Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wish and I'm Tracy Allaway. So, Tracy, we
Speaker 1: are here at the Milk and Institute conference in Beverly Hills.
Speaker 1: I know it's very fancy, it's very how's it been
Speaker 1: going for you so far? It's been fun. I I
Speaker 1: talked a lot about Credit. I watched your panel about crypto,
Speaker 1: and I have to say there were definitely more people
Speaker 1: at the crypto panel than there were the Credit panel,
Speaker 1: and also every panel that I've seen that's not about crypto.
Speaker 1: Someone asked a question, what's your opinion about crypto? Like everyone,
Speaker 1: no matter what, people are just like want to know.
Speaker 1: Someone from the audience submitted a question about how crypto
Speaker 1: would impact inflows into investment grade and you know, interesting thought, Well,
Speaker 1: it's crypto is one of those things too where I,
Speaker 1: regardless of everyone gets an opinion on it, regardless of
Speaker 1: everyone wants to know everyone's take, even if it's not.
Speaker 1: So this is very true. But I'm very excited because
Speaker 1: today we're gonna be speaking to someone who knows a
Speaker 1: lot about crypto now just a tourist, and I think
Speaker 1: a topic that we haven't really talked about that much.
Speaker 1: Is um blockchain architecture and design, and you know, all
Speaker 1: of these panels like everyone's talking to is like they're
Speaker 1: super like fanciful. It's like, I'm just gonna create this
Speaker 1: world like openness and transparency and it's gonna cut out
Speaker 1: all the fees and it's gonna be so great, which
Speaker 1: is really weird because when I think of block change,
Speaker 1: I think of high fees in low settlement or long
Speaker 1: settlement times and basically like all kinds of interesting tradeoffs
Speaker 1: and many things that are worse than the existing financial system.
Speaker 1: So I feel like people are jumping over some like
Speaker 1: basic architectural points in this whole conversation. Right. The other
Speaker 1: thing that gets me, especially at conferences like this, is
Speaker 1: everyone wants to talk about crypto. Everyone seems to have
Speaker 1: an opinion about it. But I have my doubts about
Speaker 1: whether people actually understand the underlying technology and whether or
Speaker 1: not they're differentiating between different blockchains and things like that.
Speaker 1: I think people might understand the basics like proof of
Speaker 1: state versus proof of work, layer two versus layer one
Speaker 1: or whatever, but like within those technology buckets, I don't
Speaker 1: think people are really thinking about the nuance. No, it's
Speaker 1: a lot of like it's all just gonna be really good,
Speaker 1: and it's gonna be really great for financial clues, inclusion
Speaker 1: and democracy and all that stuff. So anyway, let's have
Speaker 1: a real conversation about how these chains work and what
Speaker 1: you can do with them. Let's do it, all right,
Speaker 1: I'm really excited. Our guest knows a lot about this stuff.
Speaker 1: We're gonna be speaking with Arthur Brightman. He is the
Speaker 1: founder and creator of the Tesso's blockchain project, one of
Speaker 1: the sort of original projects that thought about smart contracting
Speaker 1: and malleability in a way that you know, much more
Speaker 1: advanced than are seemingly more advanced than what you can
Speaker 1: do on say coin. So we're gonna talk about what
Speaker 1: you could do with the chance. So Arthur, thank you
Speaker 1: so much for coming on odd lot, and thank you
Speaker 1: for having me. You know, we've been interacting on Twitter
Speaker 1: for years and years, so I'm excited. I'm excited that
Speaker 1: you're here. Yeah, meets too. So you know, like when
Speaker 1: you what do you think when you hear all these
Speaker 1: people at these conferences and you're here too, and they're like, Oh,
Speaker 1: it's gonna like be really cheap. It's gonna lower the
Speaker 1: fees for everything. It's gonna be super fast, transparency, financial inclusion,
Speaker 1: it's gonna save democracy, it's gonna save the planet, etcetera.
Speaker 1: Like what goes through your mind. I mean, I think
Speaker 1: some of it is true and some of some of
Speaker 1: some of these it's false. In terms of reducing the
Speaker 1: fees compared to UH traditional financial infrastructure, I actually think,
Speaker 1: you know, this is one of the real ones that's
Speaker 1: that we can actually do this. Yes, we can lower
Speaker 1: the entry costs for UH creating financial products or financial systems,
Speaker 1: make it a little more innovative, and and developed these
Speaker 1: things much faster than they have in the past. I
Speaker 1: do believe that at UM you can remove all of intermediaries,
Speaker 1: and a lot of the friction in the financial system
Speaker 1: comes from the fact that you need to rely on
Speaker 1: trusted intermediaries UM. As an intermediary, you have oftentimes a
Speaker 1: big opportunity for fraud UM and monitoring that fraud has
Speaker 1: a lot of costs minutry. Also, you have to deal
Speaker 1: with only a few people who are going to be trusted.
Speaker 1: If you can get rid of that, you can actually
Speaker 1: generally reduce costs. So I I do believe this part
Speaker 1: of the story. I don't know that it's going to
Speaker 1: save the planets, and and and do all these grand
Speaker 1: use saying I have a story I have about this
Speaker 1: is I once give I talk at a you know,
Speaker 1: some sort of dead like events, and it was about
Speaker 1: the promises of aluction. And I give an example for
Speaker 1: some of the over hyped ideas that I said, Well, imagine,
Speaker 1: for example, that's we're gonna put you know, plastic bags
Speaker 1: are killing turtles. But the problem is we don't know
Speaker 1: where they came from. If we could identify who leaves
Speaker 1: a plastic bag, you know, it's solve the problem. So
Speaker 1: let's put the plastic blag and obloction in, we'll save turtles.
Speaker 1: And I give that as the example of like some
Speaker 1: of the nonsense you can see, And someone pitched me
Speaker 1: that exact idea. That's amazing. Um, just going to fees though,
Speaker 1: I mean a very cynical person would say that the
Speaker 1: fees exist because yes, there are underlying costs like fraud
Speaker 1: and k y C and m L and stuff like that.
Speaker 1: But if you're being very pessimistic about the whole thing,
Speaker 1: you would also say that financial intermediaries traditional financial intermediaries,
Speaker 1: they like to make money. Uh, and a lot of
Speaker 1: those fees are opportunistic. So I guess my question is, like,
Speaker 1: do those fees actually exist because of what the intermediaries
Speaker 1: are doing and the cost or because of the way
Speaker 1: the system works? And how do we make sure that
Speaker 1: in crypto we don't end up with centralized intermediaries that
Speaker 1: are going to charge big fees anyway. I mean, you know,
Speaker 1: I think everyone who's in business likes to make more
Speaker 1: more profit than likes to charge more fees. And people
Speaker 1: are going to charge what amount of physics can get
Speaker 1: away with in general, so at some point there's competitive
Speaker 1: pressure rights, and in finance it's to that. Sometimes a
Speaker 1: lot of the competitive pressure is not is not presents.
Speaker 1: You'll have people pay you know, one percent commission on
Speaker 1: a trade because they're doing it through a private bank
Speaker 1: and you know, the trust of the private bank and
Speaker 1: do good execution and on and so forth and have nonsense.
Speaker 1: It doesn't cost that to execute a trade none at all.
Speaker 1: But the reason that they're doing it is because, well
Speaker 1: they feel that they need a trust of this very
Speaker 1: prestigious intermediary. If you remove that need, if you remove
Speaker 1: if you remove that the notion of trust. I think
Speaker 1: you get something that's more competitive because you know, if
Speaker 1: the thing is is going to work, regardless of who
Speaker 1: you routed through, interriputation doesn't matter all that all that much.
Speaker 1: It limits the ability of for intermediate is to charge
Speaker 1: our fees. Now some people will try, of course, especially
Speaker 1: I would say there's a there's gonna be a college
Speaker 1: industry of there already is um in crypto of people
Speaker 1: who want to do the most, more traditional investors, and
Speaker 1: who really shows them that? No, no, no no, it's all
Speaker 1: going to be fine. I mean we see it. You know,
Speaker 1: you have you could buy you could buy bitcoin and
Speaker 1: even hold it with a custodian if you're worried about
Speaker 1: self custody risk. Right. But nonetheless you'll find funds which
Speaker 1: charged you, uh, you know, management fees for for for
Speaker 1: holding this. So there's there's some people are always gonna
Speaker 1: want that, but it's still it's it's putting some pressure
Speaker 1: down on costs. Can you talk a little bit about
Speaker 1: your background and the founding of tests, because you're a
Speaker 1: trader at Goldman Sex, right, and so what do you
Speaker 1: what did you do? What was your position in traditional finance? Originally,
Speaker 1: And what did you see early on UH that you
Speaker 1: thought it was like an opportunity to port some of
Speaker 1: these ideas, or the opportunity you saw in creating your
Speaker 1: own chain. Well, my background is in computer science and statistics,
Speaker 1: and my first jobs I was working on as a
Speaker 1: quant So I started out in stary school arbitrage, and
Speaker 1: then I moved to UH in Southern nine A. I
Speaker 1: moved to Goldman to do high you can see trading.
