Cryptocurrencies: What Are They Good For?

Music All right, thank you guys all for joining us. I'm Jen Taylor, I'm head of product here at Cloudflare, and I'm joined by Nathan, who is the CTO at Zcash, and Adam, who is the CEO at Interstellar, which works on the Stellar project. And our topic here today is a good one and a meaty one, which is cryptocurrencies. What are they good for? And without further ado, let's just cut to the chase. What are they good for? Well, actually, first, let's step back. How do we define cryptocurrencies? Start there. Okay, I'll take a stab at it. So, the first example would be Bitcoin. Yep. And some of the distinguishing features or characteristics of Bitcoin would be that anyone can participate in the network by running a node and sending and receiving messages. It's, there's no central point of coordination, but it has a well-defined set of rules that the network as a whole enforces. So, even though there's no organization that's the enforcer, these rules are still being followed. So, then following on to Bitcoin, there's been many other variations and examples, and almost all of them are, like, specific to financial applications. Okay. Yep. So, similar definition, I would say, cryptocurrencies are an asset class that enable something new that we don't have or we haven't had until the very recent past, the last few years, which are censorship -resistant networks that layer on top of the Internet, and depending on the point of that network, allow for everything from money transfer to a form of cloud computing, albeit a very primitive one, even file storage and other services. So, it's an asset class that gives rise to a new model of software, a decentralized model of software, where the jury is still out on whether that model adds a lot of value, but the asset class definitely enables it. And so, now the world is wondering, well, we can now do things in a different way. Do we want to do them in that way, or more to the point, in what scenarios is a decentralized piece of software infrastructure beneficial to end users over a traditional cloud or application stack on the Internet? Got it. So, I mean, with that, you talked about, sort of, it being an asset class, it being decentralized, and some of those kind of characteristics. I mean, with that, what do you think cryptocurrencies are, kind of, uniquely good at? They're uniquely good at, like, ensuring people are following a set of rules, even in adversarial conditions, where you don't have a central authority that is enforcing the rules. So, people can opt into the rules, and a really, really deep question is, who defines the rules, and what should they be? Right. And I think we see a bunch of different projects exploring that space, but I think the key thing that makes them unique is that there's no particular enforcer for the rules, but people are still opting in to the rules. Yeah, building on that, no one can stop me from sending Bitcoin to someone anywhere in the world, and that's actually novel. Again, is it useful, and is it useful in the so-called mainstream of the economy, as opposed to the periphery? No one can stop me from writing a program and having it executed on Ethereum. Again, why is that relevant? Oftentimes, that line of thinking, again, leads us to criminal scenarios in our minds, but the reality is that this notion of not being able to stop someone from doing something is another way of just saying open innovation. So I think a lot of the cryptocurrency community is optimistic fundamentally because developers are iterating on a cycle time, especially around financial services, that is two or three orders of magnitude faster than the cycle time of the Wells Fargo Innovation Lab. So often, you'll hear that it's about the potential, which is sort of unsatisfying, especially when asset prices go up a lot, and everyone goes, well, how do you justify this based on potential? But that is the reality today. It's very early. Normally, a technology this early does not get this much attention. We would not be on stage talking about virtually any other technology that's this nascent. The only reason we're up here is because it happens to be money, and so it tracks this basic human reality that people are like, well, maybe there's something here, and we can trade it, and it sort of creates a capital markets phenomenon around something, and the jury's out on whether that is going to stunt the growth of the idea of decentralization or whether it'll accelerate it, and so far, it feels like it's doing both in cycles. Like, a bunch of developers rush in because of a boom in the asset price of these tokens, and then when there's a bear market, people go, they get dispirited, and they leave. So it's hard to say, but it's been fits and starts, and as of next month, it'll be the 10-year anniversary of the Bitcoin white paper, so there's gonna be some serious retrospectives, I imagine, coming out that all the journalists in the room will probably start putting together next few weeks about what do we have to show for it 10 years on. And if you were to kind of feed the journalist a piece of information, what would you want them to highlight as this is a great use case for cryptocurrency, this is what we've accomplished in the 10 years since the paper came out? Go ahead. So a great use case, I think, is enabling Internet applications that involve payments or automation of financial behaviors that act globally, where you want clarity about the operation of those transactions, regardless of where it's operating around the globe. So, right, so there's this kind of clarity, potentially, that the automation can bring that might streamline applications that would otherwise be more piecemeal around the globe. I'm just sitting here listening to the... The Blue Angels. The military. Yeah, the military is storing overhead. That backs the US dollar. Yeah, there we go. Burning, burning petroleum. Yeah, it's great, it's great. No, I think if I were writing a retrospective, I would be honest about the fact that no one in the audience here is using Bitcoin to buy lunch, right? And that's just not, no one is writing a program to run on Ethereum because it's better than running it on AWS. No one is storing files or waiting to put their files into Filecoin-enabled file storage system. But at the same