Dr. Scott Stornetta is touted as a co-inventor of blockchain and a man who “has spent longer thinking about blockchain than anyone else on the planet”. His work was quoted multiple times by Satoshi Nakamoto in the Bitcoin White Paper and he is a notable figure in the world of cryptography because of his vast contributions of valuable research to the field of cryptography and distributed computing.
In this conversation, Dr. Stornetta shares his invaluable insights on the cryptocurrency landscape and its development, including inefficiencies he sees in Bitcoin, his view on the Cypherpunks, the transition to Etheruem 2.0., utilization of blockchain in other areas and much more. Dr. Stornetta is currently Chief Scientist at Venture Capital firm Yugen Partners, you can follow him on LinkedIn
You are often referred to as the founding father of blockchain — how does it feel to be the father of such a hyped technology?
Well, I am happy to take credit for being the co-inventor of the early blockchain, but I am a little reluctant to call myself the father of blockchain. Simply because blockchain has come to mean a lot more than it originally did. Just due to the many contributions that others have made. Just to be a little bit technical at the beginning, if you don’t mind.
What we did create, Stuart Haber and I, was an attempt to create an immutable record. And we did it by cryptographically linking blocks of records together in a chain and then widely distributing the information so that there was no ability for a central party to corrupt the record.
Now, that sounds like what you’d call a blockchain, and we certainly invented that. The only reason I am hesitant is that for some people, blockchain has come to mean everything that was done by Satoshi as well as Vitalik, as well as other people. That’s the only reason I want to clarify it.
Having made that clarification, now let me try to respond to your original question. It’s very humbling to see so many intelligent people and so many resources flow into space where we had the opportunity to help with the foundation of it.
It’s just so exciting to see what happens when, what I think was a pretty good idea, starts to take on a life of its own, as others add their own ingenuity on top of it. It’s a great feeling and sometimes, it’s a little hard to believe how much has happened. Having said that, it doesn’t mean that I’m entirely pleased with the way things have developed.
I think there’s a terrific amount of energy and activity, but I am not always convinced that it’s going in the most effective direction.
What is it that you are professionally focused on most now, in these days?
I am a chief scientist at a venture capital firm that is focused on the blockchain. My challenge is, in the midst of great enthusiasm about blockchain, to locate those projects that I think are most likely to be viable.
And it’s an interesting combination of viable projects, an interesting combination of people that are excited about the technology, but also well-grounded in just how difficult it is to bring a new offering to market, that actually meets people’s needs.
You are quoted by Satoshi three times in the Bitcoin whitepaper. When did you first find out about Bitcoin and about being referenced there?
I guess I want to answer that question in two parts. And that is, I think it’s important to understand that Stuart and I were very much caught up in the excitement, long before Bitcoin, about using cryptographic methods to sort of re-engineer how people interacted in society.
People like David Chaum and Tim May, that I guess you could call crypto-libertarians, were very influential to me in kind of creating a world, where we were trying to imagine all sorts of new things, that could be done using basic cryptographic tools.
My reason for pointing that out is that I had a long-standing interest in digital money of one form or another. All the time when we were doing the foundational blockchain work. But by the time the Bitcoin paper appeared, I hadn’t been working in that particular area for a couple of years.
My first introduction to the Bitcoin paper was when I started receiving unsolicited mail. I would get mail from people that I’ve never met, just out of the blue, saying that ‘Hey, I see that you formed a lot of the foundation of the Bitcoin paper, the work that you did, and I also googled you online and I see that you’re fluent in Japanese, and so I wondered whether you’d be willing to admit that you’re Satoshi?’. And you know, I’m not Satoshi. But that was how I was introduced to the Bitcoin paper.
Finally, Stuart and I took a look at the original paper and we thought — well, that’s an interesting application — but we were not quite satisfied with all the engineering decisions that were made, as we thought they were not necessarily very good ones.
So I guess, from my perspective, there’s a sense that Satoshi put together some very exciting ideas. And I want to give all the credit I can to that contribution. Having said that, I think it’s much more appropriate to view and credit Satoshi for having done an opening act for creating digital currencies, rather than viewing it as the be-all and end-all that’s going to change everything, without any need for improvements or modifications.
Certainly, I don’t feel that way about Bitcoin. Very exciting, it got a lot of attention, it helped to get a lot of people into the blockchain space, but it’s certainly not the be-all and end-all.