Speaker 1: I worked on et F market making, natural guest market making,
Speaker 1: also word that Morgan Stanley and a few other places
Speaker 1: on this on these topics. I've also done some robotics
Speaker 1: after that, but it's quite quite different. The thing that
Speaker 1: attracted me to UH two group of currencies. It wasn't
Speaker 1: the intersection of a lot of centers of interest that
Speaker 1: I had. I have been interested in the theory of
Speaker 1: money in banking for a long time, so you know,
Speaker 1: how does moniorize what makes good money, what makes bad money?
Speaker 1: And I remember, in a way before bin cooin, you're
Speaker 1: convincing myself that the best, the best money possible is
Speaker 1: backed by nothing. Right if you use gold, for example,
Speaker 1: there's a problem with the fact that if you know,
Speaker 1: if the ment for gold increases, you get more mining,
Speaker 1: and so you know that's a waste, you know, because
Speaker 1: gold is used as a monetary instruments, you know, and
Speaker 1: in an ideal world we would have mind all the
Speaker 1: gold and increase them in. Doesn't create stimmen for all
Speaker 1: all this because it doesn't serve a purpose to have
Speaker 1: more gold once you have a given supply. And I
Speaker 1: guess we could argue that having a city in the
Speaker 1: in the monetary supply can have some some value, but
Speaker 1: it's I didn't see that way, and um when so
Speaker 1: when group has come around, I know this this bad
Speaker 1: criticism around it. So people always say like, oh, it's
Speaker 1: back by nothing, and I'm like, no, that's great, that
Speaker 1: is what you want with the currency. I was interested
Speaker 1: in the cryptographic aspect because I also had, you know,
Speaker 1: I have a made medical background. It was interested in photography.
Speaker 1: The individual sovereignty aspect was also something that appealed to
Speaker 1: me from a political standpoints, so I really it really
Speaker 1: attracted me early on. So you were one of the
Speaker 1: first ones to move from proof of work to proof
Speaker 1: of steak? Is that right? Or we never used proof
Speaker 1: of work? Sorry, I mean you were one of the
Speaker 1: first to like actually do proof of steak. What was it, Like,
Speaker 1: what was the opportunity there, and like why did you
Speaker 1: immediately latch onto that versus proof of work. I got
Speaker 1: interested in doing taste was because of my interesting proof
Speaker 1: of steak um. Around Stan's thirteen. There were a lot
Speaker 1: of innovation in this space around U proof of steak,
Speaker 1: smart contracts, privacy people were coming up with. It was
Speaker 1: an explosion of research and innovation around the around the space.
Speaker 1: And one thing, and it's early in the bitcoin culture,
Speaker 1: is that there was not a whole lot of appetite
Speaker 1: in trying to integrate any of this, any of this
Speaker 1: upgrading biguine. It's sort of a point of pride for
Speaker 1: the right, like that it's so it's the code is
Speaker 1: so assified, or that it's so hard. There's a big
Speaker 1: part of it is pride, but I also think part
Speaker 1: of it is uh sour grapes. You know. For a while,
Speaker 1: the narrative was very different. For a while was people
Speaker 1: admit concircles who were saying, you know, what's all these
Speaker 1: alcoins as you laboratories are going to find the ideas
Speaker 1: and we can always integrate the ladies into bitcoin and
Speaker 1: we moved from that to, oh, all those ideas are bad,
Speaker 1: and now you know we we couldn't we couldn't benefit
Speaker 1: from any of them bitcoin, which I think is a
Speaker 1: little sad because a lot of these ideas are good
Speaker 1: and important and have hound product market fit. This is
Speaker 1: one of the ironies of bitcoin. I think it's technology
Speaker 1: is going to save us in many ways, but also
Speaker 1: we don't want the technology to advance too much because
Speaker 1: we like it the way it is, or we can't
Speaker 1: actually do it. And then I understand the perspective. I
Speaker 1: think from the bigcoins perspective, there's a big risk if
Speaker 1: you if you let people change the ledger. That's the
Speaker 1: changes that you end up having are not merely technological
Speaker 1: improvements but actually change um the nature of bitcoin, and
Speaker 1: it change its economic properties. So I think what bitcoiners,
Speaker 1: all of these coinners feel is that if they open
Speaker 1: the door to technological changes, they're also going to open
Speaker 1: the door to social control of the economic properties a bitcoin,
Speaker 1: which is something that's they absolutely do not want. So
Speaker 1: in some sense they felt like they had to shut
Speaker 1: the door completely on almost completely on changes in to
Speaker 1: preserve the economic properties. Let's talk a little bit about
Speaker 1: what you see happening on chain. We had a recent
Speaker 1: episode of the podcast with another person who wanted E
Speaker 1: t F market Making or e t F trading, Sam
Speaker 1: Bankman Free, and he was asked to describe yield firming,
Speaker 1: and we thought we were going to get this sort
Speaker 1: of very complicated answer about I don't know something. But
Speaker 1: it turns out in his characterization yield firming is you
Speaker 1: they they'll pay you to put money in a box,
Speaker 1: and if you put money in a box before other
Speaker 1: people put money in the box, then you have a
Speaker 1: bigger part of the box. And it kind of sounded
Speaker 1: into a lot of people now that are different from
Speaker 1: a pot this game. What did you think about that?
Speaker 1: Is that a fair characterization of yield firming? I think
Speaker 1: it's a it's a fair conquisation of the way it's practiced. Uh,
Speaker 1: you know, if you wait buy volume or or by prominence,
Speaker 1: then yes, it's a fair calacterization. I wouldn't throw the
Speaker 1: baby with the bast water. I think there's something there,
Speaker 1: you know. The more generous way of looking at it is,
Speaker 1: let's say you want to you want to launch a token,
Speaker 1: you want to suit it in someone you want to
Speaker 1: get some liquidity, so you use part of your token
Speaker 1: supply as a way, we need to incentivize people for
Speaker 1: providing liquidity for it. Uh. And you could see you
Speaker 1: could see a company doing this. You could do this
Speaker 1: with equities. You could say, look, I have some equity,
Speaker 1: my business will bit more appealing to investors. Is a
Speaker 1: liquidity around around this equity, so I could set away
Speaker 1: you know, I could set aside some equity and and
Speaker 1: and incentivized my investors to pride equity. The issue with
Speaker 1: that that it seems to me, and I think we
Speaker 1: have seen this in crypto, is that once the equity
Speaker 1: is distributed, if your model inherently is about I guess
Speaker 1: paying for customers in the form of equity, then once
Speaker 1: all the equity is distributed, do you really have good
Speaker 1: customers or do you just have a base of people
Speaker 1: who are going to now go find the next company
Speaker 1: giving out equity for liquidity. And when I look at
Speaker 1: like crypto, you know, I look at all these like
Speaker 1: DE five protocols that were huge in the summer and
Speaker 1: now they're like charts are way down, and I kind
Speaker 1: of get the impression that the game is, yes, you
Speaker 1: find the company or the protocol giving out government to token.
Speaker 1: This is what they're called equity, and then at some
Speaker 1: point the equity runs out and rather than's sticking around,
Speaker 1: you just go find the next thing. Yeah, I yeah,
Speaker 1: I don't disagree with that. There's a lot of uh uh,
Speaker 1: it's it's very secular. The way frees it sometimes is
Speaker 1: that you see a lot of innovation in DeFi from
Speaker 1: a technological perspective or even from a financial engineering perspective.
