WEBVTT - Bonus: The Crypto Story by Matt Levine - Part 4 0:00:03.640 --> 0:00:06.720 This is Bloomberg Crypto, a daily Bloomberg I Heard podcast, 0:00:07.120 --> 0:00:10.119 and I'm Stacy Marie Ishmael, Managing editor of Crypto for 0:00:10.160 --> 0:00:28.440 Bloomberg News. Let me cut to the chase. Matt Levine, 0:00:28.520 --> 0:00:30.560 my colleague on the Bloomberg Opinion side of the house, 0:00:31.160 --> 0:00:34.959 is perhaps the greatest finance blogger ever to do it, 0:00:35.560 --> 0:00:37.640 and in what is both a flex and a service, 0:00:37.960 --> 0:00:40.920 He's just written tens of thousands of words on the 0:00:40.960 --> 0:00:44.640 subject of crypto for a special issue of Bloomberg Business Week. 0:00:45.840 --> 0:00:49.200 Matt's gone deep into the blockchain to break down its origins, 0:00:49.400 --> 0:00:52.640 it's possible, futures, and the current state of a technology 0:00:52.680 --> 0:00:55.960 that's showing up everywhere in industries ranging from finance to 0:00:56.040 --> 0:00:59.600 shipping too, of course video games. And we're going to 0:00:59.680 --> 0:01:03.360 be bringing his exploration to you in audio form thanks 0:01:03.360 --> 0:01:06.120 to the talents of Bloomberg editor and professional voice actor 0:01:06.319 --> 0:01:10.080 Mark Ledoff. You'll get weekly chapters of the special Crypto 0:01:10.120 --> 0:01:14.000 issue of Bloomberg Business Week. Welcome to the fourth chapter 0:01:14.120 --> 0:01:16.440 of the special audio edition of the Bloomberg Business Week 0:01:16.440 --> 0:01:19.560 Crypto issue, written by Matt Levine and narrated by Mark Leedoff. 0:01:20.240 --> 0:01:22.640 You can find previous episodes right here in the Bloomberg 0:01:22.680 --> 0:01:43.200 Crypto podcast Feed five an I c O. Here's another 0:01:43.240 --> 0:01:47.639 important difference between Ethereum and bitcoin. Bitcoin never raised money, 0:01:48.200 --> 0:01:51.680 Ethereum did. You can think of Bitcoin as more or 0:01:51.760 --> 0:01:54.760 less the open source passion product of one anonymous guy 0:01:54.840 --> 0:01:58.760 who really likes cryptography. The cost of building the basic 0:01:58.800 --> 0:02:03.080 system of bitcoin was Satoshi's time, which he donated. Then 0:02:03.120 --> 0:02:06.600 he mined the first bitcoins and got super rich, probably, 0:02:07.000 --> 0:02:11.160 but that came later. Ethereum was a bit more complicated 0:02:11.200 --> 0:02:15.399 to build. Vitalic bou Terran is the intellectual leader of Ethereum, 0:02:15.440 --> 0:02:17.920 but there were a bunch of co founders, there were 0:02:18.040 --> 0:02:21.680 legal entities, there were programmers. They spent a lot of 0:02:21.720 --> 0:02:24.720 time on it. They had to pay for food deliveries. 0:02:25.400 --> 0:02:28.840 You could imagine Vitalic saying, okay, we are a company. 0:02:28.960 --> 0:02:32.359 We're Ethereum Inc. We're going to start the ethereum blockchain 0:02:32.400 --> 0:02:34.919 and make money from it, and we'll sell shares in 0:02:35.000 --> 0:02:37.480 ethereum Ink to raise the money to build the blockchain. 0:02:37.919 --> 0:02:42.280 Sell ethereum ink for cash, get the cash, build the blockchain, 0:02:42.360 --> 0:02:46.560 and I don't know, collect royalties. Ethereum ink collects point 0:02:46.639 --> 0:02:51.320 zero one percent of every Ethereum transaction forever. Ethereum was 0:02:51.360 --> 0:02:54.480 a well known and much hyped project even before it launched, 0:02:54.720 --> 0:02:58.440 and they could easily have found investors. They didn't do 0:02:58.480 --> 0:03:03.240 that for philosophical and economic reasons. They wanted a decentralized 0:03:03.280 --> 0:03:06.959 blockchain ecosystem, and having it owned by a corporation would 0:03:07.000 --> 0:03:10.800 defeat the purpose. There is an Ethereum Foundation which works 0:03:10.800 --> 0:03:14.040 on Ethereum development and has a certain amount of moral authority, 0:03:14.440 --> 0:03:17.760 but it has no control over the blockchain itself, so 0:03:17.800 --> 0:03:22.720 they didn't sell shares. They sold tokens. In July, they 0:03:22.720 --> 0:03:25.399 sold ether at the price of one thousand to two 0:03:25.400 --> 0:03:29.200 thousand ether per BTC, a mechanism intended to fund the 0:03:29.240 --> 0:03:33.360 Ethereum organization and pay for development. In