Professor Susan Athey: "The Future of Currency"

Professor Susan Athey:

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Yesterday. I'm going to talk about the future of currency, and I'm gonna focus mostly, on cryptocurrency. And blockchain innovations. One. Of the things that has become interesting. About talking, about this subject over, time is that when I first started speaking, about it a general. Audience would know almost nothing today. Almost, everyone, has an opinion about it which, in some ways makes it harder, to, start. A conversation since. People are coming from very different perspectives but. Today I'm gonna sort of start at the beginning. But hopefully even for those of you in the audience who, are experts. Some, of the perspectives will. Get. You thinking and then we'll have a discussion starting. Around 10:15, where, we can take it in all sorts of different directions, so I. Got, interested in in cryptocurrency. And blockchain, back, in 2012, in 2013 I had some computer science colleagues, who were working on it and then, I also, went. To various, conferences, tech, conferences, where, a lot of people in Silicon Valley were starting to get interested, in it and you, might hear. Someone. Say at one of these, sort. Of tech, elite conferences, something, like I was you know employee, number, you. Know X, double. Digits at Google, and I've now put you, know 20% of my wealth into. Bitcoin, this, is this great thing and my. First reaction to that was you. Guys are bad, people, you're, doing a Ponzi scheme how. Could you be doing this this, is not this is not good but. When. I started, digging into it and really, understanding, it I got very excited, about the. Technology. And. Its potential. Since. Then I. Joined. As an advisor for, ripple and I'll talk a little bit as I, go through about what made me initially excited about ripple and then join the board a year later but before their series a and now ripple, is is one of the more successful, companies. In, this space which is really great and that was founded co-founded. By Chris Larson, who's, GSB alum as well so. We've, it's. A so, we have had a really exciting, time, with this space I and now I'm teaching a class to the MBAs we were way over enrolled and had about a hundred people in, the in the spring on this topic the students, here at Stanford, are also very excited about this space there's a sort, of an informal organization. Of students that has about 700 people on their mailing list so it's, a really really exciting. Area at the same time there's a pretty big gap between, sort. Of how many student, projects, come in from MBAs to engineers, what they're all excited, about what to do with blockchain, versus. The reality, of you, know what's actually going into commercial, production so, I'll say it's, sometimes hard for me to even to communicate. My. Schizophrenia. On this topic which on the one hand is like fascination. And research, and teaching.

And, Leadership. In the area and on the other hand for any particular person, who's thinking about investing. In a company or in a currency there's, still a lot of skepticism that, needs to be you. Know kept kept, into place so hopefully, we'll get the the, the balanced, view of all of these things as we go through, so. First. Of all I want to talk about it's actually even using the words it's kind of tricky in this area whether you talk about cryptocurrency. Whether, you talk about blockchain actually, none of the words are really perfect for describing, what's going on so it's more about like, the thing that you're doing rather than the terminology, but. There's really you. Know a bunch, of different ways to think about what. Cryptocurrency, is and one reason that can actually be difficult, to have a, conversation. Around, it is that everyone has a different idea in their head and people start talking across purposes, so, you know one one, thing to think about with cryptocurrency is it's a way to store value it's. Sort of like digital gold and now that's there's, a group of people who are very strong on that use case and that that's a use case that's happening, especially you, know if you're a billionaire and you've sort of diversified, at all of these different. Assets. And you have your you know your house in New Zealand and, you have your bunker you know why. Not you know put ten percent of your assets into something like Bitcoin, and then the keys are actually stored, in bunkers around the world and it helps you kind of protect, yourself but it's actually, you, know it's actually sort of a cumbersome, way for a typical person to try to hedge. Book. For security, reasons and also just for for, there's there's a lot of technological. Impediments. As. An asset class I'll, probably won't have time to show you too much on those statistics, but it is kind of an interesting asset, class because it's it's not. That correlated, with other traditional asset. Classes and so it's. Even, in the short term when you're not worrying about the world blowing up in some way you, know it does provide. Sort of a differentiated. Type of. Asset. The. Thing that sort of got me most, interested, in the beginning is the idea that it can be used as a payment, system now. It's, going to turn out that it's pretty hard to make a new payment system and if you're if you're in an economy that has a pretty well-functioning, payment. System it's, really not going to provide a lot of benefit, you know I've had students, come into my office for you. Know 15, years saying how they're gonna compete, with the credit cards that's just actually a very hard thing to do the economics of credit cards are pretty, hard to enter, it's not, about the technology so you could say the technology's archaic, but you know the it's actually the economics, that make it a difficult place. To enter not the technological. Improvements, but. What, one of the places where things are really broken, are international. Payments, and. So that's a place where we're, seeing. Adoption. As well as real economic, value from. From. Cryptocurrencies and then. The final thing which is really where actually most of the of, the sort, of engineering. Teams are really, working is that. You know it's a really a platform, a technology, platform so, especially something. Like aetherium, is is built, as a sort, of a software development system, and I'll talk a little bit more about, how people are using that but, it's really like a technology. That's, it's a building block for some, other kind, of service some way to a database, some way to store information and, that's, where, a lots going on if anybody's interested more, in these application, areas because we can we have relatively, short time today, GSP lecture, Doug Galen has, written recently a very nice paper that surveyed, all of the blockchain for, good initiatives, and it, talks about in, depth about where the startups, are which. Ones are close to actually. You know having a working product and so on and interestingly the, biggest category. He finds, is healthcare, and not, finance. And it's, basically cuz there's a lot of businesses, coming up with databases, for health information. That. Are where. People can actually control, other, people's access to their own health information and, that, information is stored in a database that. They, can selectively, grant, access to there's, a lot of variants, on that idea but. That's one of the more popular ideas, and there's a lot of these companies because every country, in the world has their own system and health, data is sort of something that's kind, of both valuable and somewhat broken in in most economies.