Speaker 1: But the point of DeFi cannot just be the trade
Speaker 1: DeFi tokens, and right now that is mostly the point
Speaker 1: of DeFi. So you need to I think you need
Speaker 1: to encourage to some actually you know, I really use
Speaker 1: keys and where real demand comes from. So historically Testos
Speaker 1: has avoided DeFi, right, you haven't been that involved in
Speaker 1: it in the way that say Ethereum has. But I
Speaker 1: think you started something last year called liquidity baking, Is
Speaker 1: that right? Yeah? Absolutely? Can you explain that, like, how
Speaker 1: is that different to the other bad yield farming all
Speaker 1: the way down type DeFi? Of course, So first of all,
Speaker 1: I would challenge the fact that has is cute. You
Speaker 1: defy the way it is is not sentient. It's a
Speaker 1: it's it's a project, and they are defied protocols running
Speaker 1: on the DIES foundation helps UH in general the growth
Speaker 1: of the eatiscal system. We distribute grants and we've given
Speaker 1: some grants to some defied projects, so there's no one
Speaker 1: there's no animosity or anything against the DeFi I think
Speaker 1: it has had a little distraction on Tails and on
Speaker 1: other chains for a variety of reasons. But yes, so
Speaker 1: liquidity making is interesting. It's um It was a modification
Speaker 1: of the protocol itself, so at the protocol level, um
Speaker 1: in amendment was passed and ratified and voted on by
Speaker 1: the by the valuers of the network. That would take
Speaker 1: a small fraction of the very small fraction of the
Speaker 1: to cornsmitted on every block and then use that deposited
Speaker 1: into a pool to incentivise liquidity provision between Bitcoin and tests.
Speaker 1: So the idea is that you have a little more
Speaker 1: inflation in your protocol. I think it comes down to
Speaker 1: about zero points three percent per year, So you know,
Speaker 1: it's not it's it's not very very meaningful for you know,
Speaker 1: something that has a daily standard reviation of lack about
Speaker 1: five percent. You know a few so it's always percent
Speaker 1: per year. But it sent advised people to be willing
Speaker 1: to provide liquidity between bitcoin and and the point is that,
Speaker 1: first of all, these are not gigantity yield. The point
Speaker 1: is not to try to attract people with giant into yields,
Speaker 1: or the point is not to try to strap something
Speaker 1: something new. It's just it's a cost. You be a
Speaker 1: very small cost in terms of inflation, and you get
Speaker 1: something in return, which is the provision. I want to
Speaker 1: go back to the box for a second, because in theory,
Speaker 1: the box could become a bank. Right, so in theory
Speaker 1: we could all put money into the box, we get
Speaker 1: some equity, and then in theory it could start I
Speaker 1: don't know, making loans or doing something with economic purpose,
Speaker 1: something that actually creates value, such that defy is not
Speaker 1: just trading of defy token. Right. This is like the
Speaker 1: spack argument. Right, you're sort of putting money in a
Speaker 1: box that might put something maybe, but is anything becoming there?
Speaker 1: I mean, I haven't we have the famous scriptos back.
Speaker 1: You physically have something that's nonsense, you get a high valuation,
Speaker 1: and then you turn that into actually making Yes, some
Speaker 1: some people attempt that. I don't know that anyone has really,
Speaker 1: really really succeeded that pulling out the cryptos back so far.
Speaker 1: But it was an interesting certainly, like people pointing at
Speaker 1: project like changing for example, Yeah, you know, started out
Speaker 1: a little you know, not not not very coherent, and
Speaker 1: then started you know, hiring serious academic and like doing
Speaker 1: really serious working in photography for this um. So you know,
Speaker 1: it remains to be seen whether or not that that's
Speaker 1: pulled off. But for me, it's more about it's not
Speaker 1: about how serious you are, it's more about you do
Speaker 1: at the end of the day. You know, it's about
Speaker 1: value creation, like what value are you creating? And it
Speaker 1: can't be completely internal. Another way to think about it
Speaker 1: is sometimes they obviously a small town and I'm thinking
Speaker 1: what are the exports of this down? Right? So you
Speaker 1: have economic activity, you have restaurants, but the restaurants is
Speaker 1: for the people who work here, so they have to
Speaker 1: work on something. So at the end of the day,
Speaker 1: you know, what do what do you export? What does
Speaker 1: defy export? Yeah, it's a good question, right, you know
Speaker 1: what what what are you doing? Are you because if
Speaker 1: you're looking at there's there's a cynical view of financial
Speaker 1: mark gets that's I really, I really reject, which is
Speaker 1: the ideas that all the financial market is just a
Speaker 1: trying because you know, everything is zero. Some it's very
Speaker 1: popular view, but I don't. You know, financial markets are
Speaker 1: very important because um they help get liquidity. Uh you know,
Speaker 1: signal market gets get liquidity and it helps capital formation
Speaker 1: for companies and companies actually build things, right, So there's
Speaker 1: generally value in financial marketed to help companies that do
Speaker 1: things and build things. And unless you're actually doing this
Speaker 1: in some ways, uh, we defy, it's it's going to
Speaker 1: remain incestuous and it's going to remin circular. Since since
Speaker 1: you said this, since you're not a fan of DeFi
Speaker 1: for the sake of defy, can I broaden this out
Speaker 1: massively and ask what is the use case of block chain?
Speaker 1: And we ask this all the time, and you know,
Speaker 1: yesterday Joe was on a panel with Alcoran and they
Speaker 1: announced a big partnership with FIFA, and Joe asked the
Speaker 1: FIFA president, well, what are you guys going to be
Speaker 1: doing in this new partnership and he basically said, we
Speaker 1: don't really know. We have a bunch of ideas. We're
Speaker 1: just really into crypto and we want to be a
Speaker 1: modern company, and we hear so many of these partnerships,
Speaker 1: and I feel like it's still kind of unclear what
Speaker 1: it is that you can do with a blockchain like
Speaker 1: tessos versus traditional technology or financial architecture. Yeah. Absolutely, so
Speaker 1: I think for me that the basics, the most basic
Speaker 1: use case and maybe the most important one is a
Speaker 1: censorship resistant store of value, like being able to store
Speaker 1: wells in ways that isn't anyone's liability, because if you
Speaker 1: think about it, if you have a bank account, that's
Speaker 1: still the banks liability. If you have a brokerage account,
Speaker 1: you probably don't even own, you know, their shares in name,
Speaker 1: and even if you did on the shares, it's still
Speaker 1: the company's liability rights by a bit of the company
Speaker 1: to you. There's very very few assets which are not
Speaker 1: someone else's liability. You have really estate, but it's not
Speaker 1: easily portable. Um, you could own precious smetals, but again,
Speaker 1: you know, as bare assets, they're kind of complicated. So
Speaker 1: it's unique in his respect. It's a bare asset that
Speaker 1: you can transact with across the world. So that second
Speaker 1: use case, making very easy cross border payments, very cheap
Speaker 1: corsebolder payments without intermediaries. UM. And I think you know,
Speaker 1: if you live in a in a reasonably free country,
Speaker 1: it might not seem like a like a big deal.
Speaker 1: But as soon as repressions starts started turning on, you're
Speaker 1: pretty glad that you have a sensory resistant store of value. UM.
Speaker 1: That's view points often gets a little derided because people
Speaker 1: will point at people holding Bitcoin or all these other
Speaker 1: coup of currencies and say, well, look at you know,
Speaker 1: look at them, you know, holding bitcoded exchenders. They're not
Speaker 1: concerned with that. Well maybe they're not, but maybe they
Speaker 1: think that other people are going to be concerned with that.
Speaker 1: And they helped set a price for the for the
Speaker 1: store of value. So I don't you know, it's it's
Speaker 1: basically easier using the store of value or speculating the
Speaker 1: fact that people are going to use the store of value.
Speaker 1: And I think that's completely fine. So here's my other
Speaker 1: very broad question, which is do people actually care about
Speaker 1: decentralization in crypto? And then secondly, how do you measure decentralization?
Speaker 1: And again I asked the question because this happened again
Speaker 1: at Milkin, but Cathy would from ARC was talking about
Speaker 1: the new thing they're working on, is some sort of
Speaker 1: systematized way or systematic way to actually measure decentralization in crypto,
Speaker 1: So how do you actually do it? And doesn't matter?
Speaker 1: So if you're looking today at the behavior of of
Speaker 1: you know, price setters in markets, whoever is, you know,
Speaker 1: the marginal buyer forocurrency does not care about decentralization, right,
Speaker 1: That's the next thing that's been pretty clear. But I
Speaker 1: believe that for these systems to present some values, they
Speaker 1: need to be decentralized, otherwise they'll be able outcompeted. You know,
Speaker 1: if you have some use case for your blockchain, you
Speaker 1: have to ask yourself, you know, what do I do that?
