they sell a piece of bread to you? No. You like having Bitcoin because you know that there are millions of people that hold some, potentially you can go to a supermarket and buy a piece of bread with it. Maybe not everywhere, but this is starting to happen. And clearly, Bitcoin has value. You can exchange it for Swiss francs or something else quite easily.
You have this triangle, that you can’t get everything at the same time. You can’t get decentralization, security, and scalability at the same time. If you want two of them, you’re gonna have to sacrifice part of the third one.
Adrien: Now, having the fragmentation with dozens of blockchains, actually, in a way hurts the system. It’s great in the sense that it creates competition between these initiatives, and therefore, through competition, they have to improve to keep their momentum, keep their dominant position. However, at the same time, when you want to do something concrete — let’s say you’re a bank and you want to create a new asset on the blockchain — you immediately start asking yourself, “Where should I do that?” On Bitcoin, on Ethereum, on Tezos, on any of these other, you know, hundreds of blockchains. And therefore, whichever decision you take, is going to make some people happy, and some people unhappy, because not everybody agrees on the same standard. So, it’s always this trade-off between competition is a good thing but if you have too much competition and no standards, then it limits the innovation also. And I think at this stage, we are at the beginning of this industry, where you still have a lot of competition — healthy competition in a way — you have a reasonable amount of different ledgers that are all credible, but you have still a very strong dominance with Ethereum for smart contracts and Bitcoin for cryptocurrency.
[00:33:22.23] Ben: In the current internet era there’s a tendency for heavy concentration at the app level. I think the opposite is true in the crypto world, which is the concentration is at the protocol level. If concentration is at the protocol level, is the hardest thing, then, getting those protocols to scale? Because I remember you’re the first person I ever heard talking about sharding. So, can you talk about some of the ways in which these protocols are starting or the mechanisms that people introduce to try to get this whole infrastructure to scale better? And use less electricity?
Adrien: So, I think that’s multiple different issues. So, the first one is, I don’t know if it’s a theory, but it’s at least a very strong observation. You have this triangle, that you can’t get everything at the same time. You can’t get decentralization, security, and scalability at the same time. If you want two of them, you’re gonna have to sacrifice part of the third one. So, you could, for instance, like, Bitcoin has pretty good security, pretty good decentralization, but then, the scalability is not so good. Or you could say, “Well, I’m gonna centralize”, which is what we have today. You know, if you think before Bitcoin, we had these very centralized payment processors like Visa, MasterCard. And you can say, “What matters for me is security and scalability, so I want to be able to process thousands of transactions.” However, then in this case, it’s not going to be so decentralized. It’s going to be very centralized, actually. And having these three properties at the same time is very difficult. So, when we speak about ways of scaling the blockchain, sure, we can do much better than what we do today, but we have to be aware that this cannot be infinite. We cannot reach hundreds of thousands of transactions per second or millions of transactions per second, keeping the same level of security and decentralization. You will have to start, you know, sacrificing some of these properties.
We should not see energy consumption as the devil. It’s part of any successful industry, and I would tend to argue that securing value, which is probably the most important thing today, in a globalized free market, being able to secure wealth, secure value and purchasing power is arguably much more important than many services we pay so much for in terms of electricity
Adrien: Now, what we see happening is the capability to indeed use sharding techniques where potentially part of the network validates some kind of transactions, and the rest of the network validates other kinds of transactions, and therefore, because you don’t have every single computer of the network validating every single transaction, then you can maybe double it or triple it, depending how you shard, how you allocate this subset of operations to each of these maintainers. Now, I don’t want to get into the details, but this is typically one sacrifice because now rather than having all of the users checking everything, you only have part of the users checking some things. One could argue that in many cases, this is sufficient — and I think it may be the case that it’s sufficient for many applications — but by definition is obviously less secure than everybody looking at everything. So this is one of these trade-offs.