So. Already. Hopefully, just as this intro we, can think about there's not just one thing here, there's lots of things so I'll try to build up from the very beginning, I'm gonna focus on the currency aspect, both that's sort of the title of the top but, also I think it's the one that's the easiest to start wrapping your heads around and once, you've got those basics, it you can then think more about these broader. Applications. One. Other comment though about this whole. Application. Area is that. You, know I see, I've seen you know hundreds, of projects. Come across my desk I feel. Like a lot of those conversations where. There where it's my advice or where the students come back later and tell. Me where they ended up there's a mem on Twitter that. Says you look one of these little flowcharts that says do you need a blockchain, until. You're expecting, like a whole bunch of different things and then there's just one arrow down and it says no. And. It's. Some level like that's a that's a pretty good approximation for what. A typical. A project. Comes. Up at nonetheless. You. Know I think there's still incredibly, interesting, to think about where. Where, we are going to go and it just says that you know when somebody gives you a shiny new hammer you. Don't necessarily immediate. We find. The nails and there's, a lot of hammers looking for nails but over time as our understandings, of these technologies, emerge then, when use cases emerge that do fit it'll be more like here's my problem, and oh, there's a technology, that might actually fit, but, but it's much harder to start a business with a good business idea and then, fit the technology, rather than saying oh there's a shiny new object let, me start a business that. Might where that technology might be useful and I think that's sort of the stage we're at and that's what really came out of my cryptocurrency, class, and the in the spring as well that most of even, the best VC's didn't really have a lot of real. Solid. Examples. Going on ok so now let's really spend some time getting into what this thing is building up from the beginning so, here's a picture of a ledger, Ledger's. Have been used for a very long, time. And. You. Know it's we actually sometimes your econ one on one course you'll hear about like early barter economies, where like somebody, trades an orange for an apple but, actually that was never a super, common way. To do, business because, it is kind of hard to have an orange and an apple at exactly the same time and so, you know through millennia people have kept track of who. Has what and had some sorts of ledger systems, and they've been everything, from you know stones, to, Marx on wood. Before. We had paper you, know to keep, track of ok you gave somebody you gave something and then later on you, should get something back and so, Ledger's of course are a really a fundamental, way to understand. Understand. Money, as money. Is a way to make it simpler than, having a ledger because, if I just give you a dollar I don't have to go look up on a ledger but. It sort of serves the same purpose you, give me something now I give, you a dollar later, on you can use that dollar for something else, so. Ledger's. Are old Ledger's, are powerful, it really is useful to have Ledger's. And the. The problem is that when we have gone to the digital economy the. Cash, which sort of made it simpler. Than keeping track of a ledger doesn't. Work in the digital world I can't beam you a dollar and in, ours in our financial, systems haven't really caught up to, be fully.

Digital. So that we can money, sort. Of as easily as we move in our information. So. What, is it I mean I'm gonna focus on Bitcoin just as sort of the the, kind. Of biggest, and and first big innovator. Here so, what, bitcoin is, that its core is just a big ledger it's. A big spreadsheet okay. So. Wow how could people be so excited, about a big spreadsheet but. That is what it is a big. Spreadsheet so, imagine, you know be convenient, if you're trying to. Interact. With people digitally, to keep track of who has what suppose you're across countries, and it's sort of hard to really you, know move money you, could just have a big Google Doc big, Google spreadsheet, and you. Know you could have people only authorized, to make entries, in the spreadsheet if they had a password, and we. Can put a little bit of logic on top of that which might say that you know your entry, gets, rejected if, you, don't have another. Entry, in the spreadsheet so we. Can have a big spreadsheet that says and. Forget, about how you the, initial conditions, just for a moment we'll come back to that but suppose the spreadsheet starts and says I have a Bitcoin you have a Bitcoin someone else has a Bitcoin then. Essentially. What you would want is I can login if I have the right credentials and say, I I'm, gonna make an entry that says I give a Bitcoin, to someone else and we'll. We'll reject that entry if I don't have a Bitcoin but, if I have a Bitcoin, and I logged in I can make an entry that says I give it to someone else okay this, would be a convenient, thing to do too if we if we didn't. Have weren't, all on the same banking system it would be nice just to have a big spreadsheet to keep track of who has what and that's. What bitcoin is that's, all it is there's. A big spreadsheet if you if it says that you have something and you have a password you. Can log, in and make another entry, that says you give it to someone else that's. Really the only, functionality. Of this, technology. Okay. So why would you be excited about that well, if you imagine that I was keeping you know 50 billion dollars worth of stuff on a big Google spreadsheet, we. Might have some security concerns. Okay. And if I said oh I'm gonna spin, up a server in, my house on, campus, and you. I'm gonna keep the copy, of the spreadsheet on my server, well, I would be like a magnet, for you know attacks, from all over the world and of course I want, people to, be able to access this, so I would have to sort of be open to, the Internet in some way which would create a security, nightmare, so.