Speaker 1: I'm only with you guys kind onto better as the service,
Speaker 1: And I think the answer to that often time is
Speaker 1: going to lying in the centralization. So there's been a
Speaker 1: d coupling in the sense that people don't care. But
Speaker 1: at the end of the day, when the rubber hits
Speaker 1: the road, um, the centralization doesn't matter. But I think
Speaker 1: who'nt need to see more cases of bloctions being insufficiently
Speaker 1: decentralized and running into trouble for people to start caring.
Speaker 1: How do you measure it? The centralization. Yeah, there's many
Speaker 1: ways to think about it. You can have the would
Speaker 1: say digity decentralization, where like, well, you know there's no
Speaker 1: no single parties in charge UM, but then the fact
Speaker 1: of the centralization is like not only is that true,
Speaker 1: but on top of that, you know no part no
Speaker 1: party is too prominent or has too much of a
Speaker 1: of an impact on the network UM. And then you
Speaker 1: could be looking at it in terms of the most
Speaker 1: narrow sense would be the consensus algorithm. You know, who
Speaker 1: can attack the integrity of the chain, But it could
Speaker 1: also be you know who has influenced in this worry
Speaker 1: who can who has the cloud to h serious hard
Speaker 1: works for example UM, And it could be who is
Speaker 1: who is building infrastructure that's critical for for this So
Speaker 1: you have many many degrees of of that. So just
Speaker 1: on this topic, I mean, there do seem to be
Speaker 1: benefits and drawbacks to decentralization. And we've seen for instance
Speaker 1: with Ethereum. Ethereum has a figurehead in the form of Butteran,
Speaker 1: and they have been able to do some stuff relatively
Speaker 1: quickly that probably a truly decentralized protocol would have difficulty doing.
Speaker 1: And I think Tesso's has a unique governing structure where
Speaker 1: you are quite decentralized from what I understand, So has
Speaker 1: that been like how do you feel about that? Has
Speaker 1: that been a drawback or is that a big benefit
Speaker 1: of the protocol And how do you weigh those two things? Well,
Speaker 1: I think in general, decentralization is a cost right that
Speaker 1: you have, and there's benefits susciated to that cost right.
Speaker 1: So I think it's it's worth spaying. But it's it
Speaker 1: feels almost like an insurance premium, you know, right, you
Speaker 1: busy insurance and months after amounts and you say what
Speaker 1: am I paying this insurance? And then you have a
Speaker 1: fire and you're glad you paid for the insurance. So
Speaker 1: it's it's very easy to see the cost of the
Speaker 1: central station, and the benefits are are not always as
Speaker 1: obvious immediately. In terms of testos, we have a governance
Speaker 1: procedure that's allows four upgrades to the chain, so anyone
Speaker 1: can propose an a great one tests chain and it's
Speaker 1: set to a vote in names of vote passes and
Speaker 1: it's a very conservative vote happens overse three months, but
Speaker 1: if the vote passes, the upgrade is adopted. There's a
Speaker 1: side effect though, because in order to have a mechanism
Speaker 1: that completely atomittate upgrades through voting, a lot of engineering
Speaker 1: work from the from the very beginning, went into making
Speaker 1: easier upgrades, and just as a side effect of that,
Speaker 1: that's that's a benefit, you know, unrelated to the decentralization.
Speaker 1: It's just the fact that it's really easy to to
Speaker 1: to do hot swaps of the protocol has let us
Speaker 1: U upgrade faster. We've had about nine upgrades in the
Speaker 1: best three years, and we have a tense upgrade being
Speaker 1: puted on right now. I want to go back to
Speaker 1: Tracy's question about use cases, because Okay, store value, I
Speaker 1: get it, cross border payment or payment, I get it it.
Speaker 1: On the other hand, like I kind of think bitcoin
Speaker 1: just solved those problems and so or to some extent,
Speaker 1: And so when I think about like a smart contracting platform,
Speaker 1: and when I'm here at Milkin and everyone is talking
Speaker 1: about we're gonna be trading real estate on the blockchain
Speaker 1: or virtual worlds and you know, virtual land and where
Speaker 1: like you know, your cartoon ape can live or whatever,
Speaker 1: I want to push further on, like what can we
Speaker 1: do with a blockchain that we can't do with a
Speaker 1: traditional database, and what that's gonna look like and what
Speaker 1: what applications are gonna take off it actually change society
Speaker 1: or as you put it. And I really like the phrase,
Speaker 1: and I'm gonna steal it from now. And there's like
Speaker 1: the block what are the blockchains exports going to be? Yeah? Um,
Speaker 1: and I think you know it's the most natural that
Speaker 1: the highest impendence match is total value and then we
Speaker 1: go down from there. But it's there just still a
Speaker 1: lot of value that's present. So we you know, we did. Uh,
Speaker 1: there was a friend umber of security token offering and
Speaker 1: on it was bloction and a lot a lot of
Speaker 1: them have come from the rested world and they were
Speaker 1: people of the world real estate work. There were a
Speaker 1: lot of people took anything real estate on on blockchains
Speaker 1: and they weren't doing it. You know, it was not
Speaker 1: an innovation nowative banks saying like, oh we gotta do
Speaker 1: something with blockshain. You know, they came from people who
Speaker 1: actually had the need and actually had the use case
Speaker 1: and this all the value and I don't think it's
Speaker 1: impossible for a centralized system to um to do this.
Speaker 1: But having a system that secure, that's automated. That's global.
Speaker 1: I think the global aspect the fact that it's it
Speaker 1: just works and you have this entire infrastructure around it.
Speaker 1: You have wallets, you have custodiuns um think of it
Speaker 1: some sort of layers that plugs in into a large
Speaker 1: ecosystem m that supports it, that lowers your costs. So
Speaker 1: there's value here. It doesn't come straight from the incentralization.
Speaker 1: I think it comes from the network effect of having
Speaker 1: a ginering platform where you can build all sorts of things.
Speaker 1: So I have a dumb question, and I think I've
Speaker 1: asked this before, which probably makes it extra dumb. But
Speaker 1: when you actually tokenize something like real estate or you know,
Speaker 1: a JPEG that becomes an n f T, what exactly
Speaker 1: are like, what are you buying? Because my understanding is
Speaker 1: you're basically buying a database entry, and then there has
Speaker 1: to be some external body like an open sea that
Speaker 1: points you in the direction of it. And also just
Speaker 1: to add on to it, in theory, there needs to
Speaker 1: be some legal legal recourse right such that the owner
Speaker 1: of that token actually is entitled to the cash flows
Speaker 1: of the property, whether that's in the rent or in
Speaker 1: the sale of it. That as opposed to whoever it
Speaker 1: just happens to be there. It takes the month. Yeah,
Speaker 1: there's a lot of arguments in around this space that
Speaker 1: and I've been guilty of that. That's if you follow
Speaker 1: the argument, you you will reach very strong conclusions. And
Speaker 1: there is there's always some subtleties, see like oh, this
Speaker 1: could be centralized and therefore is there's no value and
Speaker 1: so for example, the legal resource is a really good example. Um.
Speaker 1: Sometimes you'll hear, Look, there's no in having tokenize real
Speaker 1: estate on the chain because at the end of the day,
Speaker 1: you're not going to be able to you know, if
Speaker 1: you want to a certain rights, you'll have to go
Speaker 1: to the course you'll have to go to like whoever
Speaker 1: is issue is, they can refuse to honor it. So
Speaker 1: all the security of the blockchain is for not and
Speaker 1: I think that's, um, that's taking the argument a way
Speaker 1: too far. You know, that's the saying that possession is
Speaker 1: nine tenths of the law, and in some sense smart
Speaker 1: contracts is automated possession. So sure you could have legal challenges,
Speaker 1: you can have all of all sort of things, but
Speaker 1: it reverse the burden. I think it's an example who
Speaker 1: says that smart contracts reverse the burden of the lawsuit.
Speaker 1: And that's really interesting because you know you'll get transferred
Speaker 1: the title of something. You can start doing things because hey,
Speaker 1: you know it works with lending protocol. It's integrated and everything.