time, we now have not only examples or proof of concept, but viable alternative networks for payments, for arbitrary program execution, for exchanges. Stellar is, as an example, a global open exchange. Any asset can be traded through that network. Ethereum, a lot of people use it for the same purposes. There are probably more tokens listed on Ethereum than stocks traded on the NASDAQ. Yes, the market caps and the impact is very different. But the point is that we now have an alternative. And even if you look narrowly at Bitcoin, I think there is some comfort in knowing you can allocate a certain percentage of your assets to something that is similar in spirit to gold, where it has a type of direct ownership and control. There's no right price for it. It's just a function of supply and demand and belief, but that you can store your value in that instrument. And that's, again, a meaningful backstop, especially in a very uncertain geopolitical world. So you don't have to be a gold bug or a true believer to think that that's just powerful. And the fact that it didn't exist 10 years ago, I think the world is definitely better for having these alternatives available, for having sort of the open innovation that's happening. And for certain pockets, having the ability to store wealth in a new way, transact in a new way, potentially one day exchange assets in a new way, I think it just has a sense of inevitability. It's just very early. So you mentioned you can't go buy your lunch with it, right? And I just grabbed lunch at the cafe on the corner. Would you go to that cafe and say, yes, you should actually add support for cryptocurrencies? Would you advise them to do that at this point or not? And why? I think it'll take a while to get there still. So one conundrum, as I mentioned, these different networks can have different rules and there's this exploration about what is the governance for those rules? So if you look into the Bitcoin culture and ethos, it's very conservative, like don't ever change the rules. And that's maybe what gives it the gold-like behavior. But if you look at something like Ethereum, the community is much more interested in figuring out how to evolve the rules in a way that makes sense and adapts to the future. And so there's this conundrum for consumers. Like if you're using this for payments, these are basically different currencies. And it's odd for consumers today to have a bunch of different currencies on their phone. So I think there needs to be a step that's somehow integrating these for consumers to be able to use them. But also, I think the real hard part will be allowing consumers to understand what are the trade-offs between these rules and which strengths and weaknesses do they have? And then finally, how does that relate or not to the dollar or whatever local currency they're using? Yeah, I wouldn't tell them to go accept Bitcoin. At the same time, the reality is that merchants pay two, 3% fees to use what is now just cash. Cash is no longer free. Cash is taxed by companies at 2% or 3% just to transact. That doesn't make sense in the age of the Internet where everything should be existing in a native Internet format. And I think tokens are that format for value. So Bitcoin itself is a token in format, but it's the wrong medium for a payment. But I think we will see essentially dollar-denominated tokens that will make more sense in a merchant context. Can I survey the audience? Yeah. I've never asked an audience this, but it just occurred to me based on your question. I'm very curious, what percent of the audience, if they could snap their fingers, would want to remove all cryptocurrencies from the world and go back to pre-cryptocurrency and put the genie back in the bottle? And what percent are happy that they exist despite the mixed kind of results? Is that a cool question? I'm totally down with audience participation. Totally down with that. So what percent of the audience, if they could snap their finger, would just remove cryptocurrency, the good and the bad, all of it, out of the world and just go back to pre-cryptocurrencies? What percent? Anyone? Got a couple, three, four. And then I'll ask the other just in case their arms aren't working. Who is happy that they exist despite the mixed results so far? That is very compelling to me, actually. And who abstains? And who abstains, yes. Beyond the fencers. I was only in one student club at Berkeley called the Berkeley Radical Middle. So I like the people in the middle. The Radical Middle. Well, and I think it is interesting to think about. We've all read about the rise of cryptocurrencies, the crash of cryptocurrencies. It's like the thrill of victory, the agony of defeat. And everybody's like, I don't understand what's going on. You know, it'd be kind of curious, and we can actually probably move over to questions earlier than we typically do. But one of those things is also thinking about for the people that are sort of in the place where I'm like, I don't really know where it's going, but I'm kind of curious to see it get there, and I'm kind of curious to see us explore different ways and contracts and how we negotiate things and stuff like that, even if it's not clear. Where do you think we're heading with cryptocurrencies? If you were to like, fast forward to the next, to the 25th anniversary of the Bitcoin white paper, what do you think is going to be written in those articles? Actually, can I go back before we look forward? Because I do want to mention like some cases where cryptocurrencies are being used today. Because I think, maybe I was being a little too pessimistic. Because I have, you know, I want it to matter for a lot of people, but it already matters a lot for some people. So the first one might sound a little bit incestuous, but cryptocurrencies allow you to reallocate capital really efficiently. And so they've been used as a fundraising mechanism. And there's, you know, problems with that. Like a lot of the behavior looks like behavior in the stock market before securities regulation. And a lot of the behavior actually has been securities behavior, right? So, but the fundraising mechanisms have allowed these open source projects to bootstrap that are sort of global and have kind of a self-sustaining funding model. So I've been paying attention to open source for