The, Idea, of Bitcoin. Is to just to get this this product, the product is a very simple product which is just a spreadsheet where people can from all over the world make entries, but. I'm going to find a way to make it secure okay. And I'll come back to the security, that's of course one of the really interesting parts, but for now let's, just imagine. We have this product I'm gonna tell you more about what you would do with the product and then we'll come back to how it works. So. Just. To kind of get a sense, of exactly, what, happens um, again there's a big spreadsheet and it's gonna have addresses on it these are synonymous addresses. And in fact people, can have multiple addresses, so. If I have, an address, that's mine the, way the entry, that would come to me at first would be somebody else sending, me a Bitcoin, and making. An entry on the ledger then, if the ledger says I have one and I have my password, what, I would do is I would sit at my computer login. Say. You. Know I want, to make a new entry. Authenticate. The. Entry said the new entry will be a Bitcoin goes from my address to someone else's, and so when I say login what I mean is that I have the credentials, associated. With that address that, allows me to make an entry and as, long as the, the spreadsheet. Says that, yes this address received. Those coins in the past it, will accept, the, new entry, to send them to something someone else okay. So far this sounds kind of fun sort, of like training trading. Beanie babies or something I have a beanie baby I sent you a beanie baby something you send a beanie, baby to someone else of, course this only is useful, if if there if it's if, there's some value and having these entries on the ledger but I want to point. Out that that value does not derive from the ledger itself, so. We're gonna be able to have markets, where we buy and sell entries. On the spreadsheet but. Those markets, are just regular, old financial. Markets they're, not, part. Of the basic, protocol the the basic protocol is just this spreadsheet. So. If you want to see like how you access it this is a screenshot of one of the early wallets. And in the early days of Bitcoin, most people would sort of manage their own bitcoins. And so the idea was that on your own computer, you would give a little piece of software that would actually download, the entire history of the ledger and then. You, would keep a copy of it and actually you would join the, network, by by. Participating. By keeping copies on your computer. Then, the software would look through the whole ledger and just show you the things that are associated with with, you and so, it would simplify the. Whole history, and say ah these, are the transactions, associated, with addresses, in your wallet and so, you would have you would put in a password to access this, and then you could do things like send and receive and keep track of contacts, who would be addresses, and then, you know make little transactions. Either. Receiving, or sending okay. Um. So when, this actually goes, out there's. A what. Is a blockchain it's. Actually, a sequence. Of. You. Know little little, spreadsheets, that are new and additions, to the ledger and so, the block it this is basically like all of it this, is what happens when you make a new entry and so there's, gonna be you, know a block, and then it's gonna have a transaction, a fee a size the, the from and the - so. That's basically. All the, all the data in the protocol. So. Now, let's start thinking about what. What. You do with this and why. It would even be useful so, I think the first thing I thought about as an economist, and those of you from the finance sector will presumably. Had the same initial reaction, is why. Would you introduce a new currency. Like, we have the eurozone, to avoid having lots of currencies, any of you that work in international businesses. Know that like hedging exchange rate risk is like a problem it's, not something, that you would choose to take on and generally. For consumers, you wouldn't want them to take exchange, rate risk if they didn't need to so, if I'm why. He's gonna pay their rent in their taxes and dollars you know you would generally not want to hold another currency unless, you were using it as some quarter of hedging strategy, but it wouldn't be something that you would you would choose to do you wouldn't just take volatility. For, no reason, so, the first thing in sided okay this sounds really cool I really like this technology, for keeping track of who, has what but. Why do, it in in this thing called a Bitcoin why not do it in dollars so I don't have a big spreadsheet that says who has which, dollars, and the. Key insight. For that is that actually we can't put dollars. On a spreadsheet. Directly. So just, just imagine we, have this spreadsheet. Technology, we could certainly put a message on it that says you sent me a dollar and I, could make another message, that says I send you a dollar but.

What Would that really mean, because, I didn't beam you a dollar like, there's a message on a spreadsheet that says I sent you a dollar but, I can't actually send, you a dollar on a spreadsheet, I. Could. Have messages, that say I promise to give you a dollar. But. I can't actually send a dollar on a spreadsheet and that's really core. To understanding. What could what could possibly, be new and different from a sort of currency or asset perspective, is that, the definition. Of a Bitcoin is the. Entry on the spreadsheet so. If I authenticate, sending a Bitcoin to you, you. Have the, Bitcoin it's not an IOU for a Bitcoin it's not a promise, that to. Obey. A contract, and give you a Bitcoin it's actually, the Bitcoin the entire definition, of the asset is the entry on a spreadsheet well, if I put a dollar on a spreadsheet because, dollars, are not digital there, I, can't. Actually send. You a dollar, literally. On this spreadsheet and of. Course those of you from finance will will. Be familiar that in some sense like when you're when you're doing moving, money internationally you don't think about dollars, in Euros it actually those, dollars, and euros live, in a bank so, there's like Citibank, dollars or JP Morgan Dollars because, if you were moving around, the world the, way that you go through dollars, is to hold, accounts. In a bank and. If you go from country to country you, might go from a smaller. Bank to Citibank then, Citibank, would make an internal ledger transfer themselves to, a foreign. A. Foreign. Bank where they have an account and. Then you would make another transfer. From the, that foreign, account to, a smaller, Bank in that country and so what we really have when we look digitally, our IOUs. When you open up Bank of America in the morning and look at your your, balance, you say oh well I have digital money well, you don't actually have digital money you have an IOU, from Bank of America Bank of America promises. That if you send a transfer, they'll. They'll. Make, a back end transfer, but, they actually cannot promise you to do whatever you want with it if, you said I want to send it to North Korea they, would block it if, you sent a bunch of transactions, for nine thousand nine hundred ninety, nine dollars over. And over again they. Would block it okay. And we've seen various politicians get, caught, up with that type, of problem. So. You, know they it's. An IOU that, is subject, to the. Rules and regulations of, a particular country and so it can't actually be. I I can hit Send, but I don't know that, it the money will go and in fact internationally. About five percent of wires fail, the money gets lost so you hit send but it doesn't, actually receive, so any, countries, companies that have a big supply chain will have a whole little department of like failed, wire transfer, chase or Downers, to. Deal with that problem so. An asset, that, is like this is of course it's an interesting asset, and it works for most purposes but, it is fundamentally, different from an asset where when I make the entry on the spreadsheet it's done, okay. It's, good and bad if, you're a consumer, and you type in the wrong address in Bitcoin, and you hit send it is, gone. Okay. There is no 1-800. Bitcoin to, reverse it. You. Made the entry the entry is permanent, it is there it is there forever if I if I sent, a transaction, to Silk Road when I was a college. Student and you. Know and everybody knew what the Silk Road address is that is also permanently. On the record. Okay. So if somebody could have so that Bitcoin address with me then forever you, would know that I was sending money to Silk Road when I was 21 so these, things are permanent irrevocable. And actually on the Bitcoin ledger public, and in, fact in some of my research a few years ago I went in and you know analyzed the blockchain and you can see what people were doing and how many people were gambling and how many people are going to Silk Road you could figure out what timezone they were in by when they made the transactions, and. For people who would ever like post it on the web their Bitcoin address you could figure out them and you could figure out their friends and so on so, it's actually like a pretty, in. Some ways a pretty, unsafe. Way. For, to do things because you don't you usually value, your financial, privacy, and. You have no recourse, if you type in the wrong number, also, if you lose your password, this. Is a problem, so, in the early days there was a big bang theory episode, about this that kind of formalized, a bunch of my friends experience, I had lots of computer science friends and early people toying around with Bitcoin, and you know. 2011/12. The, things were worth like a cent or you know two cents, or ten cents and then they then they get up to you know a dollar ten dollars you know then it in last, December. They are eighteen thousand dollars and you're.