You mentioned Timothy May and David Chaum. They inspired the Cypherpunk movement which in the 90s included many engineers and cryptographers on the Cypherpunk mailing list. Did you participate in those discussions as well?
Yes, as I indicated, I did in the early days. But by the time Satoshi came along, it had been a couple of years since I’d been actively involved in that particular space. That’s why I didn’t see it as soon as it was put out. Because I was working on other projects.
Can you briefly explain what your thoughts are on the Cypherpunk movement in general?
Well, I am a strong fan as far as being a crypto-libertarian. I wouldn’t want to call myself a crypto-anarchist, because I think that is going a little bit too far, but fundamentally, I agree with the basic premise that cryptography allows us to restructure society with less need to have central authorities governing how we run our lives.
I think it’s a very liberating prospect that people can interact in a peer-to-peer, sort of market-based way without unnecessary intermediaries.
I certainly applaud that sentiment of maximizing individual freedom and liberty, as long as we can keep it at a reasonable level the undesirable externalities that they might create. I’d say, I am very much with the Cypherpunks in spirit, but to me, it means, what it is that I’m in favor of. It is not so much that I feel the need to talk about what I am against or what I think is evil or bad or should be eliminated.
I much rather focus on how do we create something better and let people choose and decide to go with the better option. I don’t feel any need to tear down existing structures, I just like building superior methods of people interacting.
I recently read that you praised another cryptocurrency — Electroneum — for their KYC/ AML efforts. Does that mean that you are not that much in favor of anonymous cryptocurrencies?
Again, that’s an important question and I want to be clear about my answer. My feeling is that I don’t think there’s much downside to the KYC/AML compliance. I don’t think there is nearly as much downside as people that want the entire process to be anonymous.
And part of the reason for that, again, is not that I want to restrict personal liberties, but I think, quite frankly, that more information, in general, is better than less information.
And that is a false premise to assume that by disclosing information about ourselves, we’re actually becoming less free and less independent. In fact, I think just the opposite can be true. That is if we disclose information about ourselves in the right way, and that’s really what we mean by the KYC, it can actually be more powerful for us. It can give us additional advantages and more freedom than the other way around.
Now, there’s a subtle point in there and that would probably have to be the subject of an entire discussion. Let me try to sum it up by just saying this:
I am very much an advocate of greater freedom and liberty. I think it’s a mistake to assume that anonymity is the way to realize that. I think appropriately managed disclosure of information about ourselves to others can actually give us more freedom than those that assume that the only way to preserve our liberty is through anonymity. I think that’s a mistake of reasoning, not a mistake of intent.
How do you see the issue of regulation in general? Where do you see the need for it? In which area of the crypto space?
Let me take a position that says, informed, and light regulation, I think, is the ideal happy median. I think, attempts to operate completely free from regulation or in a way that’s very hostile to regulation, the very notion of regulation, I think is counterproductive.
I think it’s far better to engage and inform those that have current regulatory responsibilities, so that one gets minimal and beneficial regulation, rather than simply to try and fight it. And some people might argue that as soon as you start engaging with regulators, you’re sort of acquiescing to their interests. I really don’t think that’s true and I don’t think it’s true for the following reason. The concern, of course, is always that regulators will be too heavy-handed out of a conscious or unconscious desire to control an area where they’re in a position of power.
But, as you insinuate blockchain and the kind of distributed trust that it allows, as you insinuate that into a system, you’re inevitably winning by attrition. Because you’re advancing the usage, you’re advancing the drivers for improved technology and it puts you in that much better position for the next iteration of technology, which gradually is going to force less regulation. The technology itself is a driving force.
And the more people that start to use it, the more leverage over time one gains over those, who try to inappropriately or in a heavy-handed way regulate things. And so, rather than feeling that we are conceding defeat by interacting with the regulatory space, I think, in fact, we’re infiltrating the space and the technology, eventually, will push for less regulation as a kind of equilibrium state.
Again, I know that there are many people that feel that if you make any concession at all to the existing structures, that you’re not being a ‘true patriot’, but again, I applaud the intent, but I think that those tactics are less effective than the ones I’m advocating.
There’s an underlying power in the blockchain technology that pushes towards decentralization, towards distribution of trust, towards treating other parties in a more peer-to-peer way. And every time that technology is adopted, it becomes more powerful and more pervasive. So I do not think the heavy-handed regulators are going to have the final say just because we choose to engage with them. Technology will win in the end on its merits.