Speaker 1: And if people somehow saying that you know, you're not
Speaker 1: entitled to it, they have to sue you, and they
Speaker 1: have to to claim it back, as opposed to you
Speaker 1: saying like, hey, I need this so And you see
Speaker 1: this in theternational financial system in the form of scrow. Right,
Speaker 1: if you have a small party dealing with a large
Speaker 1: party and it's a look, if you don't pay us,
Speaker 1: there's no way we're gonna be able to sue you. Right,
Speaker 1: So you use Scrow for that. And I like to
Speaker 1: think of smart contracts as automated is grow Escrow exists
Speaker 1: because the two parties don't trust each other. So the
Speaker 1: solution that you're creating is basically trying to fix that
Speaker 1: trust problem. But I guess, like I guess, my question
Speaker 1: is it goes back to that what are you buying aspects?
Speaker 1: So I buy tokenized real estate, I still have to
Speaker 1: trust the person who's selling it to me, because there
Speaker 1: still has to be an entry somewhere or there still
Speaker 1: has to be a centralized party that's telling me that
Speaker 1: this database entry points to that thing over there. Absolutely,
Speaker 1: but I still say you trust them with less than
Speaker 1: if you were just signing documents. It's a matter of degrees. Absolutely,
Speaker 1: And in some sense with the jap eggs and the arts,
Speaker 1: I think it's it's more trustless in some sense with
Speaker 1: it because there's no there's nothing tangible, right, It's not
Speaker 1: like somehow they can say no, you don't own that.
Speaker 1: You don't know that saying, because what you're buying is
Speaker 1: a I think if you buy a piece of art,
Speaker 1: for example, and you know, just to be sure. A
Speaker 1: lot of people buying jim Pegs are just buying it
Speaker 1: because they see it to go up and they say like,
Speaker 1: I'll buy it and I'll say it tomorrow. There's a
Speaker 1: lot of gambling associated with it, right, But there's also
Speaker 1: a genuine art community. Uh, there's not generally digital artists
Speaker 1: who are minting digital art and selling it. And the
Speaker 1: argument that like the most here it's like okay, so
Speaker 1: digital artists are saying, and that's not going to go away.
Speaker 1: People want to collect it. People always want to collect arts.
Speaker 1: So what's the alternative. You know, before before that people
Speaker 1: would collect digital art and it would receive a paper
Speaker 1: certificate saying you own you know, you you own this piece.
Speaker 1: You're not going to put it on some corporate database.
Speaker 1: You want something that's that's going to be here for
Speaker 1: the long run. You want something that gives you some
Speaker 1: meaningful form of ownership. So the best slubstrate for that
Speaker 1: is a portrack. So I do think there's a really
Speaker 1: good impendence match for art, digital arts and potact. Let's
Speaker 1: talk a little bit more about what the future looks like.
Speaker 1: And you know, Tesso's is an Ethereum competitor and a
Speaker 1: lot of the things that you can do a test
Speaker 1: as you could do on Ethereum and presumably on Salana
Speaker 1: and Avalanche and the finance chain and all these and
Speaker 1: algorand etcetera. Is your viewer. There's a question that I
Speaker 1: was wondering, like in your vision, is there one chain
Speaker 1: that wins out? You know, is it? I mean, you
Speaker 1: would want it to be Tessos, but are we going
Speaker 1: towards one chain that's the winner or is it, as
Speaker 1: they say, a multi chain world. So again to my points,
Speaker 1: is there is ABSOLUTEI arguments where you can say, well,
Speaker 1: you know there's network effect in having one chain. Um
Speaker 1: there's and you know, like you have more security, you
Speaker 1: have more assets, more compossibility, so one chain wins all uh,
Speaker 1: and there's the midst tools is absolutely argument away. Like
Speaker 1: to think about it is um as you know, if
Speaker 1: you have als in a h A in a solution
Speaker 1: and then new let it crystallize. If you criticalize very
Speaker 1: very quickly, you get something like like glass supercalize very
Speaker 1: slowly you get a few big crystals. So the lowest
Speaker 1: energy state is just like one big single crystal. But
Speaker 1: you're not going to get to the lowest energy states
Speaker 1: because at some point you'll have things that crystalize. So
Speaker 1: what it means is that yes, we haven't one touch
Speaker 1: multilze in the world, but the applications on the change
Speaker 1: will say because they have their own network effects. So
Speaker 1: I don't think we're going to have change that specialize
Speaker 1: on a use case. In a technical technical sense, there's
Speaker 1: no way you can meaningfully say, oh, this chain is
Speaker 1: the best technologically speaking for sports, and this change is
Speaker 1: the best technologically speaking for finance. The designs are largely
Speaker 1: going to converse to converge. However, if you have a
Speaker 1: lot of really really popular applications which are talking to
Speaker 1: each other and form their own ecosystem on a chain,
Speaker 1: they're not necessarily all going to mike greater way from
Speaker 1: one chain to another just because they can get you know,
Speaker 1: epstin and more security in doing so. Can you can
Speaker 1: you talk a little bit more about that interoperability point,
Speaker 1: Why is it so technologically difficult? You know, give us
Speaker 1: a really easy to understand explanation of why it's so
Speaker 1: technologically difficult to make the chains work together. The main
Speaker 1: chain that a block chain does is maintain consensus. Right,
Speaker 1: That's a hard problem that they that they solve. And
Speaker 1: if you want to have two chains communicate with each other's,
Speaker 1: they need to be in consensus with each other. I mean,
Speaker 1: each chain needs to know what states the other one
Speaker 1: is in. But at this point, if to to to
Speaker 1: have them been consensus with each other, you would need
Speaker 1: to have all the valuers of one chain, the all
Speaker 1: the valuers on the other chain, and some and by
Speaker 1: the time you've done that, you've essentially emerged the two chains.
Speaker 1: So fundamentally, bridges that supports state from one chain to
Speaker 1: another are hard you are um either increasing the competitional
Speaker 1: cost on your network or you're losing security properties. And
Speaker 1: we have some of the big hacks, and we haven't
Speaker 1: I don't think we've talked about it on the show before,
Speaker 1: but some of the big acts that people hear about
Speaker 1: in crypto lately have been on these bridges, right, yeah,
Speaker 1: So can you talk a little bit about like what's
Speaker 1: going on, how are they, why are they, why is
Speaker 1: security inherently difficult? And what have exploiters discovered about the
Speaker 1: weaknesses inherent in these bridges. So, first of all, the
Speaker 1: bridges are big honeypots because in general, the way a
Speaker 1: bridge work is you're gonna put all your assets on
Speaker 1: a chain in one needle pots and then you're going
Speaker 1: to mince a representation of those assets on the other chain.
Speaker 1: So you have a big pot of money that's sitting there.
Speaker 1: So first of all, you're a very good to target
Speaker 1: for us. So I lock up, say ten million dollars
Speaker 1: worth of value on Ethereum, and then I meant ten
Speaker 1: million dollars on Tesso's that represents a claim to that
Speaker 1: ten million one, that's right. So that's a lot of money,
Speaker 1: all right. So that's a honeypot, but keep going. Yeah,
Speaker 1: but that's the first saying. It's like, you know what
Speaker 1: what what motivate security attacks is is money. And the
Speaker 1: second thing is so it depends not every bridge is
Speaker 1: created equal, and then some bridges of were more way
Speaker 1: more secure design if you look at you know, the
Speaker 1: entire costmos ecosystem is built is built around the idea
Speaker 1: of having these bridges light client bridges between chain. Now
Speaker 1: that's more secure than other approaches, but the a typical approaches,
Speaker 1: you can't have a set of Steiners. So a lot
Speaker 1: of people said of people who are going to monitor
Speaker 1: bus chains are going to see what happens, and then
Speaker 1: they will sign messages saying like yep, I got deposit
Speaker 1: on this chain, and you notify the other chain that
Speaker 1: the pus it happens, and vice versa. But those signatures
Speaker 1: have the power to take away the funds because they
Speaker 1: could pretend that the deposits happened that never happened, or
Speaker 1: that a withdrawal happened that never happened. They need to
Speaker 1: so they need to be in concerns. They need to
Speaker 1: follow the two chains. But there's a lot of attacks
Speaker 1: you could do. First of all, you know if you
Speaker 1: have I don't know um the polygon for example, So
Speaker 1: Polygon is, uh it's an l one chain that markets
Speaker 1: itself as an alto chain on on on a serrium.