Like Wait what happened to that laptop what. Happened to my password, you know imagine like trying to go back and find something that was you know on a laptop in 2012. And there were a lot of sad people. Because. You can look at the blockchain and you could say oh those bitcoins are mine but. You can never get them back. You. Know so there are lots of people who are like you know multimillionaires. Or on, paper but just can't get the coins. So. It's an it so I have no effect those are like all the negatives, but of course there is also some positives, if you think about in a business context, wouldn't, it be nice sometimes to make a transaction, and like, 10 minutes later have it be done and there's, no rollback because then you could make another transaction on top of that and another one on top of that and you could have computer, programs do, those transactions. And you would have the certainty, that they took place so. That is a just. A different, characteristic, of these assets that is really not cannot, buy kind, of regulation, cannot, be provided, by, the existing, financial system for consumer, protection Annie mandala owner and all that stuff will not allow a bank, to really offer that. So it's just different, okay. So, now let's talk a little bit about what you would do with this and, also that'll bring up the idea of how these things are actually valued, so suppose I was my, kid was doing a Skype lesson actually one of my kids now is taking Python, over, Skype which, is a very. Convenient, thing to do and you, know you can get a teacher in Silicon Valley it's hard to hire someone to do anything for less than you know $100, an hour but. You, know you can get someone who lives somewhere else who's, a nice starving, computer science student who can teach Python to my child for a much more reasonable price so. You know you do that you're doing some sort of Skype lesson but suppose the teacher is, actually, somewhere else or maybe you're learning a language Japanese, or Mandarin, and your tutor is in another country you would like to pay them right, away if they're in another country, if I wanted to send them directly peer-to-peer, or wire transfer that, might cost me 50 or $60 which is large relative, to the cost of a lesson now, platforms. And so on will try to make that easier for you but even actually like Airbnb, and uber and so on are actually. Very upset, about the state of the current financial system, because it's so expensive for them to facilitate, these payments. Around the world so they're actually some of the big movers and pushing for improvements, so. If I wanted to do this just peer-to-peer if, the recipient actually, was, understood, the way that Bitcoin works I could do the following thing I would, open up an account on a on a company, say like coinbase or, bitstamp. And these are companies they are not part of Bitcoin they're just startup, companies and what, they the service they provide is a. Place. Where you can send fiat, currency, and then, do, trading, on their system and so they just have simple software, that creates an order book in every currency, so I transfer, in my dollars, using, like an ACH, transfer, or a wire, transfer to get my dollars there once. My dollars are there then, I could just place a limit order or a market order to say hey I want, to buy a Bitcoin and some. People want to sell bitcoins and they have nice little visualizations, in fact the software that for this is so easy that I talked to a startup.

Who Set, up an exchange over a weekend you know there's basically just off-the-shelf, software this is not rocket, science, to do the really basic part of course the security's another problem but the the basic software is easy so. Then, if I say I want to buy some Bitcoin, what will happen is that that exchange, will, then you, know find. The place where the bids and asks cross make the exchange and suddenly, I'll be the owner of a Bitcoin now. What I can do with that Bitcoin then is, it at that point the exchange, is still holding the Bitcoin themselves, so they're still in custody if. The big if the exchange went out of business right that minute I'd, be out of luck and that, used to happen quite a bit now, there are some more you. Know well-established. Companies. With governance and real engineers and things like that so, let's, so one, of these more established ones I'm not real worried about them going out of business in the next five minutes so, then I have the Bitcoin and I can then send, a transfer, to, the Bitcoin the receivers Bitcoin wallet and that can take place in about 10 minutes so I say please send then. Their, wallet, would receive that and then we could just get off the Skype call they've, been paid we're done ok so it's a very nice feature that you really cannot get across, borders, anywhere else now, what do they do once they have it well, they could take the Bitcoin and buy a cup of coffee or buy something online but. If they wanted to actually change it back and be yen then, they could transfer, to send the bitcoin onto an exchange and it might be a Japanese exchange which would receive the Bitcoin then, they could place an order to sell the. Japanese exchange would give them some yen and then, they could use the Japanese. Internal. Country, transfer. Systems, to put it into their bank account ok so. This is how you could do this and this stuff happens all the time it's a very common, thing. To do, especially for these small value transactions, people use it to pay programmers, in Venezuela, or all sorts, of other use, cases now.

