Full transcript below:
I just went to Davos to attend the World Economic Forum. It’s an event where you spend 100 thousand dollars to mostly drink. It makes one wonder who has the best business model. While I usually go to Saint Moritz, I decided to come to Davos this year.
I used to live in Switzerland while beginning Ethereum. We were the first cryptocurrency company that made an impact out of Switzerland. It was a lot of fun. The Swiss had no idea what cryptocurrencies were. They basically said, ‘Welcome to Switzerland, don’t make it our problem.’ We did our best. We also brought a lot of money so the Swiss welcomed us with open arms.
This is because cryptocurrencies, like fintech, were an emerging field. It’s still an emerging field. I’m a mathematician by training and when I entered this industry, I had no idea about words like AML (anti-money laundering) and KYC (know your customer). They were mysterious and arcane concepts. They still are in a lot of ways. The reality is that they should go away at some point. That is because the world is changing.
We are moving from fragmented and siloed markets which live in the borders of countries, to one global market. Instead of discussing American, European, or Asian markets, we are now talking about one global system being led by protocols. I see a future where markets are led by intelligent protocols. It is incredible to see this emerging complexity grow. The truth is, it has just begun to grow.
I was recently in Mongolia. I love Mongolia. I was in the outskirts and I saw a herd of camels. As a previous camel owner I went over to the camel herder to commiserate on the wonders and horrors of camel ownership. He asked me what I did for a living. I told him that I was a cryptocurrency guy. The camel herder said ‘like bitcoin? I own some bitcoin.’ This is remarkable because if a camel herder in Mongolia owns bitcoin, it is here to stay.
We are now ten years into the development of this space. What have we learned? We know that fintech and crypto are volatile. We know that people love it and hate it. We know that people have strong opinions about it. Most importantly we found out that we can deconstruct transactions and commerce into a common set of principles.Then if we put them back together every single market can unify together.
At the heart of transactions there are five properties, assets being one of them. Assets can be anything. They can be data, property, or even a representation of one’s will, like a vote. An asset can be gold, money, or stock. The question is; why should you differentiate them when you can just flag metadata? This is something we’re working on.
The second property is identity. Every transaction is one-to-one, many-to-many, or many-to-one. But there are actors and identities which need to be gathered along with this. We have created something called the DID Standard, or digital identifiers. This is allowing us to begin looking at self-sovereign identity, which I suggest you look up.
Next, we have metadata and contracts. Metadata tells the story of transactions. Why, when, where and how did you make your transaction? This tells you a lot about each individual transaction. Contracts include terms and conditions. Can you get a refund? What is in the fine print? Smart contracts offer computer-understood agreements which impart a commercial understanding. It is also important to remember that all transactions live in a regulatory framework. Often they live in many regulatory frameworks.
We generally don’t care about regulatory framework unless it affects us directly. The US, Chinese, or European regulations generally affect us the most. These are the five properties; assets, identity, metadata, and frameworks. So what do they have to do with fintech?
We have started looking at these concepts in a rigorous way. This allows us to embed an unlimited amount of specificity, and machine understanding into every transaction. It lets individuals and enterprises template these things. This means that everything can be automated.
Lets say, for instance, you want to run an exchange like Huobi. They are a very good exchange and they’ve been fantastic partners. So, an exchange like Huobi has to spend years of effort and millions of dollars to build their capability knowing everything about a transaction that comes their way. This means that every time they enter a new jurisdiction they have to master a new set of laws and hire a bunch of new people. This is inefficient and costly.
Essentially, they have to deconstruct the customer’s entire commercial history. The reason that they do this is to find out if their customers are a risky person or not. Often times this just boils down to where one’s passport is from. Couldn’t this be automated? What if we just give someone an address and see if a transaction settles?
We can embed terms and conditions within this. We can include identity to authenticate new customers. The exchange will then give the customer a hash with which to sign. Without that, then the transaction doesn’t settle. But what if this became more complex?
You might need to prove the fact that you have paid your taxes to continue doing business on the exchange. In this case you would only have to go to your local tax agency and have them sign off. Without that signature the transaction will not go through. The important thing is that you can determine any rules you want around these transactions. The automated rules are built right into the structure.
Ultimately, the success of the transaction is completely dependent on the sender and not the receiver. But, the great thing about this is the fact that the sender now has cryptographic proof that the law was followed during the transaction. This is an unbelievably powerful system because you can use it for any type of transaction.
Moving past money
While we see most transactions as financial, that is not always the case. For instance, if you get sick in a foreign country, you might need to have your personal doctor send over your medical records. This is a transaction as well. It is authorization to send an asset from place to place with contingent settlement. This is the magic and power of our industry.
When you start deconstructing transactions then you realize that we are not talking about one thing. We are talking about the movement of money, consent, data, voting, and supply chains. We see this time and time again during our work in Uganda, Rwanda, South Africa, and Ethiopia. One of the conversations that have a lot in Africa is that globalization tears down the legacy economic systems in the region.
When Starbucks says that they want coffee farmers to use sustainable farming practices with fair trade coffee this poses a problem for the small farmer. If the farmer doesn’t have a cellphone to prove their coffee is fair trade, how can they be expected to comply with international regulations? This tells us that they need a new system.