You’ve been in the space for a very long time — how has your perspective on digital currencies evolved over time?
Well again, we’ve been thinking about digital currencies for more than 30 years, not 10 years. And I think a singular moment for me came in understanding that digital currency is what we want, not necessarily digital cash. That the currency is more fundamental than cash. Now, what do I mean by that: what we need is means of exchanging value amongst ourselves.
As Dan Larimer might say, any interaction that two parties both agree to without coercion is most likely to increase the overall benefit to society. And so, we want to make it restrictionless as possible, the ability of any two parties to interact with each other and exchange value. It’s a fundamental economic driver — and a social good driver.
That doesn’t mean that cash is required, as opposed to currency. And here the distinction I think is really quite important. The Bitcoin paper purports to talk about a cash system. But for all, by any reasonable definition, Bitcoin is not cash, but a currency. Namely, fundamentally, we have a ledger that records all the transactions. And in that sense, even though the ledger itself is widely distributed, it’s the same ledger that all parties hold.
We still have a single ledger that is recording all the transactions. A single ledger in the sense that all of the instances of it are identical and duplicate. And so, the fact that we have a ledger that clearly reports transfers from one party to another already shows us that we don’t have cash in the anonymous sense.
Now, I understand that what Satoshi has is a kind of pseudo-anonymous ledger, but it’s really much much closer to a fully disclosed ledger because we have a complete audit trail. It’s essential to the functioning of the system, and so it’s really a far cry from having the anonymity of cash.
And I actually don’t think that’s all that important. What I think it’s important is that we have a single view of the world and that we have a consensus agreed on the ledger of all the transactions that have taken place. And as a result of that, I think some of the efforts to anonymize it or make it more decentralized, are actually overkill and counterproductive.
For example, I would specifically suggest that the mining concept and the proof-of-work is actually a bit of a detour compared to, what I think are more natural mechanisms, such as proof-of-stake, or even proof-of-authority.
And I think the proof, if you will, the support for my position, is the wide recognition that there are more efficient and less energy-intensive ways to still support a distributed ledger. And there’s quite a bit of innovation in that regard. I think that the things that you see, for example, from Block.one, are efforts in that direction. I also think that Silvio Micali’s Algorand is another example of the fact that we can achieve the things that we fundamentally want and need in far less energy and compute-intensive ways. I see that’s probably the biggest shift that I’ve seen.
I think, secondly, there is, in my opinion, a somewhat artificial distinction being made between permissioned and permission-less systems. I think the real goal is to have systems that are as widely available to any and all participants as possible. That is fundamentally positive and the direction that both a kind of ethical and a moral argument makes as well as an economic, lowest cost argument makes.
But the fact that we want systems to be widely available to any and all that participate does not mean that those systems have to be permission-less. What we want is a liberal market that allows people, any and all, to participate in peer-to-peer ways at very low net-cost. And I think, what will emerge as the winner is something that’s a bit of a hybrid between the way people describe permissioned and permissionless systems.
You talked about the definition of cash. Bitcoin may be considered to be an equivalent of that by some. This is very much related to the block size debate. Do you have any takes on the BTC block size debate?
Yes, I very much do. I guess I have two thoughts. First of all, there is a notion, that I think is very much antithetical to science and to dialogue and progress, to simply say that the block size shouldn’t change simply because this was the way Satoshi said it and it isn’t broken, so there’s no need to fix it. I think that’s very dogmatic and rigid and I think it fails to really grasp what the fundamental drivers of the benefit here are.
Now, having said that, that leaves open the question of what is a good block size? And I’m happy to hear debate on both sides of that, but given that I think that the mining aspect of it is not essential, and I want to be clear about that, I think the smaller the block size in time, the better.
As long as it can be achieved and still preserve the basic goals of keeping things balanced in a peer-to-peer way and widely distributed and widely accessible. So yes, I think there is no need to think in terms of ten minutes as a block-size and I also think it’s not a fundamental constraint.
The so-called 51 percent arguments that require us to effectively wait for several blocks before we feel that consensus can be achieved — I think that’s an artificial problem, that doesn’t so much need solving as it needs to be approached in a different way.
Speaking of consensus algorithms and proof-of-stake. Do you consider it to be superior in terms of security, or maybe in functionality compared to proof-of-work?