all, they sold 0:03:33.360 --> 0:03:37.080 about sixty million Ether for about eighteen point three million dollars, 0:03:37.440 --> 0:03:41.760 all before the technology itself went live. Ethereum's Genesis block 0:03:41.920 --> 0:03:45.480 was mined in July. Today, there is a total of 0:03:45.480 --> 0:03:49.400 about one twenty two million ether outstanding. Some of that, 0:03:49.560 --> 0:03:54.280 like bitcoin, comes from mining or now validating, but almost 0:03:54.360 --> 0:03:57.560 half of it was purchased before Ethereum was launched by 0:03:57.640 --> 0:04:01.040 people who wanted to bet on its success. Camilla Russo, 0:04:01.160 --> 0:04:04.320 in her book about Ethereum, wrote, a whole new financing 0:04:04.360 --> 0:04:07.800 model had been tested, one where a ragtag group of 0:04:07.800 --> 0:04:10.920 feuding hackers with no business plan and no live product, 0:04:11.240 --> 0:04:14.560 let alone users or revenue, could raise millions of dollars 0:04:14.600 --> 0:04:17.840 from thousands of people from all over the world. Before 0:04:18.000 --> 0:04:20.520 anyone who wanted to buy stock in big tech firms 0:04:20.560 --> 0:04:23.680 like Facebook or Google would need a US bank account. 0:04:24.120 --> 0:04:26.520 Things got even more complicated for those who wanted to 0:04:26.560 --> 0:04:29.279 invest in startups that hadn't gone to the public markets 0:04:29.279 --> 0:04:32.880 to raise funds. Now anyone could be an investor in 0:04:32.920 --> 0:04:35.760 one of the most cutting edge technology companies out there. 0:04:36.320 --> 0:04:38.919 All they needed was an Internet connection and at least 0:04:38.960 --> 0:04:43.760 point zero one bitcoin. It worked out well for those investors. 0:04:44.120 --> 0:04:47.400 That sixty million ether is worth billions of dollars today, 0:04:48.040 --> 0:04:51.240 But as a whole new financing model it's a mixed bag. 0:04:51.839 --> 0:04:56.200 Many people, particularly securities regulators, think it's good that startups 0:04:56.240 --> 0:04:59.320 usually can't raise money from the general public without at 0:04:59.400 --> 0:05:01.880 least a business a plan, and there's a sense in 0:05:01.920 --> 0:05:05.640 which this sale, the ether pre mine or initial coin 0:05:05.800 --> 0:05:09.240 offering i c O, was the original sin of crypto 0:05:09.320 --> 0:05:12.360 as a financing tool. A lot of other crypto teams 0:05:12.400 --> 0:05:16.280 copied Ethereum's approach, riding up vague plans to build some 0:05:16.320 --> 0:05:19.279 project and then raising money by pre selling tokens that 0:05:19.320 --> 0:05:23.000 would be useful if the project ever happened. The analogy 0:05:23.040 --> 0:05:25.360 I've tweeted is that I c o s are like 0:05:25.400 --> 0:05:28.400 if the Wright brothers sold air miles to finance inventing 0:05:28.440 --> 0:05:33.600 the airplane. Not everyone got around to inventing the airplane. 0:05:33.839 --> 0:05:36.360 There was a seventeen I c O boom in which 0:05:36.400 --> 0:05:38.640 a lot of projects raised a lot of money by 0:05:38.680 --> 0:05:42.680 selling tokens that never turned out to be useful. When 0:05:42.760 --> 0:05:45.720 rag tag groups of hackers with no business plan can 0:05:45.800 --> 0:05:48.960 raise millions of dollars from anyone with an Internet connection, 0:05:49.520 --> 0:05:52.760 they all will. The odds that any particular one of 0:05:52.800 --> 0:05:56.880 those non business plans will ever succeed are low. The 0:05:56.880 --> 0:06:02.280 odds that any particular one will be a scam are high. 0:06:02.440 --> 0:06:09.800 Six other chains one layers tried lemmas. The basic ideas 0:06:09.839 --> 0:06:14.839 of Ethereum, a distributed computer, smart contracts, depps, new tokens, 0:06:14.880 --> 0:06:19.039 etcetera caught on broadly within crypto. Ether is now the 0:06:19.080 --> 0:06:24.240 second biggest cryptocurrency, well behind Bitcoin, well ahead of everything else, 0:06:25.200 --> 0:06:27.800 but it has a lot of competition. If you're building 0:06:27.800 --> 0:06:30.520 smart contracts, there are a lot of other blockchains where 0:06:30.520 --> 0:06:36.600 you can run them, including B and B chain, so Lana, Avalanche, Cardano, Tesos, 0:06:36.760 --> 0:06:41.760 Polka Dot, algorand tron and Tara two point oh, Tara 0:06:41.880 --> 0:06:46.200 one point oh blew itself up oops. These platforms, like 0:06:46.240 --> 0:06:50.280 Bitcoin and Ethereum are called layer one block chains, meaning 0:06:50.320 --> 0:06:54.080 they're entirely separate from one another. Each layer one blockchain 0:06:54.160 --> 0:06:57.599 maintains its own ledger. They compete with one another much 0:06:57.640 --> 0:07:01.600 like other tech platforms do, arguing that they offer better performance, 0:07:01.640 --> 0:07:06.039 a better environment for developers, a different programming style, better tools. 