Adrien: Another way of scaling is to not have every transaction written on the blockchain. Of course, when Bitcoin started, it was the assumption that, you know, everybody could write a transaction on the blockchain, or at least some people believed that. I don’t think Satoshi Nakamoto himself believed that. He wrote something in one of his, I think, messages or maybe in the white paper that suggested he was aware that this would not scale forever. But clearly, it was realized at some point that you could not scale what you write on the chain, forever. You would have to, at some point, decide to write transactions outside of the chain. And so, what we see today as a possible way to scale is to say that small transactions, fast transactions that require really high frequency, but maybe do not need to be secured to a point where you write everything on the chain, they could be processed more centrally between two parties using cryptography. So, in a way, it would still be relatively secure, no way for an intermediary to steal the funds or to break the chain. But you would only rise the settling transaction, the clearing transaction on the chain after you have reached a point where the risk that you have of chain is maybe too high for your tolerance.
[00:37:16.08] Ben: Is that how you see permission and permissionless blockchains coexisting? So, just again, for the benefit of our listeners, can you define what the difference is between permission and permissionless?
Adrien: Yeah. Permissionless ledger is like Bitcoin. It is a ledger that can be used and maintained by any user. If you have an internet connection, not only can you use Bitcoin, but you can also maintain it, you can be what is called a miner — so somebody that’s going to protect the network actively — and you don’t have to ask anybody; you don’t have to ask the government, you don’t have to ask your bank. You can just participate in maintenance and use it however you wish, like any other user on the system, without any permission. That’s what we call a permissionless ledger. Now, of course, not everybody is happy with this solution. If you think about banks, for instance, they don’t like the idea very much that they would start issuing securities and have to have processes to apply compliance logic on something which is, in some way, out of their control. So, in the last five years, or maybe more than that, several initiatives have been launched to create things that looked very much like Bitcoin or Ethereum but that are not controlled by any internet user. They are controlled by a subset of pre-approved users. That could be a consortium of banks, for instance, where you take a consortium of 10 banks, and each of the 10 banks knows which are the other banks of this consortium. We can verify, therefore, that only just 10 banks are maintaining and protecting this network and potentially accessing its information. So, this is a permission ledger, a ledger that is not accessible by anybody.
[00:39:00.14] Ben: And so, you could see a situation where a consortium of companies or banks might do supply chain finance, for example, in a permission blockchain, and then write the resulting transactions into a public or permissionless blockchain.
Adrien: It could be the case. I think we’ve seen quite a few projects going that way, where a permission ledger is used a bit like intranet — you know, like, before the internet, we had more intranet — so it’s used a bit more in a private context. And when you want to settle or when you want to get back to a more public standard, you would operate on a public chain. I’m not a big believer in permissioned ledgers, to be honest. I think that although in some use cases, they have a strong value proposition, in general, they are not so much more than a very secure database. You could, in fact, implement a permissioned ledger with some SQL database with additional layers on top of it, checking the integrity of data and making sure that multiple parties have ways to audit the contents. And so, I sometimes am a bit doubtful that this can establish itself as the new standard for digital currency management. However, in some cases, we’ve seen interesting applications. In particular, when you have natural consortiums for specific applications, if you look at a specific supply chain, it may be that indeed, you don’t need to open up to the rest of the network, you just want these specific dozens or hundreds of parties to be involved. And why would you then go on a public chain where you have to pay fees, where everything is public, and therefore you have privacy leaks, and where you’re not in control — so, it’s harder to apply your governance logic on top of it. In these cases, indeed, using a permission ledger is an interesting alternative.
Cryptocurrencies in general are becoming much more legit. And we see it concretely happening with regulators opening up everywhere in the world and reputed banks moving in this field, also.
[00:40:49.00] Ben: We’ve talked about how blockchains can become more scalable. Another objection that people raise is that, you know, they’re so wasteful in terms of… You know, because trust is achieved through mathematics, and mathematics is done by computation, these need an awful lot of electricity, right? So, there are ways — proof of stake and so on — that are emerging where we don’t necessarily have to burn a whole lot of electricity to create the trust, right? So, do you mind just talking about some of those emerging techniques?