a long time. And all open source in the past has been either work of passion, or it's basically sponsored by commercial companies like Google, who may then drive it in certain directions. But this is like the first time I've seen where we can have these like international organizations, some of which aren't even companies, or many are like nonprofits or companies, but they have this means to like allocate capital for their vision that seems novel to me. So I think that's pretty interesting. Another case is, you can find little pockets of cases where censorship resistance matters. And so like one example is in Venezuela, where the economy is terrible. There are cases where some people, not many Venezuelans, but some Venezuelans are able to mine cryptocurrencies. And so they're basically providing a service for the cryptocurrency network. And in exchange for that, they get these assets. And those assets actually are valuable to them, even though they're volatile, but they're less volatile than the local currency. And that's also like juxtaposed to dollars, which they might want, which are actually quite difficult to get into the country. But the cryptocurrency can get there like immediately. So that's an interesting. So I think we're seeing some of these edge cases where the sort of value proposition is starting to come through. Well, and there's some in markets and places too, where there are fundamental kind of structural challenges in the economy or in the financial systems that really prevent the reallocation and the access to capital. The ability to sort of play by a different set of rules that aren't constrained by that. So, yeah, I'll take the 25 year anniversary. 25 year anniversary, fast forward, I'm looking forward to it. For 600? Yeah. So, I do think that the Internet ultimately becomes the rail for financial assets. Mm-hmm. Like MP3 is the format for music. Mm-hmm. First thing that happened, we get like Napster, BitTorrent, it's on the periphery. It's violating a bunch of IP and rules and laws. People get in trouble. But it was obvious that that was the right format. It was obvious that as soon as you like ripped media from this old format into this new one, it could move more easily. It could be shared and repurposed and repackaged and remixed. I think the same is gonna happen with money and all financial assets. It's much harder to put a dollar on the Internet than a photo of a cat. And just to be really explicit about why, if I send you a photo of a cat, it doesn't actually like leave my device and go to you. It's just a copy, right? If I send you a dollar, it's like super important I don't have the dollar afterwards. So, like the ability to use the Internet to transfer without copying is really fundamentally the root idea of using cryptography to create this virtual safe deposit box system in the sky that lets us move value between these different addresses. So that is like, to me, obviously better in terms of a format than like, let's just lock our money into these like layer cakes, starting with banks and then adding on the PayPal's and the visas and everything else. And then all the fees and everything that makes those services kind of clunky and expensive and inefficient. So I think 25 years on, that will be the case. And when we look back and say, what was so hard? Like we knew that format, we understood how to build these networks. The hard part is the last mile, like getting those assets into that new medium is a lot harder. It's hard to go from like a dollar sitting in a federal reserve system onto a network like Stellar, than like your David Bowie CD, like ripped onto like Napster, right? So that's just like a much different transformation process. And so it'll take a lot of time. It'll take more time. And I think also like that it will probably look less like moving dollars and Apple stock. And it will start with assets that don't exist today, that will sort of prove out the format. So I think you're gonna see more markets being created than things we already know, being like transacted in a different way, just because the assets and their existing infrastructure are so inextricably linked. Yeah. So what I think I hear you saying is it's not, if we get to a place, if it becomes critical, then I'm able to transfer a dollar of value into an equivalent cryptocurrency, like we're never gonna get out of the gate, right? But if there are to your point with the fundraising and even to some extent Venezuela, the ability to basically create ecosystems that have and create the ability to create value within the context of that ecosystem and then trade there, like we're gonna be much better off. Crypto first, sounds like mobile first. Yeah. Don't come to my meeting unless you say mobile first. Crypto first asset classes, crypto first assets. And I don't mean the underlying cryptocurrencies that power these networks, but the things that get issued on top of the networks, where for example, it's very hard to like dole out ownership in an online community. Like there's really no corporate structure that makes sense for that, but you could easily do that in these types of mediums. So I think new types of assets that are native to these networks, that'll probably be where it goes first. We need much more design thinking and product thinking in crypto to get there because most people in crypto don't talk to humans. So we need people that talk to humans to really understand where those markets are. And it's about time for that because we've been largely invested in infrastructure, but now we need to start getting out and talking to people. Yeah, Nathan and I were talking about that in the green room. What would it be like to, what are the product management needs at a cryptocurrency company? But so, okay, so we talked a little bit already like where we think it's going and stuff like that. Like what are two or three things you think you most need out of people in this room or this community to unlock kind of the 10 year anniversary to the 25 year anniversary? What are the things you would ask of this esteemed group of people to help you with? Help people manage their private keys better. I'm all in on that one. Like for those who have thought deeply about passwords, authentication, identity, like you're probably the most important thinkers that crypto