There's A few problems with this first of all this is kind of high friction this is not like you know a simple consumer, product, you're. Exposed, to exchange rate volatility, along, the way now, that exchange rate volatility might not much be much within a day although, like over Christmas and I was caught up in this as well because I was holding and was trying to sell you, know you you, like the price might move 5%, or 10% in, the course of a day so you had to like be there at your computer trying. To get this stuff done and not like be lazy about it but, generally in a given day it doesn't move that much and you also have to worry about these these exchanges, going out of business. One thing that doesn't matter is the level of the exchange rate so this thing works as well when Bitcoin is, $100 a Bitcoin as it is 18,000. A Bitcoin because I'm just getting in and getting out, so all those exchange rates will move in concert, I don't really care how high it is what, I do need is transaction, volume because in the early days you know when it was not that popular you would the spreads would be high and so you would you would lose a lot on the bid-ask spread today, you, know there might be just. Even ripple, which I'm talked about later you know we were, having lots of four billion dollar days so four billion dollars. Of transaction, volume over, the holidays and then more recently it's been about you know half. A billion dollars a day so that's more than a lot of stocks and so that that means these are actually like fairly liquid relative. To stocks, and that's important, for making this work nonetheless. You, this is really not a great consumer product, and the way this is would end up getting mass marketed, would be that a company, would do this for you and, the. Consumer, really wouldn't see it so the consumer would have enough and just say I want to send money to Japan and the app would implement this on the back end and there are a number of products all over the world that try to do, that now. There's. A few additional concepts, that that become interesting, here it's like once you understand, all of that you. Realize that actually. These, exchanges. Are kind, of a big source of friction and a source of risk so what you might want to do instead is have a decentralized. Exchange where, this is all done in software so. That all of the transactions. Go one after the other and so v1 of this was actually ripple into 2013. So, this is what their software looked like then they, built a sort, of a new version of Bitcoin that was similar in some ways in different in others but one of the ways that it was different is it actually, built, into the protocol, the, ability, to have. Market, makers make bids and asks as well as a pathfinding algorithm that would say if I want to send something to Japan, it's, gonna find a sequence of trades I can make to, get me from the dollars to the yen. Automatically. So it's the same thing as this previous, picture, except for it all happens, at once through software so, there might be a market maker making a market between XRP, their currency, in dollars there may be another market maker making an offer between yin and XRP they. Would plug, into an API and those mark Maker's would commit that if someone took, their bids and offers then. The the the the, the transaction would go through they wouldn't have to manually approve, it would just be a standing, offer and so you could just take it and execute that in three seconds so, this is what they're the the v1 of ripple did and that was its differentiating, thing and I thought at the time this, was really a big improvement, because I was, generally thinking consumers, would not want to hold a cryptocurrency, themselves. So if I wanted to think about utility, this would be a better way so um, this, would and now there's a there's a bunch, of V twos of this coming out now called decentralized, exchanges, that on other protocols, and platforms are trying to implement this idea. What. The interesting thing that happened with ripple is that they went, out and tried to sell this to banks and said hey banks. You, might want to use a system like this to move money across borders, and some.

Banks Were interested, but actually a lot of banks said hey we're, a little worried about this cryptocurrency thing it's got regulatory, risks, and it's gonna take some time to figure it out but, we love this idea so. Could you do this for us but, without the cryptocurrency and, then. You actually realize that Wow yeah why didn't we do this before like, we should have done this without the cryptocurrency, before, and you might ask why don't we do it today and the answer is you know not, about the technology it's. About the we all use Swift and we're all stuck and we have software systems that are used to an old way of doing things and we just haven't advanced, so my economist friends say well couldn't we just fix that and I'm like yeah they. Are that's. What we're doing so, you, know rippled introduced then something called an inner ledger protocol, which basically takes, this idea of a decentralized exchange, and it's a protocol, that, basically, will say if I want to get money from one, end to the other there, might be a bunch of middlemen market, makers and people who have accounts and multiple banks I'm, gonna they're all going to make offers onto this protocol. And then if I want to get money from A to B we're. Gonna have a protocol that insures the money instantly, goes from A to B but, it never gets stuck in the middle and like that's a really nice thing because in the today's system, you tend to have delays, and have things get stuck in the middle so. The, bottom line of how this is getting used is that banks, are basically. Plugging. In and we have there's a, in the middle-east there's also a big group in Asia a, big group of Japanese banks, have have just joined it's a lot of smaller countries, or the early adopters and they're setting up their own network so they don't have to go through Swift, because. Swift is you. Know some are archaic and it, also ten, it doesn't go, slowly their, messaging, doesn't work very well and then the smaller countries also feel they're very disadvantaged. Because. It's sort of everything is going through a few large u.s. institutions, so, in terms of the future of currency, in some sense part of the role of the US dollar has been to be a hub currency, in a hub-and-spoke system. But. With these new technologies the, smaller countries don't have to go through that hub anybody. Who flies an airline through a hub knows, that you pay a higher price, and, it, can be slow and the airlines kind of exact monopoly, power, over you when they have control, a hub and and, the smaller banks and countries feel the same way about their, relationship. With the large US banks that where. They have to pay markups, and face. Delays as they go over that system so their be able to basically create a peer-to-peer network that, allows them to move money instantly among themselves without, having to go through that now, a set, of those, actually. I'm in a set. Of those those. Countries. Are also using. The cryptocurrency right. Now it's mostly remittance providers so there's a company called koala kazooing, it u.s. to Mexico and, there's, a. Association. Of fourteen hundred US credit unions, that's doing it to help the credit, unions access, international. Markets and so it's kind of coming up from the bottom from the smaller players who aren't well served. Alright, so. Let. Me now see a couple quick words about mining, just so that you won't walk away not, understanding, how this is so this all started with this anonymous, white, paper Bitcoin, a peer-to-peer electronic. Cash system and. Basically. What they wanted to accomplish was. A worldwide network of what. We call weekly identified, parties, to, reach consensus. On the contents, of the ledger so. You, might ask why would you want this and I think actually a lot of us would, still ask that if you were using a commercial implementation, but let's just take for a second what they what they wanted to accomplish was, sort of intellectually. Mind-boggling, I'm, gonna we said before we've got these copies of the ledger we want to decentralize, them but, I've got to provide security, somehow, so, how are you gonna do that and their idea was to allow people to join the network when you had no idea who they were no. Way to know no way to verify anybody. Can join a college. Kids people in any part of the world you. Know can, join this network and can help keep track of what the truth is okay. If you're gonna ask that anybody, in the world can, join and keep track of what the truth is you're, gonna have to figure out some way to make it costly to join and that. Is part of what, what. This this. This. Whole. System does so. The Nakamoto, consensus.