I don’t want to say that I think proof-of-stake is the ultimate solution, but I do want to say that proof-of-work has a fundamental flaw to it, that it’s not an equilibrium solution, it’s simply not a best-case solution. And so, there’re many many efforts to move away from proof-of-work and I think in general, that’s a good idea.
Whether proof-of-stake is itself an ultimate desired destination, I don’t necessarily agree with that. I think the debate is still open. And I would just go one step further and I’d just like to try an example case out on you about proof-of-work, proof-of-stake, and so forth. It’s by asking — what is the minimum viable blockchain?
And, you know, I’m a physicist by training and so along with other more theoretical academic practitioners, I’m always looking for what is the simplest base-case that achieves many of the benefits. Because that allows us to better understand what the real essence of something is.
And so, let me offer an example that I think many people would disagree with, but I think it kind of highlights my point of view. Again, I don’t offer it to be combative, but rather to shine some light on the situation. A couple of years back, there was a consortium formed amongst a number of large insurance and reinsurance companies that wanted to build a blockchain consortium for managing insurance issues. And it has been operating for a couple of years without much real, in my opinion, meaningful progress, but that might be a little bit judgmental.
However, a couple of months ago, two of the members of the consortium announced that simply the two of them were going to set up a blockchain. And all they would do would be to create a single shared ledger between just those two entities because it would save them in the netting out of payments that go either way between the two of them. It would eliminate the need for them to do settlements and reconciliation. And I often ask people as a kind of Rorschach test, is that a blockchain or isn’t it?
And my answer is, even with simply two parties, we already have many of the benefits of a blockchain. Mainly, if their interests are divergent, there is a tension between the two companies. And so the simple fact, that two separate, interacting enemies with non-aligned interests are cross-checking against each other and have identical copies of the same ledger, already many of the benefits of the blockchain are being realized.
And notice that not only is that achieved without any sort of proof-of-work, but it’s also achieved without any sort of proof-of-stake! What’s more essential than either of those is that they have naturally unaligned interests, as well as aligned interests.
And that tension alone is the fundamental guarantor of blockchain integrity. That each of them can pursue their own self-interests in a way that collectively creates greater value than each of them individually maintaining their own records. The fact that their interests overlap but are not fully aligned, is what fundamentally creates the integrity of the system.
And so, that suggests that the fundamental driver of integrity is neither mining nor stake, it’s something broader than stake. It’s something that extends beyond the blockchain and embeds itself in their larger operations in the world. It’s not a system that entirely depends in a closed way on just the interactions that they’re having between themselves, because their reputations themselves are also being staked in a sense.
I just think that goes to show that proof-of-stake, while an improvement over proof-of-work, if implemented correctly, is even yet not a final solution.
What are some other interesting consensus mechanisms that you see out there?
There’s so much effort at this point that I don’t want to try to pick favorites. I mentioned Algorand, I mentioned Block.one, I think they both are worthwhile efforts. I think people simply need to be thinking in a more fundamental way about what is it we actually are trying to achieve and what is truly essential about the blockchain versus what is contrived.
Many things in the Bitcoin solution are somewhat contrived. And we would be wise to use BTC as a great starting point for our thinking, but we shouldn’t be so enchanted with it that we fail to analyze for its essential positive and negative components and try to seek better solutions.
That’s really my point. I don’t want to suggest that I have an ultimately best solution, but to simply say that we shouldn’t confuse the particulars of implementation with our ultimate goals in what we’re trying to achieve.
So if I understand it correctly, is the proof-of-work mechanism something that you see as the biggest weak point of BTC?
I think it’s even more fundamental. I think it’s the presumptions. Bitcoin is asking a different set of questions that those necessarily need to be asked. For example, the assumption that different parties at different times must be doing the actual creating of the next block in order to ensure that no central authority can control the system, I don’t think that’s necessarily a valid assumption.
For example, if you have a system that is so transparent that everyone can see what’s going on all the time, then the person that is actually doing the calculation is effectively powerless. Even though they are the ones carrying out the transaction, since everyone is able to view whether they’re doing it properly or improperly, they really have no great power or control over the situation.
I think we’ve confounded the need to make the system reliable with the notion that we need to make it unstoppable. For example, I think, I’m actually quite pleased with the internet and how it functions in a largely peer-to-peer way, but that doesn’t mean that for efficiency’s sake we have a hierarchical DNS system. I think that a hierarchical system, in the case of the DNS, for efficiency, doesn’t fundamentally make it a bad system.