0:07:07.000 --> 0:07:10.800 A famous problem in crypto is the blockchain tri lemma. 0:07:11.080 --> 0:07:14.240 Blockchains can be scalable, they can process a lot of 0:07:14.240 --> 0:07:19.640 transactions quickly, decentralized, they don't depend on a few trusted parties, 0:07:20.000 --> 0:07:23.680 and secure. A minority of computers on the network can't 0:07:23.720 --> 0:07:27.720 successfully attack it, But, says the tri lemma, you can 0:07:27.760 --> 0:07:32.040 only choose two of those three. Bitcoin and Ethereum chose 0:07:32.120 --> 0:07:37.360 decentralization and security, which makes them fairly slow computers. Other 0:07:37.400 --> 0:07:41.720 blockchains are faster, but more centralized. If your consensus mechanism 0:07:41.800 --> 0:07:45.880 is we trust six computers to verify all transactions. That's 0:07:45.880 --> 0:07:49.240 going to be faster than Bitcoin's proof of work algorithm. 0:07:49.240 --> 0:07:53.800 But if someone hacks those six computers, look out. People 0:07:53.840 --> 0:07:56.680 on the decentralized and secure blockchains spend a lot of 0:07:56.720 --> 0:08:00.640 time thinking about scaling. Often this involves so called layer 0:08:00.680 --> 0:08:04.240 two systems, which are built on top of layer one technology, 0:08:04.320 --> 0:08:08.160 such as Bitcoin and Ethereum. For instance, Bitcoin has the 0:08:08.240 --> 0:08:11.720 Lightning Network, a layer two payment system that basically lets 0:08:11.720 --> 0:08:14.360 people on the Bitcoin blockchain set up payments to each 0:08:14.360 --> 0:08:17.720 other without running all of them through the blockchain. This 0:08:17.760 --> 0:08:21.080 makes the payments faster and cheaper, and they periodically settle 0:08:21.120 --> 0:08:24.360 on the blockchain for security. Much of the thought in 0:08:24.440 --> 0:08:27.080 Ethereum these days is about how to scale it so 0:08:27.120 --> 0:08:30.760 that it can execute large numbers of transactions quickly and cheaply, 0:08:31.320 --> 0:08:35.120 a prerequisite for building a universal world computer, or frankly, 0:08:35.160 --> 0:08:37.880 even a payment system that can compete with credit cards. 0:08:38.559 --> 0:08:41.040 Much of the action here is about layer two systems 0:08:41.040 --> 0:08:43.760 that specialize in doing some sorts of transactions off the 0:08:43.800 --> 0:08:47.679 main Ethereum blockchain, where space is somewhat scarce and expensive, 0:08:48.040 --> 0:08:51.480 and then saving the results to that blockchain, where transactions 0:08:51.520 --> 0:08:55.640 are secure and immutable. A lot of the interesting cryptography 0:08:55.720 --> 0:08:59.600 in crypto is found here. People love talking about zero 0:08:59.679 --> 0:09:03.840 knowledge proofs in this context because in some broad sense 0:09:03.880 --> 0:09:06.880 there are problems of data compression. You want to be 0:09:06.920 --> 0:09:09.160 able to do a lot of transactions on a layer 0:09:09.200 --> 0:09:12.160 two and then write down those transactions in an abridged 0:09:12.160 --> 0:09:15.200 way on the Ethereum blockchain, while still being confident that 0:09:15.240 --> 0:09:18.280 the secure and immutable Ethereum blockchain keeps track of all 0:09:18.320 --> 0:09:25.600 of them two bridges wrapping. Some people in crypto are 0:09:25.640 --> 0:09:30.360 faithful to a single blockchain. They are Bitcoin maximalists or 0:09:30.360 --> 0:09:35.160 Ethereum or Avalanche or so Lana loyalists. Many people are 0:09:35.280 --> 0:09:39.080 generalist dabblers, though they like buying lots of tokens on 0:09:39.200 --> 0:09:43.040 lots of blockchains because they see merit in many blockchain platforms, 0:09:43.360 --> 0:09:46.720 or because they like it when lines go up. One 0:09:46.760 --> 0:09:49.000 result of this is that sometimes you will want to 0:09:49.000 --> 0:09:52.840 own the token of one blockchain on another blockchain. This 0:09:52.920 --> 0:09:56.800 comes up a lot in decentralized finance, or defy the 0:09:56.880 --> 0:10:00.679 system of crypto exchanges and financial products that live on blockchains. 