Says That we can let anybody in the world join and keep, track of the ledger but, if they disagree, we're, going to use majority, voting, to. Say which one is the right one so, if I can join the network and say I'm keeping copy of the ledger my temptation, would be to put another entry that says everybody, just gave all their bitcoins to me that. Would be fun and if I can keep a copy bludger why wouldn't I do that well, the answer is that everybody has to vote majority, rule, over, whether that's the right thing and nobody else would want to approve that transaction. So because. I wouldn't have authorized, it I wouldn't have had wouldn't have followed the rules to do that so, it's voting, and. You're. Gonna have majority rule now the immediate thing you think of was wait if it's voting, why don't I just set, up a hundred thousand computers, and have them all vote for me okay. That's and that is in fact possible, now, the way that you avoid that is are a couple of things first of all if I set up a hundred thousand computers and made them all give the money to me then the prices and the markets, might crash so I might not really get anything out of that and that is one of the part the key, things like keeping it secure it's actually an economic incentive if, I tried to vote break the system by creating a lot of computers and giving all the Bitcoin to me I wouldn't be able to sell them because nobody would want to buy them because they've just broke the system so it's really an economic incentive, model, it's not a. Cryptographic. Breakthrough. It, is economic, incentives, that's very interesting about this the. But. The second way that they've. This is they make it expensive, to join so you can't just join and and and create, the ledger you, have to actually pay, a fee okay. But the problem is we're all over the world we just said we don't have an international banking, system that, really works particularly, well and, you, know these people, might. We don't even know who they are so how could I you know get money from them so, I want them to pay to join the network but I don't have a great way to collect cash from them so, the solution, is you, have to burn money to. Join the network, that's. The solution now, if I literally had you burn cash, you. Might worry about how do I know that you really burn the cash I could doctor a video of me Vernon cash and say hey I'm burning cash let me join the network but, that might mean that might be hard to verify so. They had to figure out a way to burn cash, to. Join the network in a, way you could tell. Unambiguously. That you burn the cash okay, so what's the solution to that they, set up this very hard, math. Problem, that's using cryptography basically, we're, the to solve the math problem the, only way you can solve it is to keep guessing so. Every, 10 minutes this system, is going to pose a question and then, all around the world people guess, the answer to it and so, the way the and, so you can then use electricity, and computing, power to keep generating guesses, and guesses and guesses and guesses and the. Only way you'd ever get a right answer is if, on average is it if you burned a lot of energy. So. The the barrier to entry the analog of burning money is to burn electricity, and the way it's credible is that I only reward. You if you, actually solve, the problem and on average you can only do that if you burn a lot of electricity so. That is the system, bunch, of people burning, money all over the world for, the right to vote and which. Is the right system but I just wanted really emphasize that is an economic, breakthrough.

Not Actually, a cryptography. Breakthrough. And. Then what have what happened over time is that actually. It. Convento. Knee. Thing they're good at is to solve these problems just for bitcoins there's a whole industry developing, chips just for Bitcoin then, there are their server farms, that are now, very. You. Know streamlined, and efficient that, buy these chips make, the server and then solve these math problems and, try, to get the rewards so it's actually like a very the people respondents their economic, incentives to create mining, farms very, quickly and it's a bit of an arms race because, you actually can't be profitable, at it unless you're using cheap energy and the latest chips otherwise you burn more energy than the rewards that you get. So. Now we have a distributed, ledger with a bunch of people burning money all keeping copies of it and we've achieved the security, we were looking for now. It's turned out because of the economics, there's been a lot of concentration, in that like you can diseconomies, of scale so it's better to be a big network, and so we do actually have more concentration, and people still worry about the. Control of a small number of groups. And. In addition this money burning has really gotten quite expensive so it didn't seem like a big deal when, you were sort of a bunch of people playing around with a science project but right now Bitcoin consensus, cost about $10,000. Per minute and accounts for about 0.1% of world energy consumption, so. It's actually very expensive to burn that energy and then people are out there thinking about alternatives, are there ways to get all these benefits without, having to burn so much money it ranges, from trying to do something productive with your electricity instead of solving this useless math problem, to other things like proof of stake where you get to vote if you have some commitment to the ecosystem, and and, then, a third, solution is to, actually not just let anybody join so, and. That, sort. Of thing I'm burning, point one percent of US energy consumption just because I wanted to have the feature that anybody in the world could join anonymously. Maybe, if I restricted, energy a little an entry, a little bit I wouldn't have to do that so. Finally. I'll just mention that one, of the cool things you can do with Bitcoin is to create software, that. Moves this money so in a typical escrow, system for buying a house you would have a central party who keeps everything checks, if certain conditions are met and distributes, the funds while. Smart, escrow, is like is a simple example of a smart contract it's, a piece of software that can hold on to funds, check. The, state of the world was there a hurricane did the stock price go up did, something else change and as a result of that in a state contingent, way distribute, the assets so, I could head your risk around the world I could place a bet with anybody without having to trust them know them or pay a bank to there's a middleman just, by running up a piece of software and that software is. Available at scale there are platforms for creating those software so people can create these types of contracts. And and, and allow new things to happen and that's one of the big areas of innovation so I. Think I will stop, here and open up for questions and, yeah. We can take it any direction there's lots of places we haven't gone yet about the value of the currency anything else so let's open up to questions now and. Then. We got mics coming around so up here. Yes. Can, you talk a little bit about the future of energy consumption, there's all this data mining, yes. So I I mean I think it's, a big problem and it's, some level you know if you, if you said oh is a country, gonna try to use Bitcoin for their national currency, or are we really gonna see something like you used to use at scale I think that the this. Energy. Consumption, money burning thing is just a fatal defect, from, having it really, get big as a transaction mechanism, and so when, you talk to countries, some. Countries are thinking, about getting rid of cash entirely, like, England. Is advanced in that some of the Scandinavian countries, are thinking about that and they, have thought about can, we use this technology to. Have a fiat currency but. But just not have cash have, it be purely digital but, none of them are seriously. Thinking, about you, know I'm gonna have this kind of proof of work energy burning thing to run a national system they, would instead sort of limit entry like manually, you would have a distributed, system but, you kind of have to have permission to join and then you don't have to burn the money in the same kind of way.