And I think that sometimes we get a little dogmatic about what needs to be centralized and what needs to be distributed, versus asking ourselves — is this any real threat to our liberties? And if it isn’t and it’s more efficient, then it probably, actually is a promotion of our liberties.
Speaking of DNS it seems like a domain name system is something that could work in a decentralized way equally well as f.e. With Ethereum Name System? What do you think?
Well, I know that there are proposals to do decentralized DNS. But to me, they have to win on their efficiency merits. They can’t just win on the notion that in every case decentralized is simply better than centralized.
Let me offer two examples there. Let’s take the case of Wikipedia. I think Wikipedia has very much a peer-to-peer feel. I think it’s very much an accessible system and yet, it still has centralized elements to it.
Now I understand that people could argue about the fact that those that are promoted to be the senior editors or whatnot have too much power and that they can suppress things if they exercise their authority unwisely.
But still, we have a pretty decentralized and democratized, if you will, way of electing those editors, promoting those editors, and so I think something like Wikipedia and what it’s able to achieve, even though it makes a different trade-off between centralization and decentralization, is a good working counterexample to the notion that unless something is fully decentralized, it just won’t flourish as well.
I think it’s also useful to consider just how in the American democracy we have, one way to look at it is, a centralized federal authority, we have a president who has, a congress that has a fair amount of control, but we also have a consensus mechanism. We have a decentralized algorithm and it runs every time we execute an election. The outcome is in no sense guaranteed and we really are putting our faith in the algorithm to select for efficiency’s sake representatives.
Those representatives, yes, they represent something of a centralization of power, for efficiency’s sake, but it’s not clear to me that it’s an inferior system to every person voting every day on every issue that comes up.
I think we should be careful about assuming what the ideal is and be more focused on comparing two implementations and asking ourselves which one delivers the greater social good, rather than simply saying whichever is more decentralized is by definition the better choice. I think that’s a false dichotomy.
You mentioned permissioned blockchains. As I understand, you do see some use-cases for private blockchains and permissioned blockchains as well?
Well, it’s interesting that you used private and permissioned as synonymous because I don’t consider them such. A private blockchain has the notion that only a certain number of participants are allowed and that others are deliberately excluded. A permissioned blockchain at least admits of the possibility of allowing any and all people to participate so long as they identify themselves.
I don’t think that that’s necessarily a bad thing. I think our concern with identity is that we have a justifiable concern that if people know our identity they are able to do certain things that we don’t want them to do to us. But I think the direction to move in is to ask ourselves, how we can use our identity as a value-creating opportunity and that our efforts are better directed at minimizing the negative impact that people sometimes have when they know our identity. Rather than assume that anonymity is fundamentally better than identity.
I think just the opposite argument can be made. What I want is an identity without penalty. Maybe I’m not even a fan of private, maybe I’m not a fan of permissioned. But I am a fan of identifying networks that are open to all parties.
Let’s move a little bit more towards Ethereum. How much do you follow development around Ethereum and what are your takes on its transition to Ethereum 2.0?
Well, certainly some improvements in efficiency and a move away from proof-of-work — all to the positive. I think the more fundamental question is that Ethereum presupposes that the problem to be solved is that we want a highly distributed computer. As opposed to a highly distributed ledger.
And again, I’m happy to weigh that proposition on its merits and its social good that it creates, but I’m not willing to assume that it is a given that if a highly distributed ledger is a good thing, that an even better thing is a highly distributed computer.
I mean, that’s axiomatic for Ethereum and it’s not clear to me that that wins on its merits. What is the social good that is achieved by replicating the computation over tens of thousands of nodes as opposed to replicating the record, which I think is a fundamental good. And then doing the computation in a transparent and verifiable way.
Those two things, I think, are quite different, they lead to quite different conclusions about efficiency and what is necessary in order to maximize liberty.
So I’m happy to applaud improvements in Ethereum and I think Ethereum 2.0 is a large step forward, but at the same time, I like to question the fundamental premise that Ethereum seems to take as axiomatic. Namely that the only way to guarantee the best outcome is to have tens of thousands of nodes executing contracts in lockstep.
Ethereum also has lots of competition. Which of the competitors do you see as the most interesting for the future as a smart contract platform?
I’m happy to take the question, but the answer I’m going to offer I think you might not like. And again, to me the system that is best is the one that most meets the needs of actual users. And I think there’s an attempt to make arguments about which is the most elegant, or the most efficient system or the most peer-to-peer system. I’d rather ask, which is the most useful system?