Speaker 1: They have five billions. Explain that just quick diver what
Speaker 1: do you mean it's an l one change in. Yeah,
Speaker 1: so is an l one network. And the proof is
Speaker 1: that they are actually investing in the two solutions. You know,
Speaker 1: if you're an alter, you don't invest in healthy solutions
Speaker 1: for for scaling yourself. But it's part of a lot
Speaker 1: of their marketing. Initially was like no, no, no bill
Speaker 1: and Polygon is just like billing on etherium because we're
Speaker 1: all part of scaling ethereum. But their incentive or at
Speaker 1: odz without of the asyrannical system keep going. It's been
Speaker 1: a good growth hack to to to say like no, no no,
Speaker 1: we're complimentary to asyrium, but everyone's computing and uh so
Speaker 1: the Polygon contract has is a five out of eight
Speaker 1: multi sig and it has like a few billions of
Speaker 1: value like if you're if you're holding a signature and
Speaker 1: so there's eight people. Yeah, and in theory to access
Speaker 1: those billions, you just need to get five of them.
Speaker 1: That's right, Okay, just just high stakes. Yeah, yeah, and
Speaker 1: uh so yeah, it's it's it's it's high. Second, you're
Speaker 1: not where you could put the signature. You're not going
Speaker 1: to put it in your apartments. You know, you need
Speaker 1: to be acceptable to access it, so you can't even
Speaker 1: put it in the Bengal So you need some sort
Speaker 1: of probably some data center. But even if you have
Speaker 1: a data center, now you have to sing a black
Speaker 1: well who has access to it. You know, when there's billions,
Speaker 1: if your attack is worth billions a budget that you
Speaker 1: have for actually tricking e sais, I mean you have
Speaker 1: people being kidnapped for example, there's a there's a lot
Speaker 1: of I mean for billions of dollars. It's not you know,
Speaker 1: it's not impossible. People have been kidnap for a lot
Speaker 1: less than that, So that's you know, there's a lot
Speaker 1: of there's a lot of risk associated with running a bridge.
Speaker 1: If you look at Accine Infinity for example, so they're
Speaker 1: not on ethereum, they're running a clonavicorium and there's a bridge,
Speaker 1: and they were hacks for like a dohndred million or
Speaker 1: something like that, And it's easy to look at this
Speaker 1: and say like, ah ha ha, you know, silly and
Speaker 1: fty games they got, they're probably sloppy with security. And
Speaker 1: I have no idea. I have no idea what's you know,
Speaker 1: what's backing it. But I've seen a bunch of people
Speaker 1: say like, apparently the evidence points that, you know them
Speaker 1: being like North Korea, because you know, for a six
Speaker 1: hundred million for North Korea, that's a lot, that's a
Speaker 1: lot of that's meaningful money. But if your adversaries or
Speaker 1: nation states, that puts the you know, that puts the security,
Speaker 1: and you don't really have the security problem. The way
Speaker 1: that bloctions are designed like that, the security works a
Speaker 1: lot a lot better. You know, everyone's responsible for their
Speaker 1: own safety. You don't have this giant an epot of
Speaker 1: all the funds of the one bridge we're try in
Speaker 1: the same place. This actually reminds me of something that
Speaker 1: I want to ask you, and it gets back to
Speaker 1: the multi chain versus absolutist argument or tension. And I
Speaker 1: guess Tesso's has been around for a long time, and
Speaker 1: you know you've been doing this for a while. You people,
Speaker 1: you're well known in the industry. You've talked to a
Speaker 1: bunch of people, you have different partnerships. What is it
Speaker 1: like actually going out and selling the technology to a
Speaker 1: company or convincing some sort of entity to use it,
Speaker 1: Like what is that I guess endeavor like and how
Speaker 1: do you compete against something like Ethereum or Salona or whatever. Yeah,
Speaker 1: so you know, in general, it's I don't go around
Speaker 1: to companies who have no interest in using block chains
Speaker 1: and salem like you should be using you should be
Speaker 1: because in general there's some existing interests. I'm sure some
Speaker 1: blockchains do that. I mean, there's probably a few of
Speaker 1: them at this conference. Yes, it's it's it's it's it's
Speaker 1: it's quite possible. But you know, by a large people
Speaker 1: are you know, even every large institution has at least
Speaker 1: you know, every bank since to sell in certain has
Speaker 1: like an innovation center that actually wants to do something important.
Speaker 1: So there's already you know, like at least some easting
Speaker 1: interests and some ideas of doing something. So it's more
Speaker 1: about like, you know, why should we use what you
Speaker 1: what should the use testos as opposed to any other
Speaker 1: any other blockchain, And then you know, we rely on
Speaker 1: some of the good attributes of testos, which is a
Speaker 1: very stronger centralization, um the fact that we have a
Speaker 1: really good software stack for building take your application, it's
Speaker 1: I think a lot easier to verify the security of
Speaker 1: contracts written on and on contracts that that use solidity,
Speaker 1: good developer community. Sometimes it can just be handolding. Sometimes
Speaker 1: people say, you know what, I've tried to build on
Speaker 1: this chain and I couldn't find any help. And being
Speaker 1: able to go to these people and provide technological expertise
Speaker 1: makes some big difference. And I want to get your
Speaker 1: take on another big thing that's going on in crypto
Speaker 1: right now that's attracting all kinds of controversy and medium
Speaker 1: posts and tweets, and that is the chain Luna and
Speaker 1: is like this, So the deal is in my understanding.
Speaker 1: Maybe you'll you'll explain it better. But there's a chain
Speaker 1: called Luna and they have a stable coin called ust
Speaker 1: and they've you can get on USC if you buy
Speaker 1: this coin and then like stake it, and people are
Speaker 1: making tons of money and it's going up. And then
Speaker 1: also I think the Luna Foundation is buying a bunch
Speaker 1: of bitcoin, like billions of dollars worth to build this
Speaker 1: war chest to hold the peg of the stable coin
Speaker 1: because to hold a stable coins peg. There's a lot
Speaker 1: of interest in stable coin architecture and design. And some
Speaker 1: people think like this is like gonna blow up. And
Speaker 1: someone once told me it's like all the stuff that
Speaker 1: you're worried about with tether, you should be looking at
Speaker 1: Luna and other people like super bullish on it. What
Speaker 1: is your reader the situation? I see more talk about
Speaker 1: this story than a lot of other things right now. Yeah,
Speaker 1: I have, you know, I have my My theory is
Speaker 1: no convertibility, no parody. So you cannot if you cannot
Speaker 1: convert your assets from from your dollar civil coin into dollars,
Speaker 1: you're not gonna have any form of parody. And it's
Speaker 1: it's such a powerful law. I mean even you know
Speaker 1: you saw it in equities. The classical example is um
Speaker 1: Shell Royal Dutch where after where after a merger they
Speaker 1: had shares treading on in Amsterdam and chares ring in London,
Speaker 1: and there's the same equity. They give the shareholders exactly
Speaker 1: the same rights, and one treaded you know, for for
Speaker 1: years at like a discount to the other, and and
Speaker 1: and there's the same instrument. But because you cannot convert
Speaker 1: one into the other. So if you don't have, if
Speaker 1: you cannot just hope that people are gonna be rational,
Speaker 1: you need arbit chargers to be able to come in
Speaker 1: and easy arbitrage. So with a lot of fractionalized with
Speaker 1: a lot of like fractionally backstable coins, the arby chargers
Speaker 1: can do that to some extent. But the system realizes
Speaker 1: on constant growth in the number of people who wanted
Speaker 1: to hold a coin. And if you don't have this growth,
Speaker 1: and if you have, you know, as soon as you
Speaker 1: use through contraction and people start asking for redemption, then
Speaker 1: the system collapses. So that's you know, how business, for example,
Speaker 1: it's built, and that's how or wanted to be built.
Speaker 1: Luna is a little different. Um. What they're doing essentially
Speaker 1: is they're saying, okay, so we have an idea of
Speaker 1: the price of Luna in unst dollars, and so anyone
Speaker 1: who comes in can issue some against you can burn
Speaker 1: some Lunine, issue some some some us T or do
Speaker 1: the opposite, and we're gonna pay because oh that's great,
Speaker 1: you know it will it's it's a growth, it's a
Speaker 1: way to grow. The difficulty with that is there's no
Speaker 1: limits to how much USD can be UH can be created,
Speaker 1: and the lunit holders are actually paying for the twenty
Speaker 1: percent are coming from from somewhere. Now. They're happy to
Speaker 1: do it because they're saying, well, you know, the growth
Speaker 1: and the demand in the civil coin creates visibility for
Speaker 1: the ecosystem, it creates hype, and it creates market care.