Yeah. So. My understanding from, the regulatory standpoint. Is the central banks will tolerate this as long as it's marginal, but. The, idea that you can move very large sums of money. Which. Ultimately is, fiat money across. Borders, is, not something, they're going to tolerate when, it gets to scale so. It's a great question so there's. I think it's really important to separate two use cases so one is the consumer, to you consumer, use case like over Skype. And that I think is very threatening, as to high inflation countries. That have a lot of capital controls, and, I basically I would like go short any country, that is dependent on capital controls by the way cuz you can't put this genie back in the bottle like, this technology. Is out there and there are privacy-preserving, versions. Of it so essentially. You just cannot, keep. Your capital in your country, at scale, in the future but, that the concern about that is one reason they would clamp down of course other things are sort of any money laundering and so on now the business this is one reason I'm more interested in the business-to-business case, which is sort of what ripple is doing because in that case nothing, changes. In terms of the regulatory framework the, consumer, never touches, it so consumer, is still going through the same financial. Institutions. And the financial, institutions are just doing it on the back end and for. That use case actually the central banks of smaller countries are incredibly, enthusiastic they're. Actually pushing their countries forward because, it just as a matter of national policy, having, your entire country, dependent. On you, know paying markups, to Citibank is a bad thing and you. Know you also sub subject, to regulatory risk, that the US can change regulations which, can make it harder for certain, countries to move money where they want to move that so, from that perspective getting. This sort of peer-to-peer kind. Of regional networks the central banks are actually incredibly. Enthusiastic what. They want I think is they don't there's our happy. To go to a new technology, they, just want to make sure that that, they still have the normal gateways, and so that I think is a much more promising, Avenue, nonetheless, they're, still thinking more about the technological, solution, and only. Some of them have really embraced, scripto currency, as as a conduit, as a hub currency. So. In your opinion. Which. Cryptocurrency. Has, actually, tried to solve the flaws of Bitcoin, or. Which is the most advanced. That's, part one part, two is that, is. There. A better model, available. Than, Bernie energy, that, can cure a fit of that of the fundamental flaw in all these mechanisms, so, this is a very deep question and you could read you know thousands, of pages on Reddit of people arguing about this so I I will I will say a few kind, of comments, but I cannot, claim to have, all the answers so when, I first started talking about alternative, cryptocurrencies in say 2013, and I was involved with ripple very early there, was a whole set of people including some of our famous. Tech leaders in Silicon Valley who. Would stand up and say you, know scale economies, you know the best thing doesn't always win Bitcoin was first Bitcoin, Bitcoin, Bitcoin everything is gonna be Bitcoin these other things are all gonna die I would, stand up and quietly raise my head and say well you. Know if you're thinking about enterprise, software it's. Not all just like the Betamax and, VHS and. You know Netscape, versus ie in fact, in enterprise, software you. Typically, have a lot of different vertical solutions serving, different parts of the market with different combinations, of features and so my, thought, was that we will see different systems, for different purposes and in fact that is sort of how that's evolved, so I don't think there's one size fits all so ripple, wants to move you know hundreds, of billions of dollars or, trillions, of dollars between, banks, internationally, so, they need a highly, scalable, system that, is and these proof-of-work stuff is just a complete. Non-starter so they have sort of in, some sense controlling. Who, who, keeps track of the ledgers and they, also have software that allows you to just move things without even touching the cryptocurrency so you wouldn't even really call it a cryptocurrency solution.

For That use case that is what's taking off and the other things are not taking off so much for. Developers. You know you might you you might want a cryptocurrency. That actually has the, ability more. More, ability. To write software embedded in the protocol and so, aetherium has gone a lot in that direction in, terms of making it easy for people to build software on top of aetherium so aetherium is almost thinking of itself like an operating system really and so, that's good, for that there, are coins that preserve financial, privacy so, there are coins that actually do. Everything that Bitcoin does and there's still a big lecture but nobody from the outside can look at it and and, reconstruct. The network of who sent what to whom if, you're trying to evade capital, controls, or do money laundering, that's, your currency you, know that looks great. And of course consumers might have an interest in financial privacy even if they're doing legitimate things, because if they if you can see on the network that you hold a lot of cryptocurrency you're actually vulnerable to kidnapping, and all sorts of other things and you're, more vulnerable with crypto because the money can move across borders so fast so you, can your risk of theft in a way that you're not forced. The money that's stored in a bank so I would just say that they're different and and I don't think it's gonna be one-size-fits-all I don't think there's gonna be a thousand, but, there may be 15, or 10, that. You know actually each solve a different use case better, and the biggest problem right now is we actually have very little product market fit there's not there's hardly any actual, use cases where this thing is really doing a great job so. Trying to make it one size fits all it, just makes that problem harder rather than easier but. This is a very controversial, thing and if and there's a top. It out there's all these between Twitter bots that are trying to make people buy and sell currencies starting. Just like though in the election you know we have these twitter bots that in created, division and tried to make everybody hate each other well the crypto space has all these bots that try to make everybody hate each other and troll each other so. It's really just kind of a Wild. West in terms of the conversation, on that topic. We. Keep hearing about tokens, all the time these days where do tokens fit into all of this well, so I mean the. The Bitcoin, is the token for. That ecosystem. And, you know XRP is the token for the XR the ledger. I think. One of the ways people, are kind of like this I said you have a token economy and since I'm actually really, a marketplace, expert and this crypto thing is a relatively, new thing but, you know some I'm, on the boards of Lending Club and Expedia and rover which are marketplaces, so I've got a lot of people coming into my office pitching, me these like marketplace, economies, where the idea is that oh you give your medical data then, somebody's gonna pay you in a token you hold the token now, you want, to get other people to join the system so your token will get more valuable and then. That will grow or the tokens, might also replace, like frequent flyer miles or other types of ideas so there's all these ideas about sort. Of businesses, that are built on top of block chains with tokens that are specific, to the business and, then there becomes a little economy, and those tokens and, everybody, wants to make it grow and they're all invested, in this, the business so, you.