0:10:01.360 --> 0:10:04.760 If you're writing smart contracts to trade tokens on the blockchain, 0:10:05.120 --> 0:10:08.920 those smart contracts. Computer programs will have to run on 0:10:08.920 --> 0:10:12.280 one particular blockchain, but you might not want to limit 0:10:12.320 --> 0:10:15.920 yourself to the tokens of that blockchain. You are, after all, 0:10:16.080 --> 0:10:19.480 building an exchange. You might want to write programs on 0:10:19.520 --> 0:10:23.040 the Ethereum blockchain that trade bitcoin, or write programs on 0:10:23.080 --> 0:10:25.880 Slana that trade ether. Say you want to write a 0:10:25.880 --> 0:10:29.080 smart contract on Solana to swap some ether for soul, 0:10:29.559 --> 0:10:33.960 the Salana token. How do you do that? You don't. 0:10:34.000 --> 0:10:37.880 Your ether lives on the Ethereum blockchain. You have Ether 0:10:38.160 --> 0:10:40.800 is a fact about the ledger on that blockchain. The 0:10:40.840 --> 0:10:44.160 Salana blockchain has no record of that, nor does Ethereum 0:10:44.160 --> 0:10:48.640 have any record of Salana tokens. It's all incompatible, separate systems. 0:10:49.240 --> 0:10:52.600 It's separate banks and property registers and d m vs 0:10:52.720 --> 0:10:56.800 all over again. That's an annoying answer and can't really 0:10:56.840 --> 0:11:00.679 be right. So there are workarounds. The principal one is 0:11:00.720 --> 0:11:04.200 called a bridge. A bridge is generally a smart contract 0:11:04.240 --> 0:11:07.800 on one blockchain, a smart contract on another blockchain, and 0:11:07.880 --> 0:11:10.480 some sort of trusted computer program that sits between them 0:11:10.520 --> 0:11:13.640 and passes messages. If you want to swap some ether 0:11:13.840 --> 0:11:16.840 for soul, you find a bridge. You send your ether 0:11:16.960 --> 0:11:20.120 to the bridge's smart contract and Ethereum, which locks it up. 0:11:20.640 --> 0:11:23.520 As far as the Ethereum blockchain is concerned, your ether 0:11:23.679 --> 0:11:26.880 belongs to the bridge. Now. The bridges off chain computer 0:11:26.960 --> 0:11:30.480 program sees this and alerts its Salana smart contract, which 0:11:30.480 --> 0:11:33.359 gives you the equivalent of the ether on the Salana blockchain. 0:11:34.480 --> 0:11:37.800 The equivalent of the ether could, I suppose, be some 0:11:37.880 --> 0:11:41.199 amount of soul at whatever the current ether soul exchange 0:11:41.240 --> 0:11:45.040 rate is. The bridge could also be in exchange, but 0:11:45.120 --> 0:11:48.240 the normal approach is to take ether on Ethereum and 0:11:48.320 --> 0:11:53.760 give you back wrapped ether sometimes w E on Salana. 0:11:54.000 --> 0:11:56.760 Wrapped ether is a token issued by the bridge's smart 0:11:56.840 --> 0:12:00.200 contract on the Salona blockchain, representing a claim on the 0:12:00.200 --> 0:12:03.960 bridges ether on the Ethereum blockchain. It is, as it were, 0:12:04.360 --> 0:12:08.840 ether on the Salona network. Bridges are notorious sites of 0:12:08.960 --> 0:12:12.000 risk in crypto. A big bridge contract will have a 0:12:12.000 --> 0:12:14.360 lot of crypto locked up in it, will need to 0:12:14.400 --> 0:12:18.080 regularly send and receive crypto from strangers, and will have 0:12:18.160 --> 0:12:21.880 to interoperate between different environments. If you can find a 0:12:21.920 --> 0:12:24.240 bug in a bridge, you can make a lot of money. 0:12:24.880 --> 0:12:28.640 People do that pretty regularly. An actual big Salona Ethereum 0:12:28.679 --> 0:12:32.080 Bridge is called wormhole. It was hacked this year for 0:12:32.120 --> 0:12:39.000 about three and twenty million dollars of w E see 0:12:39.320 --> 0:12:46.160 a slow database. Here's a slightly different generalization of bitcoin. One. Look, 0:12:46.400 --> 0:12:51.000 you've built a distributed database. Two. This database has some 0:12:51.080 --> 0:12:58.440 fascinating properties. It's distributed, decentralized, secure, trust less, and permissionless. Three. 