Building a new system
At Davos, multinational organizations are running around and trying to figure out how they get each of these countries to upgrade. The good thing is that we’re already working in these regions and talking with stakeholders. We are building blockchain-based supplyline systems. These systems are just as abstract and arbitrary as bitcoin in this respect.
What does that mean? It means that the same thing that could prove that coffee is fairtrade and certified could also be reused as a payment system, a voting system, and even property registration. It is also transnational, meaning that the government of Ethiopia would not control it; in fact, the people would.
Furthermore, you will be able to set the rules ahead of time, making them unchangeable or immutable. Even if the data contained within the system is inconvenient to a party, it can’t be changed. This is particularly important for diaspora communities who leave while owning property but return wanting to claim assets.
The system is also abstracted to the point where you can solve a large amount of problems. Fundamentally, it forces an uncomfortable conversation in society. Namely; who do you trust, how much do you trust them, and why do you trust them.The reason that this is an important conversation is because business is done in consortia.
Consider cell phones as one example of this. I have a US cell phone. However, I can get cell phone service here in Switzerland. This is the notion of interoperability. Everything in life is a version of this same social, economic, and legal consensus. This could include the movement of people, funds or even data. It is the crux of the fintech movement.
It is not just about transactions. Blockchain technology is about building consensus among actors for common understanding. There are certain problems that we have to solve together. Greta Thunberg is with us in Davos. She is talking about global warming. Why has this problem been so difficult to solve?
That is because it is a collective problem. It requires all actors to come together and hold one another accountable. The way that you usually solve problems of that scale is by one nation becoming so powerful that they can force other nations to fall in line. Standardization through the military.
That is not going to happen any more. We don’t want that to happen any more. In the absence of an empire, how do you get the world to do something for its benefit while taking a hit today? This is the fundamental issue of global trade, environmentalism, and global marketplaces. This is the century where the dollar recedes as the global reserve currency. Do we want to replace it with another? Perhaps we should create an international standard.
The difficulty with standards
How does one control that standard in a way that is just as good for Rwanda, Barbados, and Kyrgyzstan, as it is for the United States? This runs opposite to what it is today, where those with all the power, money, and size make the rules. This is the basis of our business. Kill the middleman, push power to the edges, and build systems that are equally fair for the least amongst us, not the greatest amongst us. It is our goal.
This is why we do what we do. At IOHK, we worry about the science of how this is done. We wrote over 50 papers and we were cited thousands of times. We went to all the world’s universities for peer-review. Ultimately, we were asking a lot of first principle questions about what is fact and fiction. Can we actually build these systems which are fully decentralized while allowing participants to scale to billions of users?
The good news is that it is possible. If not from us, than from competing protocols coming out of academia. However, we are building these protocols using world-class developers working with formal methods and Haskell engineering to make sure we get it right. But, the magic of this movement is that what we do is open.
Open source optimization
We don’t have a single patent. All of our software is open source and it seems that many of our competitors have this same philosophy. I believe that there has never been a time in human existence when social systems were not proprietary. Generally, they have been locked into some kind of culture, religion, governance, or identity. Us versus them. One corporation against another. This standard versus that standard. This is changing.
Right now, there is a great merging of ideas. The things that I come up with are being taken by others and vice versa. The point of this is optimization. We’re evolving at a very rapid pace. How often does a currency evolve? Not often, because if you screw it up you have Venezuela. This is why things stay the same and often collapse.
Today there are 3,000 cryptocurrencies. All of them are competing with one another. The point of this is that there is real money to be made in solving these problems. We have created a financial incentive to evolve. Consider the idea of a stablecoin . How do you ensure that one token can buy the same amount of bread it bought previously? Now developers are rising to meet this challenge.
These same concepts will go into ensuring that countries can have a stable currency. The same technology will allow servicing transactions of coffee farmers in Ethiopia and letting nations have a better payment system than Visa or Mastercard. Better yet, they are free and they are open. You have equal access to them as I do. No one owns them. There are no patents.
While researching, we found a way to make these systems environmentally friendly. When I started, bitcoin used the power of a small city. Now it consumes more power than all of Sweden. If it’s successful it will consume the same amount of power of Germany. More importantly, there is no incentive for it to become more environmentally friendly.
When you look at the next generations of cryptocurrencies specifically at the proof-of-stake protocols that IOHK and our competitors build, you can run a global financial system for 10 kilowatts. That’s the power of a large home. This has better performance and a global scale. As it grows it will use less power. These protocols were developed in the last ten years. We see that as innovation.
But we didn’t stop there. We are also optimizing around data. Our research with recursive snarks tells us that petabyte scale blockchains can be interacted with using only kilobytes of information while maintaining security. Things are advancing quickly. The decision that you have to make is, do you want to be a participant in the new world financial system?
Right now we’re living in standards set in World War II. Now we’re deciding everything over again. What does privacy mean? What are assets? What is money? How should cross-border settlements be done. Right now, we are all in the room where those things are being decided and you get to choose if you want to participate or not. We hope you choose to join in.