Speaker 1: But there's limitations to u to how that works. What
Speaker 1: they don't do. What you need to do is you
Speaker 1: need to be able to set the interest rate in
Speaker 1: the way that's going to balance the supply and itsupper
Speaker 1: stoually be determined by what's backing it and the demand,
Speaker 1: which is, you know, how many people actually want to
Speaker 1: hold this stable coin and they don't have a mechanism
Speaker 1: like like this. And instead of building this mechanism, because
Speaker 1: you could do that, you could you could do something
Speaker 1: where you say, look, we want to have no more
Speaker 1: than of the market gap of them not being into
Speaker 1: ust and if we have more than thirty percents, and well,
Speaker 1: well we'll lowers interest rates, including you know, potentially going
Speaker 1: negative and if we have less, well so that there's
Speaker 1: making them that work instead of that they're going and
Speaker 1: so we're gonna buy bitcoin which is, you know, if
Speaker 1: you want to have also some centralized ownership and going
Speaker 1: by you know, go and go and buy some of dollars,
Speaker 1: Like why would you nationel for doing what do they
Speaker 1: say is the rationals headlines? Well, it was the biggest
Speaker 1: holder of the biggest holder of point. How cool is that?
Speaker 1: Or potentially is the idea is that? Well maybe we
Speaker 1: could appreciates and and and and it helps us backing problem. Yeah, um,
Speaker 1: since you mentioned arbitrage there, I was wondering, given your
Speaker 1: E t F market making background, do you see a
Speaker 1: lot of parallels between the world of crypto and UM
Speaker 1: and E t F trading, UM c F trading, not
Speaker 1: not just per se right, not directly, but just having
Speaker 1: in general financial background. I think he's helpful when looking
Speaker 1: at a lot of the five protocols and understanding how
Speaker 1: they how they work or don't work. I have a question,
Speaker 1: and again it's sort of about these parallels. So one,
Speaker 1: people got hyped up about blockchains early when the robin
Speaker 1: Hood stuff was going on, and people started learning about
Speaker 1: payment for order flow, and they like, oh, you're giving
Speaker 1: a penny or a million of a penny on every trade.
Speaker 1: Some high frequency trader jumping ahead of you and so forth.
Speaker 1: But crypto or block chains themselves and ethereum and other
Speaker 1: smart contracting platforms have this concept of MTV and minor
Speaker 1: extractable value. And if I want to place a trade,
Speaker 1: you know, blocks only happen every once in a while,
Speaker 1: and in theory, that trade goes out there and everyone
Speaker 1: can see it, and a minor can jump ahead of
Speaker 1: can I think is how it works? Essentially jump ahead
Speaker 1: of me and get a better price on that execution
Speaker 1: and then sell it back to me and I get
Speaker 1: a worse execution. How big of a problem is this?
Speaker 1: Can you like talk like and how does it work
Speaker 1: on tesso's And what are the sort of like things
Speaker 1: that people should understand about, you know, the power that
Speaker 1: miners have or the you know what how MTV comes
Speaker 1: out of the system. Well, that's a big guy, that's
Speaker 1: that's I know. It's like, these are the things that
Speaker 1: we haven't really talked about before, and you're gonna explaining
Speaker 1: these things. So I figured I would just give you
Speaker 1: a bit have you to hide to hide to dive
Speaker 1: into it. So the first thing to understand is that
Speaker 1: order flu is not funcible rights order flow, that comes
Speaker 1: from retail trading. Is not the same thing as order
Speaker 1: flu that comes from Goldman Sachs. So that comes from
Speaker 1: a fun manager. You know, if I come to you
Speaker 1: and I say, hey, you know I want to buy this, uh,
Speaker 1: this equity from you this year is from you make
Speaker 1: sure sure you know? Or maybe maybe not, but if
Speaker 1: if if common sucks come to you and say, hey,
Speaker 1: don't you want to buy this from us? So this
Speaker 1: is like retail flow is much more desirable because we're
Speaker 1: all down. It's not even that it's umb, it's like
Speaker 1: it's just not informed. You're you're buying. You know you're
Speaker 1: buying it because either maybe you're gambling or because you're saying,
Speaker 1: like I like this talk, I want to buy it
Speaker 1: for retirement and so and so forth. This is not
Speaker 1: like you have just received some informations for a wire
Speaker 1: about something and you've done all of that and now
Speaker 1: you know that the execution is going the press can
Speaker 1: go down. So it's quite different. And once, once upon
Speaker 1: a time, um, you didn't have to mix all the
Speaker 1: other flu together. So if you were a big fund
Speaker 1: manager and you have this large SMP fund and you
Speaker 1: need to rebalance and you talk to another big fund
Speaker 1: manager and they need to rebalance, and then you strike
Speaker 1: a deal because you know that the other person is
Speaker 1: not trying to screw you, right, so they're just trying
Speaker 1: to just trying to solve a mutual problem. Yes, and
Speaker 1: also you're going to do repeat business with them. That's
Speaker 1: quite important. And that's you know that happened upstairs and
Speaker 1: icy uh. And then at some point he looks at
Speaker 1: this and say, well, you know, we see all these
Speaker 1: big trades happening, and they're very advantagerous. But the reasons
Speaker 1: and MS right, this is regulars. Yeah, the retail guy
Speaker 1: doesn't get access to that. So we're gonna put everything
Speaker 1: on the electronic exchange and brookers will have to route
Speaker 1: to whichever exchange has the best, you know, the NBBO,
Speaker 1: the best beg an Ask and a lot of instrumental investors.
Speaker 1: When they start doing that, they had no idea how
Speaker 1: to do it. So now they start showing these big
Speaker 1: orders or even you know, if they chop them up,
Speaker 1: they don't do it in they don't really do it
Speaker 1: in a way that hides the amount of volume that
Speaker 1: they want to do, and they get eaten by hYP
Speaker 1: you cant traders who appear as a college industry as
Speaker 1: soon as the reaguims is past, and so a lot
Speaker 1: of a lot of these big cell side people get
Speaker 1: very very upset at it. And if you read Flashboys,
Speaker 1: it's very one sided book that looks only about the
Speaker 1: cell side, doesn't introduce a single person on the actricancy trading.
Speaker 1: I remember there's this crazy bit in Flashboys where he
Speaker 1: was talking he was about to do like a retail
Speaker 1: trade and he was about to click like order or buy,
Speaker 1: and then he saw the price move on his screen
Speaker 1: and he was convinced that it was because you know,
Speaker 1: Goldman Sachs was front running his his like tiny retail
Speaker 1: trade and bizarre because it's also presented I think like
Speaker 1: in South and ten and is like, oh, I'm uncovering
Speaker 1: this big secret, and I'm like, I started working in
Speaker 1: Goldman sections and nine because people were talking about this
Speaker 1: on TV and I saw it was cool. So you know,
Speaker 1: it wasn't CNBC. It's not like they were encovering a
Speaker 1: big conspiracy um. And you know, people adapted, of course,
Speaker 1: so they started using execution brokers where you know they
Speaker 1: will say no, well well we'll take your order, chop
Speaker 1: it up and then put it on put it on
Speaker 1: the exchange. But so now as a result, what happens
Speaker 1: is um you get interrantiational flow. So you get this
Speaker 1: retail flow. And if you send a retail flow to
Speaker 1: the exchange, the retail is going to get a worse
Speaker 1: price because the exchange doesn't know in this thing. The
Speaker 1: exchange says, whoa wa, wait a second, we don't know
Speaker 1: who you are. You could be retailed, you could be
Speaker 1: a hedge fund. We're gonna be giving you wide quotes
Speaker 1: because we don't know whereas as a brooker, you know,
Speaker 1: the order fluid is not is not toxic. That's a
Speaker 1: word that's used for like informal flow. It's it's not
Speaker 1: informal to flow. So you can give it a better price.
Speaker 1: So you're gonna imagine in generally you're gonna give you
Speaker 1: a better price in the envideo, which you're a lot.
Speaker 1: You know you're a lot too. You know. To do that,
Speaker 1: you're going to report the trade to the exchange and
Speaker 1: that it's or you're going to give the customers n
Speaker 1: b b oh. But actually you internalize it for something better,
Speaker 1: so the customer feels like, oh, I haven't paid anything.