Adrien: Yeah, sure. But, before I speak about these imaging techniques, maybe there is a philosophical question, which is, do we actually care? If you think about this, governments use a lot of electricity too, and we’re not arguing that we should remove all governments on planet Earth, just because they turn on the light when they get to work. Banks use a lot of electricity. Gold mines, when you’re mining gold, you use a lot of electricity.
Ben: And there’s also, we can put electricity on a renewable rail.
Adrien: Of course, I think we’re getting there in the future. We may have actually a very efficient way for, if you think about, some of these renewable energy factories, however they do it, that don’t know exactly how to store the electricity, they don’t want to sell electricity at the wrong time during the day. Well, they could actually use this electricity to mine Bitcoin when it’s not profitable to sell it on the market and rebuy electricity later. So, I think we should not see energy consumption as the devil. It’s part of any successful industry, and I would tend to argue that securing value, which is probably the most important thing today, in a globalized free market, sort of economic system, being able to secure wealth, secure value, purchasing power is arguably much more important than many services we pay so much for in terms of electricity. You know, if you ask me, I’m a bit of a libertarian so I’m quite open-minded about this. But if you ask me, if you want to save energy, I’d say maybe fire a third of the government. Maybe a third of the administration today is not so necessary. If you think about it, we have all of these laws that are no longer relevant and that need to be implemented, that need to be monitored. Let’s save energy! You know, fire some state employees. Or maybe some banks are no longer so efficient, so we can fire some personnel in the bank. So, I know it’s a bit hard to say that, but the energy consumption is not something we should necessarily avoid. We could argue that having the most secure blockchain on the market today — that is Bitcoin — has a price, an electricity price, but this price may be the right price for the service it provides.
Adrien: Now, you’re right that there are some new initiatives. It’s been quite a few years already that what is called proof of work — proof of work is the main mining algorithm on Bitcoin, which is so energy-consuming. There are new initiatives to replace this proof of work algorithm with more modern or let’s say different ways of securing the blockchain. And although I doubt very much that Bitcoin will adjust to it — because again, the main value of Bitcoin is that it doesn’t change so much — we already know that other chains like Ethereum or Tezos have moved or will move to such a new way of securing the blockchain. Now, it’s not perfect either. It may be more ecological, you may use less electricity — actually, significantly less electricity — but it has other security weaknesses that it introduces, that we don’t know much about and it’s not clear that it’s actually as secure and as neutral that the Bitcoin system is. So I think it’s good for innovation, but I would not be so convinced that this is the way everything has to go. I think Bitcoin remaining the way it is, it’s actually a very strong value proposition.
[00:44:37.25] Ben: Because in its essence, if somebody has a larger stake then somebody else has more say over the blockchain, is that right? So it’s not as equitable or not as fair.
Adrien: Yeah. But, you know, in this proof of stake modality, which is this alternative to proof of work that uses less electricity, if I want to make it simple, the richer you are, the more control you get. So if you’re rich in terms of coins and cryptocurrency, you’ll have larger control over the network. And the assumption here is that it’s very hard for somebody to centralize so much that it has a lot of control over the network by becoming very rich. Well, this assumption is correct. If you look at history, and the billionaires of yesterday that now are worth more than 100 billion or 200 billion, you may wonder if this assumption of relatively decentralized coin distribution is valid. Of course, there are ways to counteract on that, you can create counter incentives for cheaters or abuses of the system, but is it going to be perfect? I think nobody can know for sure until this is concretely implemented.