Let me just illustrate it in a different way. If you know something about my background, you know that I was trained and received my PhD in physics. And physicists, particularly theoretical physicists are prone to fall in love with something that is elegant and beautiful, because often in the past it points us in the right direction of simpler and more powerful theories.
But for the last 30 years, many theoretical physicists have pursued string theory because it is so seductively elegant in some of its core ideas. There’s only one small problem with string theory, and that is, to date it has yielded not a single experimentally provable or disprovable prediction. And that starts to get a little bit wandering astray from what physics is about.
In a similar fashion, I see so many arguments amongst competing platforms that talk about the superiority of their algorithm or their technology, when they should be talking instead about why they are solving a problem that users actually care about, rather than solving a problem purely for its elegance’s sake.
I think there’s a risk that we end up where we are with string theory, where thousands of people have done their dissertations in string theory, tens of thousands of papers have been written and yet we still have effectively no use-cases.
I think we are putting too much effort in the theoretical and the abstract in many of these contests about platforms and not enough focus on the gritty and inelegant issues of what do users actually want, what do they actually need — what will actually benefit them, as opposed to ‘my system scales better than your system’, or ‘my system is more secure than your system’. I think sometimes we put the cart in front of the horse.
What are the other cryptocurrency projects in the space that you consider to be interesting in terms of technology and maybe that you also think can solve some problems that users care about?
First, when it comes to interesting technology, I very much think that the efforts in zero-knowledge proofs, zkSnarks, and just more generally homomorphic encryption create a rich set of possibilities about dealing with data that is not so binary.
Namely, in the old world, it was either you have all the information and you know everything about it, or you have no information and know nothing about it.
And now, we have this very rich space about how we can confirm some information but leaving out some details, and I think that’s a space where a lot of innovation can take place and where ultimately we will have a lot of value added as people come to see that it’s not just a dichotomy between only two choices — either going with all the information or only a bit of it.
That I think is a very rich area for exploration. Now, in terms of making something more usable? I guess I really come back to wearing the practical hat that I wear, which is, we’ve received funds in my day job from investors and are looking for those entities, that are most likely to deliver sustainable long-term social value.
Those companies that we find that are being most successful, when they actually talked to their users and customers, all they end up doing are talking about a problem that their user or customer has and the fact that they have a better solution to that problem. They almost never mention the blockchain itself, rather the blockchain is a secure technological foundation that allows the benefits of the particular use-case that they’ve built their product for. But it doesn’t need to be shouted out in order for it to deliver its benefit.
It’s a little bit like when people talk about the success of the internet. In a sense, the success of the internet is the fact that no one even talks about the TCP/IP protocol anymore. No one even talks about, for most of the users, the HTML protocol anymore. We’ve moved beyond the technology per sé and can express the direct benefit it brings to the person’s problem.
And that really means that the technology has succeeded, when the technology is no longer mentioned but is an underlying important layer. Then we know we have succeeded. In so many of the sales pitches that we hear of new efforts, they’re telling the customer or the user not that they’ve solved their problem better, but simply that they need to believe in blockchain or buy into the blockchain as it is inherently better as the reason that this user should adopt the thing.
I think that is evidence that they’re not really solving the user’s problem. Because if they were, that would be all they would need to describe to the user. They wouldn’t have to convince the user that philosophically they need to buy into the notion of blockchain. It would simply win on the merits of how it best solved their problem.
And so, that I think is what I think is so important to these situations, is to be more focused on what does the user need as opposed to ‘see how clever I am for having created something that scales better or is more transparent or discloses less information’. People don’t buy clever; they buy solutions, something that solves their problem. And I think we are a little too much on the side of clever in the crypto space.
Apart from cryptocurrencies and timestamping, which are the other areas of use-cases that you see fit for blockchain?
There are many. And I do want to be clear that I am, in the long term, quite bullish on cryptocurrencies, but I think it will take a while for that to play out. And more than likely, it will play out more rapidly in not private, but identity networks and ones that are closer to stable coins, rather than those that are freely floating.
But in addition to that, I think that we should not ignore the most boring case to begin with. And that is the benefit of an immutable audit trail in existing corporations and record-keeping. That’s one.
The next is, there’s inefficiency in the way value is transferred today, largely due to having separate records that then require reconciliation and settlement. I think there’s great opportunity there, particularly in the financial services space, but not just limited to currency.