Speaker 1: You know, but actually you've made money because you can
Speaker 1: quote tighter on your interniz flow than you could on
Speaker 1: the exchange. So retail really went out out of this,
Speaker 1: like the small retail guy who's like just spuying single
Speaker 1: in stocks markets much more liquid for that. I would
Speaker 1: say the losers out of this have been logtituational traders
Speaker 1: who now have to eisier use execution brookers or dark pools.
Speaker 1: So here's a very broad question based on that very
Speaker 1: long and detailed answer. But what is crypto trading like
Speaker 1: behind the scenes of exchanges? Like how transparent is it?
Speaker 1: And what sort of execution are people getting? Right and
Speaker 1: all the MTV aspects, So it's like what are what
Speaker 1: are the equivalent like how big are some of these?
Speaker 1: So the according to MTV is is putting your giant
Speaker 1: order on the exchange and everyone knows what you know
Speaker 1: you're about to do, uh, and so people can get
Speaker 1: you know, people can get ahead of you. The difference
Speaker 1: is that if I put a giant order with my broker,
Speaker 1: at the very least the broker has if you sharing
Speaker 1: responsibility towards me you know, I mean his client, and
Speaker 1: so they have to do things a certain way. Whereas
Speaker 1: I don't have any fidishary relationship with a minor. Now
Speaker 1: there's nothing stopping people from building these relationships. You know,
Speaker 1: as a trader, you could go to a block producers
Speaker 1: and say, I want you to promise me that when
Speaker 1: I send you an order, you're never going to include
Speaker 1: you're never going to show it to anyone else, and
Speaker 1: you're going to before like you could do that, which
Speaker 1: people don't do it. Do you think that's gonna happen? No? No,
Speaker 1: I think what's gonna happen is people are going to
Speaker 1: build better protocols which are going to remove some of
Speaker 1: the some of the extractable value. Do you think regulation
Speaker 1: will come to the space, like will well the SEC,
Speaker 1: for instance, get interested in best execution for for retail
Speaker 1: traders in crypto? So I I don't retalily. I think
Speaker 1: it's possible because people have made ATV into some sort
Speaker 1: of moral issue, which I think is dangerous. Uh. You
Speaker 1: know the words saying like all the miners are exploiting people,
Speaker 1: they're taking advantage and so and so forth. One thing
Speaker 1: that I think would be more helpful to frame you
Speaker 1: us And again I said, it's like, if you want
Speaker 1: a fid sue response. You know, if you want toure
Speaker 1: relationship with your miners, you should ask for it. What
Speaker 1: I would worry about is the regulation that says that
Speaker 1: by default, as a miner, you have a responsibility with people,
Speaker 1: which I don't think you should have. What about if
Speaker 1: I have a fiduciary responsibility with a brokerage that, for instance,
Speaker 1: is providing me crypto exposure through my four oh one
Speaker 1: k as I think someone is doing now I forgot
Speaker 1: the name, but you know various people are starting to
Speaker 1: do this in a sort of more regulated way. How
Speaker 1: does that fit into the execution? Well, in that case,
Speaker 1: of course, you know, the brokers should not like favor
Speaker 1: another client ors themselves, you know, in doing the transaction now,
Speaker 1: but if they if I is it trade? And just
Speaker 1: to be clear, this happens for on chain trading when
Speaker 1: you use the fire protocols. It's not it's not directly
Speaker 1: an issue is trading on centralized exchanges. I think you know,
Speaker 1: at first of all, a lot of it comes from
Speaker 1: the latency of change. The more latency you have, the
Speaker 1: more mtvs are is going to um um. It's going
Speaker 1: to be because of quotes are not adjusted in real time,
Speaker 1: So it's partly a fraction of that and the way
Speaker 1: in which protocols have been designed. If you are an
Speaker 1: assistant where you can't address quotes really rapidly, you need
Speaker 1: to build batch transaction mechanisms and is it harder to program?
Speaker 1: But once you have this, you can reduce the MTV
Speaker 1: on on its change a lot, and I think we'll
Speaker 1: see that happen. So just going back to the turtles
Speaker 1: at the beginning of this discussion and plastic bags on
Speaker 1: the block chain, I was I was packing up my
Speaker 1: apartment in Hong Kong a few months ago, and I
Speaker 1: noticed that a bottle of balsamic vinegar that I had
Speaker 1: that I never used was it was on the blockchain? Right,
Speaker 1: you could trace it to test its validity, And big
Speaker 1: existential question here, but it is the future just everything
Speaker 1: on the blockchain, And how do you differentiate between the
Speaker 1: importance of having something like plastic bags being tracked and
Speaker 1: traceable versus having something like a store of value that
Speaker 1: people are using up to hedge against inflation or for
Speaker 1: whatever reason. Well, I think there's more value in the
Speaker 1: store of value aspects than the supplication applications. A lot
Speaker 1: of the supplication applications we see on bloctions honestly are
Speaker 1: stone soup. You know you'll see IBM go to these
Speaker 1: people and put everything on a bloction. But if you
Speaker 1: digitalize your entire chain rights where you have, you know,
Speaker 1: like you can scan your codes and do all of
Speaker 1: this and put it in a system and then you
Speaker 1: know like you've you've solved your problem, and then you
Speaker 1: put it on the bloction, you know, why not, But
Speaker 1: that's not really what's driving the value. I believe this
Speaker 1: value in digizing and having um photographic signature on supply chains. Absolutely.
Speaker 1: I don't think the bloction adds a hot to to this.
Speaker 1: All right, Well, uh, the brightman of tess, thank you
Speaker 1: so much. There's a great conversation. And I feel like
Speaker 1: the U we have really good conversations with, like the
Speaker 1: people who did some actually did some time in the
Speaker 1: trad fi trading world. That seems to be like the
Speaker 1: sweet spot for people who can explain things. So thanks
Speaker 1: for coming on odd locks than thank you for having me.
Speaker 1: Thanks so much for a thing that was great. I
Speaker 1: guess I said that at the end there. But I
Speaker 1: do feel like the best explanations and conversations we have
Speaker 1: on this space are often with someone who did some
Speaker 1: time trading and some legacy institution and can sort of
Speaker 1: I guess I would say, like translate some of these
Speaker 1: ideas back and forth. But I also feel like there's
Speaker 1: a tendency in crypto for people to talk about like
Speaker 1: all these issues are brand new, when in fact they
Speaker 1: have been you know, very diligently thought out many years
Speaker 1: before by traditional finance whole institutions, and there's a reason why,
Speaker 1: you know, they do it a certain way. But execution,
Speaker 1: for instance, is something that's been top of mind for
Speaker 1: a lot of people for decades. I still think people
Speaker 1: should just chill out. It's like it's depending or it's
Speaker 1: like it's just a fraction of a panel, that's the
Speaker 1: big deal. Um. The other thing that I liked from
Speaker 1: that conversation was the description of defy. You know, the
Speaker 1: question of what is the export here? And we've talked
Speaker 1: about it before, but like, what exactly are we doing
Speaker 1: other than dealing and more del Well, you used to
Speaker 1: make fun of me because early on and some of
Speaker 1: our first defied conversations, I would like, well, the whaling expedition,
Speaker 1: and it's like I would never make fun of it
Speaker 1: is the protocol. Actually, you know, it's like vc I
Speaker 1: got its roots kind of in funding whaling expeditions. I
Speaker 1: never made fun of you. I just questioned why you
Speaker 1: were obsessed with whaling expeditions all of a sudden. Fair enough,
Speaker 1: but anyway, like that is like you know, it is
Speaker 1: other pointed out, like it's not that exciting if it's
Speaker 1: just tokens, trading tokens, trading tokens and more tokens, or
Speaker 1: it's not that world changing or boxes but tokens token
Speaker 1: I's boxes. Yeah, all right, shall we leave it there.
Speaker 1: Let's leave it there. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe wi
Speaker 1: Isn't Though. You can follow me on Twitter at the Stalwart.
Speaker 1: Follow our guest on Twitter, Arthur Brightman. He's at Arthur B.
Speaker 1: Follow our producer Carmen Rodriguez at Carmen Arman. Follow the
Speaker 1: Bloomberg head of podcast, Francesco Leave at Francesca Today, and
Speaker 1: check out all of our podcast at Bloomberg Onto the
Speaker 1: handle at podcasts. Thanks for listening.