Adrien: Now, if I want to be honest, proof of work is not perfect either. So, this existing Bitcoin protocol that secures with what is called mining, it is heavily electricity consumption is not perfect either. There is also a degree of centralization, the reason being that as soon as a company emerges and makes profitable business rounds of mining, it’s going to grow, it’s going to hire more people, buy more hardware, and is going to concentrate a lot of mining around its factory. And what we see today is that China is one of the main miners. It has several of the largest mining factories, and electricity price is one of the key drivers of where you would like to establish such businesses. Some countries naturally attract mining, other countries naturally reject or repulse mining because it’s too expensive and not profitable. And even though mining is interesting in the sense that, in theory, anybody could just turn on its computer or laptop and start contributing, and therefore creating very decentralized networks, in practice, your laptop is so weak or is so bad in comparison to professional miners that it has become unrealistic to compete with professional miners, unless you heavily invest in professional hardware. And that means that most people will not do it, and therefore centralization also appears.
[00:47:05.12] Ben: And is that centralization of mining becoming a problem? Does it make the network vulnerable?
Adrien: By definition, having excessive centralization always means it makes it more vulnerable. At one point it becomes really vulnerable is hard to say. I think we’re far from that. And even though it is relatively centralized today, it still is an oligopolistic control. And the interesting property of such protocol is that even if you have a miner that represents, I don’t know, 5% of the total mining power, and therefore, one could say has 5% of the mining power, he cannot do anything by himself. He would need to align himself and have a handshake agreement, or a contractual agreement with up to 50% of the mining power — so many other parties on the network — to finally reach a point where this is potentially dangerous for the network. What we’ve seen in the past that this sort of centralization event can happen. There were multiple times in the history of Bitcoin, where mining was so centralized that the top two out of three miners, were almost able to control the network. What we’ve seen is that naturally, without trying to enforce new rules or change the protocol, the network itself got so afraid by this amount of decentralization, that it fragmented by itself. So, some of the contributors of these mining pools, you know, these mining companies, decided to switch and move to different companies, because they didn’t want to be potentially parts of excessive centralization, that would hurt the trust and the security of the network, and presumably the value of the coin because the value of Bitcoin heavily depends on how much you trust it.
[00:48:49.10] Ben: So we’ve come a long way. So, you know, initially we had this, you know, in for me, of being a place where criminals did business, right? And then we had this sort of, Bitcoin boom. I remember Jamie Dimon said that Bitcoin was worse than tulips. And then, it just seems that, you know, as time has gone on, more and more institutions have entered this space. A lot of the negative reputation has disappeared so, I think most people recognize that it’s not a place where exclusively criminals do business. And it seems like in the very recent past, there have been a number of key masters, right? So, people like Paul Tudor Jones writing that letter where he said he was going to invest in Bitcoin, he saw it as a reputable asset, and the OCC saying that banks can now act as custodians and Renaissance Capital now being able to trade futures. Do you think we’re reaching some sort of tipping point where Bitcoin moves from an edge case niche financial product to something which is truly in the mainstream?
Adrien: I think there is no doubt about it. The only thing that’s missing is the regulatory approval in some countries — actually in many countries — and the ecosystem and infrastructure to build up so that the banks or the institutions that are moving in this field, have the technical capability to do so. What we see — our company Metaco is well-placed to know about this market because we’re in discussion with dozens of banks pretty much everywhere in the world — and we see the demand is very, very strongly increasing. It’s generally a demand that needs to start building today to be productive or operating in a couple of years. So, it’s not something that is so responsive. You’re speaking about large companies, large banks, or even smaller banks, but that have a lot of other considerations — the regulatory aspects, the risk, the reputation. The market is moving now and it’s a given, at least to me, that what we knew about Bitcoin — five, six years ago, it was the preferred currency of the dark web Silk Road markets to buy drugs, weapons and pay hitmen — is very far away now. And Bitcoin criminality, of course, is always going to exist the same way that you still use dollars for terrorism financing and money laundering or whatever criminal act — or Swiss franc or any other traditional currency. Bitcoin is not going to be an exception. Of course, there will be criminal activities with Bitcoin. But Bitcoin is becoming much more of a legit currency. Cryptocurrencies in general are becoming much more legit. And we see it concretely happening with regulators opening up everywhere in the world and reputed banks moving in this field, also.