The next thing I see possible is making assets that are now illiquid and making them liquid. The economists have talked about something called the ‘liquidity premium’ and it simply means, and this might be obvious and already known to you, that if you have an asset, it becomes more valuable if it is trade-able or convertible to other assets than if it is not. I think there’s great opportunity there. Another thing that I like is the ability to use tokens to assign value in a much more rapidly changing way, as people contribute to an ecosystem.
So, for example, now let’s take the co-founders of LinkedIn. And I think LinkedIn is a fine thing, but I often raise the question about LinkedIn — you know, a couple of years ago it was sold to Microsoft for 26 billion dollars in cash and yet if you think about it, who has really created the value of LinkedIn? It’s you and I, and the people that are going to read your book. We each, individually are creating the value of LinkedIn as we form networks inside LinkedIn.
And so, it begs the question: when LinkedIn was sold for 26 billion dollars, did you receive your part of that 26 billion? Did I receive my part? No, we didn’t. And I think there’s a way to use tokens and reward participants in an ecosystem for the contribution that they make. This is something that you see in the Steem efforts. I think that’s a terrific thing that will allow us to have more fluid and peer-to-peer social structures.
I think we can kinda see the successor to the existing corporations, where they have clear delineations between shareholders and employees and customers. I think we can build much more exciting ecosystems that blur those traditional boundaries by using tokens in a way that they are awarded in real-time, according to the value that people are contributing to the system. So those are five, I believe, general use-cases where I think there’s plenty of opportunities.
It’s interesting that you mentioned the liquidity premium. Oftentimes the liquidity of certain assets is limited by law. Is blockchain really the solution to provide more liquidity, do you think it can be done in some other manner?
What you say is true, often how liquid something is limited by law and regulation. But one has to ask oneself why that’s the case and I think it largely comes down to the protections that are put in place that keep certain things illiquid are really, fundamentally due to an argument that says that there’s not enough information for people to be fully informed about the potential risks and benefits and therefore they’re restricted. And I think that blockchain is very much a technology that can bring much more information to light and therefore reduce the need for those legal and regulatory constraints.
Fair enough. You are also a part of the Celsius project. What is your role there and how are you satisfied so far with how things have worked with Celsius?
I’m happy to say that I serve on the Celsius Network advisory board, I think that it’s a terrific effort to make tokens more valuable by conferring some of the benefits that holders of conventional fiat currencies have. They have the ability to earn interest on what they hold; I’m very pleased with the progress that Celsius has made.
I think they’re a great example of trying to be practically minded, while still having altruistic ambitions — social benefit ambitions. I think Alex Mashinsky is a terrific entrepreneur. None of those things guarantee the ultimate success of Celsius or their relative success against competitors, but I think they have a strong use-case; I think they’re intent on providing more social benefit to more people and I applaud their combination of practicality and idealism. That doesn’t guarantee success, so…
Speaking of competition of Celsius, and I believe that Celsius has a lot of competition in DeFi apps. When do you think DeFi has the potential to reach mass adoption?
I think it’s going to be a rather incremental process. I think, in a sense, it’s hard to say when you’ve crossed a threshold of mass adoption. But I think mass adoption is inevitable. The question of how quickly it happens or whether the current interest will survive long enough to get to the stage where they start to thrive is an open question, but I don’t think there’s any question that in the long term we’ll see mass adoption of alternative currencies and tokenized assets.
The last question. In 10 years from now, what do you think will be the role of BTC protocol in our society?
Well, my answer is that I think in 10 years we’ll see much much wider use of non-national currencies, much much wider use of distributed ledgers and blockchain-based technologies. But whether Bitcoin itself, that particular design choice will be prominent really depends on the ability of those that surround Bitcoin with an ecosystem work to ameliorate some of its fundamental limitations or not.
Things like the Lightning network, obviously, are just one example of many attempts to build upon BTC. But it really comes down to competing ecosystems. And it’s important to understand that in the often-cited example of videotape VHS vs Betamax, it’s often not necessarily the best technology that wins — it’s the best total solution to the users that wins.
So my thoughts on cryptocurrencies 10 years from now? Am I bullish on distributed ledgers and other blockchain-based technologies becoming much more pervasive? Absolutely. Am I bullish on Bitcoin itself as a specific choice? That all depends on how rapidly that ecosystem develops compared with competing ecosystems.
Thank you very much!
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