0:12:58.920 --> 0:13:02.640 Your database happens to track the ownership of electronic coins. 0:13:03.559 --> 0:13:06.200 Four What if we built a database like that to 0:13:06.280 --> 0:13:12.439 track the ownership of other things? One Map and territory. 0:13:13.520 --> 0:13:17.479 Modern life consists in large part of entries in databases, 0:13:17.679 --> 0:13:21.040 I said, and then I listed a few, starting with money. 0:13:21.480 --> 0:13:24.359 There's a reason I started with money, and why Satoshi 0:13:24.400 --> 0:13:27.840 did too. A dollar is an entry on the list 0:13:27.880 --> 0:13:30.679 of dollars. If you have dollars, what you have is 0:13:30.720 --> 0:13:33.400 an entry in your banks database saying how many dollars 0:13:33.440 --> 0:13:37.520 you have? This entry is the dollars. The bank doesn't 0:13:37.559 --> 0:13:39.880 have sacks of gold or a big box of paper 0:13:39.920 --> 0:13:43.679 currency that the database refers to. It just has the database. 0:13:44.600 --> 0:13:47.679 This is even more true for bitcoin. There are no 0:13:47.760 --> 0:13:51.400 paper bitcoins at all. If the bitcoin ledger says you 0:13:51.440 --> 0:13:54.440 have a bitcoin, then you have a bitcoin. That's all 0:13:54.480 --> 0:13:58.679 a bitcoin is. Almost nothing else works quite that way, though. 0:13:59.200 --> 0:14:01.600 If you own a house, in some legal sense, the 0:14:01.600 --> 0:14:03.440 main thing that you own is an entry in a 0:14:03.480 --> 0:14:07.480 property register, but in some much more important sense, the 0:14:07.520 --> 0:14:10.480 main thing that you own is the house. If your 0:14:10.480 --> 0:14:15.400 house burned down, you could not sleep in your deed. Conversely, 0:14:15.520 --> 0:14:18.120 if someone snuck into the property registry at night and 0:14:18.160 --> 0:14:21.040 slipped in a new deed saying that they owned your house, 0:14:21.520 --> 0:14:23.280 and then they showed up at your house to kick 0:14:23.320 --> 0:14:26.960 you out, you might reasonably raise objections like, but all 0:14:27.000 --> 0:14:30.000 my stuff is here, or but I have the keys 0:14:30.040 --> 0:14:33.200 to the locks, or but all my neighbors know I 0:14:33.280 --> 0:14:36.560 live here, or but this is the address on my 0:14:36.680 --> 0:14:41.400 driver's license, and you might convince everyone, the sheriff, the courts, 0:14:41.480 --> 0:14:44.200 your mortgage lender, that in fact, you own the house 0:14:44.240 --> 0:14:47.240 and the deed is wrong. The property registry is not 0:14:47.400 --> 0:14:50.320 definitive for house ownership the way the bitcoin ledger is 0:14:50.360 --> 0:14:54.720 definitive for bitcoin ownership. But the idea of putting important 0:14:54.760 --> 0:14:59.200 databases of real world stuff on the blockchain. For some reason, 0:14:59.240 --> 0:15:01.840 the definite art coal is always used with this stuff, 0:15:02.040 --> 0:15:05.840 and one shouldn't worry too much about which blockchain has 0:15:05.880 --> 0:15:09.440 a lot of appeal. People are always talking about moving 0:15:09.480 --> 0:15:13.280 real estate registries, or cargo manifests or carbon emissions onto 0:15:13.280 --> 0:15:17.400 the blockchain. This is appealing because as a database, the 0:15:17.400 --> 0:15:21.280 blockchain has some nice properties. The important public blockchains, such 0:15:21.320 --> 0:15:25.800 as Bitcoin and Ethereum, are secure, open, and permissionless. Anyone 0:15:25.880 --> 0:15:28.560 can prove they own a Bitcoin and that ownership can't 0:15:28.600 --> 0:15:33.600 be reversed arbitrarily, and anyone can build on these systems. 0:15:34.120 --> 0:15:36.840 If you want to build an exchange for trading ethereum, 0:15:37.000 --> 0:15:39.720 you can just do it. The blockchain is public and 0:15:39.760 --> 0:15:43.160 the standards for building new Ethereum programs are open. Building 0:15:43.200 --> 0:15:47.200 a new system for buying houses is overwhelmingly difficult. You 0:15:47.320 --> 0:15:50.080 need to get lots of banks and county property registries 0:15:50.120 --> 0:15:53.920 and appraisers on board. But if somehow the houses were 0:15:53.960 --> 0:15:58.160 moved to the blockchain, that would permanently allow for permissionless innovation. 