Know In some level that's how Bitcoin started, so you can't say that the idea doesn't make any sense and it can, make sense but the hard part with all of those things is just getting them started you, know they all face a chicken-and-egg problem and, unless you have a good business you know those tokens are just nothing. But. It's a very hot topic for entrepreneurs. Yeah. I'm still really confused about the whole voting business, when it comes to the all. The different Ledger's the different versions I mean what actually happens, if my. Computer actually keeps a ledger and, a new transaction, comes in how. Does my computer either, accept. Or reject that transaction. As a legitimate, transaction. So. If you are if there's, this is kind of confusing because they're sort of in the equilibrium and out of equilibrium so like when the system is working then. There's, just, software that you would run and it, would say here's a new batch of transactions, it would check a set of rules so like was this person authorized to make the transaction did they have the Bitcoin and so on and so in that state of the world the software just checks a set of things and and then. Accepts, or rejects, it so there's no problem, so what's what, makes it more confusing is if you think about some sort of out of equilibrium behavior which could take a whole bunch of different forums, but they all would have the same idea, of putting. Things on the ledger that didn't follow the rules and so. That's the case that where you, know other people would say hey my, my copy doesn't look like your copy and if they're following the rules they would just say well I don't know what happened that you must have made a mistake we're gonna do, the same thing as everybody else I checked and I agree the he checked and he agrees all good, we just keep going, so these attacks, are, the things that are sort of could, take a variety of different forms could. You speak a little bit more about blockchain for, good specifically. Like v chain for vaccine authentication or, other healthcare applications, sure. So, and, there's again a whole, variety of them a lot of them are nascent I think. One. One. Idea that I think does, have legs is trying, to follow. Supply, chains and, complex, settings, so, if you're the Gates Foundation and you're trying to move money around Africa. You know you give the money and there's this whole leakage, along the way and a lot of stuff is in digital, and there's. A lot of corruption so it's hard to make sure it got where it was going so one thing you can imagine happening. And it's certainly been discussed, is that some, big institution. Whether it's like the World Bank or the Gates Foundation or, someone else it's really big could, sort of force their supply chain to. Track. Funds through, a distributed, ledger and that, might be useful because, the people you're dealing with don't actually have identities, like you actually have to use suppliers who, you really can't verify, and the. Countries, themselves don't, have good legal institutions. And so on so that's a good use of the blockchain if it's a if it's just funds you could just see them going from one person the other and and they, would be dispersed you know split up as you go along so a big block grant here and then it's dispersed and dispersed and dispersed but you would have a ledger. That keeps track of that until the very end another. Way that you can do that is with physical goods and there, you get into this challenge, of how do you keep track of this physical good but the really, simple version of the idea is there's some kind of barcode, that's really embedded, in the good that you can't take out easily and you scan it at the beginning and then, as it moves along it's, scanned again and every, time it moves from Party to party that triggers funds being released as well, as a record of what happened and again.

We Already have IT systems, to do that today it works great inside a firm but it doesn't work so well if you're going across countries, in Africa or someplace that doesn't have, good systems so those are some of the applications. That might get donors to give more money or make things more, efficient, and then, other types, of things I mean the vaccines, thank you maybe there's there's a counterfeit. Vaccines, so, you might want to scan the vaccine at the factory and see, that this is on authentic, vaccine, and then at the end you could tell that it was real and people have also talked about it for just counterfeit, luxury goods in China, no, there's been versions, of those businesses, that don't involve blockchains and when you really dig into it you might say really. Neat I don't need the full Bitcoin, I just need a database I just need a database of access so the questions still arise of like what's the best way to do, that what's the very best technological system, to manage us by chain. Do. You have any estimates, of how much, illicit. Versus, legal, transactions. Are going on in the, cryptocurrency, space, yeah. So in the various. People have analyzed this at various points in time so my own analysis, is a bit dated now cuz it was mostly 2015, and 2016 so by far the biggest thing that people are doing with these things is day trading and, like holding them so, I was actually excited to look at all the stuff people were doing but most people are just not doing anything you, know they bought them they held them and then, the price went up and they sold them or they're just trading them a lot so most of the volume is just on and off exchanges, and they're not actually doing all these great things that we imagined they would do. The. Now. Of course all that liquidity can, make it cheaper for someone to build a real business and so like the u.s. to Mexico the fact that there's all these day traders it makes it really cheap for a remittance, provider, to get in and out of say, XRP going to Mexico the fact that there's a lot of trading volume but that's the main thing they're doing and then among the things where you could identify what, they were doing, yes Silk Road was big gambling, was big you know but, in some sense that's just sort of like in the early days there's just not really much to do with it you know one, of you know you're you want to just have fun so you're just kind of doing things for fun you're buying coffee cuz it's, cool not because you really need to so, it's hard to kind of draw inferences from, from that very nascent, time. Period. So, I think though you know go, so right now really like no people aren't using, it at scale. Period. But, though these, illicit use cases are. Won. In use case that's where there's not a better alternative today, and that's partly why that's like an actual use case, thanks. So much everybody for coming. You.

2018-10-29 10:43

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