could really use because the whole thing kind of like falls apart as soon as you just build a wallet and then just like have a password with a passive recovery and like it's in the cloud and you're just like, why, what is the point of all this? So we really do need to figure out how the end points can, yeah, how the end points can be secure and also can be, like have a good user experience. Like that balance, that's probably the biggest product challenge right now. That ease of use, creating an opportunity for ease of use. Because we all know getting good security and ease of use is easy. Yeah. All the people at Cloudflare can understand that. Yeah, that's what I, so we'll leave it. And there is this fundamental challenge because there's, so this is a new paradigm where users who want to participate have the option of like controlling their own private keys and users aren't very used to that and we need like tools to help them manage that, to protect themselves and to sort of understand what's going on. Yeah, yeah. It's just a safe deposit box system. That's all it is. It's just a safe deposit boxes in the sky, give keys to people, they've got assets in those boxes, they can move them around, they can trade them through these order books that are decentralized. Really cool, but yeah, as soon as you just give the keys to someone else, it's just like an inefficient cloud service. Well, and I think you also kind of almost need like the Napster experience to drive the cryptocurrency. Like going back to your MP3 example, part of what led to that was sort of all of a sudden you had a community where people were like, oh my God, I can go and can actually, I can exchange these MP3s and I'm getting a lot of value from it. And it appealed kind of to very technical people and my mom, right? And I think there's a certain moment too of sort of what is that one or two first things that are really gonna unlock the demand for like I gotta get in there and participate in that in a community at scale. Right, yeah. Okay, with that, I'm gonna open it up to questions because I'm sure there are a ton. We'll start right here. Brian Gerard in his book, The Attack of the 50-Foot Blockchain, points out that putting your money, your cryptocurrency in an exchange is like putting your money in a sock under somebody else's bed. Yeah. I gather you're not greatly in favor of exchanges based on what you've said. Well. Could you comment on that? It's like putting your money in a sock under someone else's bed for like a couple minutes and then getting it back. If you're just going to the exchange, exchanging for something and taking it out. But if you leave your money on an exchange, that's true. And that comes back to like private key management because if you hold your own private keys and use a decentralized exchange, which are becoming more mainstream now, then you don't have that problem. It's more like a marketplace where you're transacting directly with your counterparty, but neither side has to let go of what they have until the network confirms the transaction and then it just swaps. It's like in the movie where it's like, give me the girl, no, you give me the money, like, no, you give me the girl. And then like, it never works because how do you do that exactly at the same time? Well, blockchain solved that problem that you can actually swap the prisoner and the money for the exact, at the exact time. And the first exchanges just, they don't work that way. They just, they are the central counterparty that does everything for you. So that comes back to like, it takes a lot of product work just to make it as good as a centralized exchange. So also early exchange, anyone could like install the software, right? So anyone could write software to be an exchange suddenly, wherever they are in the world. But as like the sophisticated innovations are pushing forward, so like decentralized exchanges that don't place your funds at risk of theft ever, even like as you execute a trade, those are possible, they're being researched, they're being deployed now, they're really early. But meanwhile, like the existing financial system is also adopting and integrating blockchain. And so there are exchanges now that are very well regulated, have like banking licenses. And so if you store your funds on those, then it's very much like a brokerage or a bank where they just, they have your stock certificates or whatever brokerages do for you. But the difference now is you have the option if you want to like hold these assets directly, if you know how, and you're like a computer expert right now. I had a quick question about, so stuff like Zcash, Monero, that's anonymous, how do you see in 25 years, what's gonna evolve to make that compatible with any kind of regulation? As you know, all the bank regulations are pretty strict, KYC and that stuff. So it's very interesting, I love the cryptography behind this stuff, but it does create some problems because there are just certain cases where you can't see things. Yeah. I think people believe that a lot, but I don't think it's true. So like, so one of the exchanges I was thinking of is called Gemini. It has regulatory permission from NYDFS, which is like one of the main regulators for financial in the US. It has permission to trade Zcash. And if you study, I have not studied KYC or AML regulations that much, but they were created in a world that was pre-blockchain that already had cash and already had these other forms of transaction and money transmission. And those regulations still apply just as well. The privacy in Zcash, that's its main distinguishing feature, is it allows you and the counterparty to reveal whatever you want to third parties. So like I can reveal transactions to my tax accountant or a bank or whatever. What the privacy does is it protects you from everyone else. So like Bitcoin's actually very not private by comparison to like just the banking system because random people in Russia can sort of see which transactions you're issuing. Or if you're a business, they can learn about your internal finances or things like that. So the privacy in Zcash is intended to just sort of like reestablish what we are used to in the real world, like with cash or dollars. That we are at time. So thank you guys very much. Really enjoyed the conversation. Thank you.