0:15:58.960 --> 0:16:03.000 Everyone could build programs and exchanges and derivatives and interfaces 0:16:03.000 --> 0:16:06.560 for house buying, and the best ones could win. The 0:16:06.600 --> 0:16:10.160 problem is that houses can't live on the blockchain. They 0:16:10.200 --> 0:16:13.200 live in the real world. They can burn down and 0:16:13.280 --> 0:16:17.960 stuff Connecting the electronic artifact on the blockchain the house 0:16:18.080 --> 0:16:23.160 token to its real world referent. The house is philosophically 0:16:23.240 --> 0:16:27.440 and practically tricky. How to make this connection is largely 0:16:27.480 --> 0:16:31.720 an unsolved problem, and quite possibly an unsolvable one, but 0:16:31.800 --> 0:16:36.160 also an important one. Crypto's financial system is well developed 0:16:36.160 --> 0:16:39.720 and has some advantages in openness and permissionless innovation over 0:16:39.760 --> 0:16:43.760 the traditional financial system. If you could ingest the physical 0:16:43.800 --> 0:16:49.720 world into that financial system, you'd have something cool two 0:16:50.240 --> 0:16:54.800 enterprise blockchain. A less ambitious version of this is look. 0:16:55.200 --> 0:16:57.960 Banks are already keeping lots of databases to track lots 0:16:58.040 --> 0:17:02.800 of things. Dollars in banking counts, but also loans, tradeable securities, 0:17:02.800 --> 0:17:07.040 derivative contracts, trade financing, all sorts of stuff. Some of 0:17:07.040 --> 0:17:11.000 those databases are slow, some are written in Kobal, and 0:17:11.080 --> 0:17:14.520 some require an exchange of facts is to settle transactions. 0:17:15.119 --> 0:17:18.200 It would be nice if those databases were faster, if 0:17:18.200 --> 0:17:20.680 they could talk to each other efficiently. It would be 0:17:20.800 --> 0:17:23.800 nice if JP Morgan Chases database could talk to Goldman 0:17:23.880 --> 0:17:27.920 Sachs's database, if there weren't a manual and contentious process 0:17:28.000 --> 0:17:32.639 of reconciling trades between banks. In if you were a 0:17:32.640 --> 0:17:35.879 loan trader at a bank and you thought, uh, our 0:17:36.000 --> 0:17:39.840 systems for trading loans are so slow and cludgy, and 0:17:39.880 --> 0:17:41.879 you walked into the c e o s office and said, 0:17:42.240 --> 0:17:45.000 we should spend tens of millions of dollars hiring top 0:17:45.000 --> 0:17:48.119 notch programmers to build a new loan trading system, and 0:17:48.200 --> 0:17:51.000 we should start a consortium with our competitors and clients 0:17:51.000 --> 0:17:53.679 where we all agree to use the same loan trading system, 0:17:53.880 --> 0:17:56.199 because that will make my life easier and eliminate a 0:17:56.200 --> 0:17:59.400 lot of back office costs. The CEO would probably say 0:17:59.400 --> 0:18:02.480 things like who are you and get out of my 0:18:02.560 --> 0:18:07.840 office and you're fired. But in twenty seventeen, if you 0:18:07.840 --> 0:18:10.920 were a lone trader at a bank, or a blockchain consultant, 0:18:11.320 --> 0:18:13.840 or frankly, a person off the street, and you walked 0:18:13.840 --> 0:18:16.080 into the office of a bank CEO and shouted the 0:18:16.119 --> 0:18:19.520 word block chain, the CEO would hand you a sack 0:18:19.560 --> 0:18:22.800 of money. Lots and lots and lots of people took 0:18:22.840 --> 0:18:26.920 advantage of this. Blockchain was for a while the sexiest 0:18:26.960 --> 0:18:30.359 word in finance, and banks were tripping over themselves to 0:18:30.400 --> 0:18:34.760 announce blockchain initiatives. And not just banks. This stuff had 0:18:34.800 --> 0:18:38.959 a particular vogue at banks, but e g. Shipping companies 0:18:39.000 --> 0:18:42.400 also got in on it. Maersk has a blockchain platform, 0:18:42.840 --> 0:18:46.679 trade Lens, built with IBM that it advertises for shipping 0:18:46.680 --> 0:18:51.239 and supply chain management. The Australian Securities Exchange announced that 0:18:51.320 --> 0:18:54.480 it will replace a trading system with the blockchain, though 0:18:54.480 --> 0:18:58.880 it keeps delaying that the idea here was sometimes vague 0:18:58.920 --> 0:19:02.560 to be honest, but broadly speaking, we're talking about permission 0:19:02.600 --> 0:19:07.440 to block chains or private blockchains. Big public blockchains are 0:19:07.440 --> 0:19:10.440 generally not something a banker is going to like. Having 0:19:10.480 --> 0:19:14.000 