[00:51:42.10] Ben: Did you ever have any doubts that cryptocurrencies and blockchain would become a mainstream phenomenon?
Adrien: I personally never had doubts about it, otherwise, I would have probably sold my coins multiple times in the last seven years, as the market crashed — which happens regularly. I think for me it was clear, and it still is clear. What I could never have been 100% convinced is whether Bitcoin would be the winner, or Ethereum, or something else. I’ve also made a lot of wrong bets on some of these other currencies that I did not invest in, because I thought they would never succeed. And actually, those things can be worth more than a billion today. So, nobody really knows, I think Bitcoin is here to stay and I think it’s going to be a very, very strong new asset class on the market as it becomes more mainstream. I’m pretty sure that the other smart contract platforms on the market, like Ethereum, are here to stay. They have this very strong network effect today, where they’ve almost established themselves as standards. So, a big question has always been which of these cryptocurrencies are going to survive? But I think we’re very close to having a concrete answer to that question today.
We, at METACO, focus on infrastructure, and then we work with regulated partners, which are banks, in making sure that they have the most solid and professional infrastructure to protect their assets, to start tokenization use cases, do anything that is related to the blockchain.
[00:52:53.27] Ben: I just want to maybe finish off by talking a bit more about Metaco itself. So, you recently raised a 17 million Swiss francs series A round in the middle of the COVID-19 pandemic. So, that would seem to indicate that this space, again, is hot and becoming mainstream. But can you just talk a bit about why you’re different from some of the other companies that provide custodian infrastructure? Do you think it’s because you’re principally on the side of the banks and the financial services companies?
Adrien: Yes, indeed, we’ve gotten through a Series A financing round, where we raised 17 million. To be fully transparent, we started the fundraising before the COVID. But, you know, it doesn’t change much about the outcome, which is, you know, raising funds takes more than six months.
Ben: And it was a larger raise than you were initially seeking, right?
Adrien: Oh, absolutely! We aimed to raise 8 million, we ended up with more than 20 million on the table and we settled at 17 because we didn’t want to get into a lot of negotiation about new valuations, reducing dilution, etc. But it was a very successful round. To be honest, it was not the easiest period to close such a round. It is clear that a lot of venture capital funds on the markets stopped any discussions they had not just with us, but with any company on the market because they had to focus on their existing portfolio of companies that maybe may have been suffering because of the period. I think we’re getting back to normal now but we’ve been extremely successful in also the companies that we brought as shareholders. You know, Standard Chartered Bank is one of our shareholders, Zuericher Kantonalbank — it’s massive players in the banking sectors. Standard Chartered is a global custodian, Zuericher Kantonalbank is one of the most reputed banks in Switzerland. We brought a company called Giesecke+Devrient, which is one of the security giants that is supporting central banks everywhere in the world, and that is also very much focused on Central Bank-issued Digital Currencies, which is one of the reasons for the investment in Metaco. So, incredible investments and opportunities opening up with these different new partners and shareholders.
Adrien: I think as a general comment on the company, we are very special in the sense that we are specialized engineers in cryptocurrencies, in blockchain, in security, and obviously in software engineering, but we don’t focus so much on regulated services. We actually don’t want to become a regulated company. We focus on infrastructure, and then we work with regulated partners, which are banks, in making sure that they have the most solid and professional infrastructure to protect their assets, to start tokenization use cases, do anything that is related to the blockchain. And so, for that today we have the chance of still being very much of a startup. We are agile, we can take decisions very fast, very efficiently, depending on the market conditions. But, at the same time, we’re backed by extremely solid companies, we have a lot of liquidity and that gives us all of the opportunities to scale not just in Switzerland, but in Western Europe, Germany, and Singapore, Southeast Asia, and in North America.
Ben: Fantastic! Adrien, thank you very much for your time!
Adrien: Thank you, Ben!