all transactions to be public is good for security, everyone 0:19:14.040 --> 0:19:17.960 can verify that everything is correct, but also bad if 0:19:18.000 --> 0:19:21.199 your transactions are meant to be secret. It's also just 0:19:21.240 --> 0:19:24.520 sort of ikey for regulation who make sure that your 0:19:24.520 --> 0:19:28.280 transaction records are correct. A bank regulator will ask and 0:19:28.320 --> 0:19:31.639 the bank will answer, well, we don't really know, but 0:19:31.720 --> 0:19:34.760 we think it's some mining pools in Russia, and the 0:19:34.800 --> 0:19:38.760 regulators will get nervous. But many of the basic ideas 0:19:38.800 --> 0:19:42.320 of a blockchain, a ledger of every transaction that's demonstrably 0:19:42.359 --> 0:19:46.359 shared by every computer on the network can be implemented privately. 0:19:47.080 --> 0:19:49.280 If you get together with eleven of your friends and 0:19:49.320 --> 0:19:51.600 agree that the twelve of you will do transactions with 0:19:51.640 --> 0:19:55.560 one another, keep a ledger, verify all the transactions, and 0:19:55.680 --> 0:19:59.240 use cryptographic hash functions to make sure the ledger isn't changed. 0:19:59.560 --> 0:20:02.399 Then you and just do that. If you all trust 0:20:02.440 --> 0:20:04.840 each other and don't let anyone else join the network, 0:20:05.320 --> 0:20:08.040 or if you let only people you trust join the network, 0:20:08.400 --> 0:20:11.000 then you don't have to worry about malicious miners taking 0:20:11.040 --> 0:20:14.639 over your network. It's just you and your friends. This 0:20:14.680 --> 0:20:19.840 has advantages for security, particularly for explaining security to bank regulators. 0:20:20.320 --> 0:20:22.560 You also don't have to make the blockchain public if 0:20:22.560 --> 0:20:25.960 you don't want to, and there are efficiency advantages. It's 0:20:26.000 --> 0:20:28.840 only twelve of you confirming transactions, so you can do 0:20:28.880 --> 0:20:32.439 it faster. Presumably you're doing this for a reason. You 0:20:32.480 --> 0:20:35.000 want the ability to do these transactions with each other, 0:20:35.400 --> 0:20:38.159 so you don't have to get paid for confirming transactions. 0:20:38.640 --> 0:20:41.600 You don't need mining or staking. Those are ways for 0:20:41.640 --> 0:20:44.399 public blockchains to reach a consensus among people who have 0:20:44.480 --> 0:20:47.280 to prove they have a commitment to the system. The 0:20:47.320 --> 0:20:50.880 twelve of you all know one another and build the system, 0:20:50.920 --> 0:20:53.760 so your consensus is good enough without any further proof, 0:20:54.320 --> 0:20:59.000 you can just vote on it. We'll be right back 0:20:59.040 --> 0:21:02.200 with more from Bloomberg Business Week Special Crypto issue written 0:21:02.200 --> 0:21:15.520 by Matt Levine a narrated by Mark Leadoff. D Web three. 0:21:16.560 --> 0:21:19.199 An important fact about bitcoin is that it's both a 0:21:19.240 --> 0:21:24.040 technological method of sending money and the money itself. That is, 0:21:24.240 --> 0:21:27.439 Bitcoin is a computer system for sending bitcoins, and a 0:21:27.480 --> 0:21:31.199 bitcoin is the thing that the bitcoin system sends. Some 0:21:31.320 --> 0:21:34.480 of what goes on in crypto is about the technology. 0:21:34.880 --> 0:21:38.159 People use the ideas of blockchains and smart contracts and 0:21:38.160 --> 0:21:41.439 so forth to build software. Some of what goes on 0:21:41.520 --> 0:21:44.640 in crypto is about the money. People call up their 0:21:44.640 --> 0:21:47.520 brokers to place bets on the prices of crypto tokens 0:21:47.560 --> 0:21:50.080 going up. But a lot of what goes on in 0:21:50.119 --> 0:21:55.240 crypto is about both crypto technology runs on crypto tokens 0:21:55.600 --> 0:22:00.680 and crypto tokens get their value from crypto technology. Brawly speaking, 0:22:00.920 --> 0:22:04.080 the name for this is web three. The idea is 0:22:04.119 --> 0:22:07.000 that the original web was the early development of the Internet, 0:22:07.359 --> 0:22:11.600 when people built decentralized, open, community controlled protocols for the Internet. 0:22:12.320 --> 0:22:15.560 Web two point oh or Web two was when big 0:22:15.600 --> 0:22:18.760 tech companies more or less took over the Internet. Now 0:22:18.800 --> 0:22:22.280 your experience of the Internet is largely mediated through Facebook 0:22:22.320 --> 0:22:25.399 and Google, and Apple and Amazon, and they make tons 0:22:25.440 --> 0:22:29.600 of money from controlling the Internet. No open decentralized project 0:22:29.640 --> 0:22:32.680 is going to compete with them. But Web three will 0:22:32.720 --> 0:22:36.720 be when people build decentralized, open, community controlled protocols for 0:22:36.760 --> 0:22:41.439 the Internet again and also make lots of money because 0:22:41.440 --> 0:22:44.760 the decentralized protocols won't be owned by big tech companies. 0:22:45.119 --> 0:22:47.560 But they won't be free and owned by no one either. 0:22:48.119 --> 0:22:52.439 They'll be owned by their users. Just kidding. They'll be 0:22:52.440 --> 0:22:55.720 owned by venture capitalists who buy tokens in these projects 0:22:55.760 --> 0:22:59.160 early on, and who are the biggest boosters of Web three, 0:22:59.600 --> 0:23:04.720 but all so by their users. One tokens and token omics. 0:23:05.560 --> 0:23:07.760 Think about what you get when you buy a bitcoin. 0:23:08.520 --> 0:23:11.040 One thing you get is a unit of digital cash. 0:23:11.560 --> 0:23:13.640 You can send the bitcoin to someone else to buy 0:23:13.640 --> 0:23:17.680 a sandwich or whatever. If this digital cash thing takes off, 0:23:18.000 --> 0:23:21.080 then lots of people will accept bitcoin for sandwiches, and 0:23:21.160 --> 0:23:24.560 this currency that you bought will be very useful. But 0:23:24.640 --> 0:23:27.480 another thing you get is a share in the bitcoin project, 0:23:28.080 --> 0:23:30.840 not a share of actual stock, but still a chance 0:23:30.880 --> 0:23:34.600 to profit from the success of bitcoin. If this digital 0:23:34.640 --> 0:23:37.440 cash thing takes off, then lots of people will want 0:23:37.480 --> 0:23:40.080 bitcoin to use to buy sandwiches, and there will be 0:23:40.119 --> 0:23:43.320 a lot of demand for bitcoin, but only twenty one 0:23:43.359 --> 0:23:47.000 million bitcoin will ever exist, so each bitcoin will be 0:23:47.040 --> 0:23:50.000 more valuable as more people decide to use bitcoin as 0:23:50.000 --> 0:23:54.720 their way to transfer digital cash. That logic never quite 0:23:54.800 --> 0:23:58.479 made sense. A convenient currency for digital cash transfer has 0:23:58.520 --> 0:24:02.040 a stable value, and the rising value of bitcoin makes 0:24:02.040 --> 0:24:05.640 it less useful as a currency. If your bitcoin keep 0:24:05.680 --> 0:24:09.320 going up in value, you should not spend them on sandwiches. 0:24:10.119 --> 0:24:14.120 Bitcoin as an appreciating asset will be a bad currency. 0:24:14.320 --> 0:24:16.520 There's a famous story of the guy who spent ten 0:24:16.560 --> 0:24:20.800 thousand bitcoin in May to buy two large pizzas as 0:24:20.840 --> 0:24:23.040 proof of the concept that you could use bitcoin to 0:24:23.080 --> 0:24:27.120 buy pizza. Today, those ten thousand bitcoin would be worth 0:24:27.119 --> 0:24:31.960 about two hundred million dollars. Still, it worked well enough. 0:24:32.560 --> 0:24:35.560 Bitcoin is used enough for digital transfers of value that 0:24:35.640 --> 0:24:40.080 it became valuable and early adopters got rich. This is 0:24:40.119 --> 0:24:44.200 a key financial innovation of crypto. Crypto built an efficient 0:24:44.240 --> 0:24:48.359 system to make the customers of a business also its shareholders. 0:24:49.320 --> 0:24:53.000 Lots of crypto projects have this basic structure. File Coin 0:24:53.160 --> 0:24:56.640 is a decentralized system for storing files where you can 0:24:56.680 --> 0:24:59.560 pay to store files or get paid for storing files 0:24:59.560 --> 0:25:03.840 for someone else. You pay or get paid in file coin. 0:25:04.920 --> 0:25:08.639 Helium is a decentralized system for wireless hotspots where you 0:25:08.640 --> 0:25:10.720 can get paid for running a hot spot or pay 0:25:10.760 --> 0:25:15.040 for access. You pay or get paid in Helium's tokens, 0:25:15.640 --> 0:25:18.400 and there are play to earn video games such as 0:25:18.600 --> 0:25:21.639 XI Infinity, where you pay for tokens to play the 0:25:21.640 --> 0:25:26.560 game and get rewarded in the game's tokens. Participating, storing files, 0:25:26.560 --> 0:25:30.080