a16z Podcast - a16z Podcast: Bitcoin's Growing Pains -- and Possibilities

Episode Date: July 10, 2015

Bitcoin has had more than its share of drama. There is, of course, the mystery surrounding its anonymous founder (or perhaps, founders) Satoshi Nakamoto. More recently, there's been a battle over whether the size of blocks need to grow to account for more capacity -- especially since there isn’t much time left to make changes before blockchain capacity runs out, says core bitcoin developer Mike Hearn. Hearn joins a16z’s Chris Dixon on this segment of the a16z Podcast to discuss the current state of bitcoin development; Hearn’s own Lighthouse creation, which is a bitcoin-based crowdfunding app; and what it will take to move the bitcoin protocol into the mainstream. The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Welcome to the A16Z podcast. I'm Michael Copeland. For an arcane protocol, Bitcoin has more than its share of drama. There is, of course, the mystery surrounding its anonymous founder or founders, Satoshi. More recently, there is the battle over whether the size of Bitcoin blocks need to grow to account for more capacity, or if it's just fine the way Satoshi left it.

The drama creeps in because there isn't much time left to make changes before Bitcoin blockchain capacity runs out, says core Bitcoin developer and security expert Mike Hearn. And running out of blockchain capacity could spell disaster, he says. At worst things break quite badly, but even at best, even if things don't break, some users won't be able to use Bitcoin, right? They will be kicked out of the system, effectively. There won't be enough capacity to handle them. Hearn joins A16Z's Chris Dixon on this segment of the pod to discuss the current state of the Bitcoin project, Hearn's own lighthouse creation, which is a Bitcoin-based crowdfunding app,

and what it will take to move the Bitcoin protocol into the mainstream. If you're in the West and you have access to, you know, credit card payments and so on, it's not always clear why you would want to use Bitcoin. But that's not because there aren't good reasons. It's because we're not doing a good job of, like, telling people about them. Chris Dixon kicks it off. Mike, thanks for being here. Thanks. It's great to be here.

So let's start off talking about the state of Bitcoin. There's a lot of debate going on right now about the block size issue. I guess, could you first kind of explain that and then talk about your views on it? Yeah. So a long time ago, when Satoshi was still in charge of the Bitcoin. project, he added a quick hack to the code basically kind of a cludge, which limited Bitcoin's capacity to process transactions. And at the time that he put this limit in, Bitcoin was nowhere near even close to this limit. He imposed a maximum one megabyte block size. And it says one block

every 10 minutes on average. You can calculate a maximum transaction rate from that. And at the time he put it in, we were around less than 10 kilobytes per block, so a long way from that. And we're now at more like half of that block size. And as traffic is growing, it looks like we might start hitting that limit sometime next year. So Gavin has proposed that we- Gavin is the main Bitcoin maintainer. He was, actually. So when Satoshi left, he nominated Gavin Anderson as his successor.

And Gavin was maintainer of Bitcoin core for a while. and then he delegated that again to Vladimir van der Leyen. So Gavin has suggested increasing the block size, and I've been suggesting this for some time as well. This is a debate that's been going on for several years and has never triggered any action, but now we're sort of out of time. So it's now moved into a new phase of this debate.

And that's what this sort of current drama is about. It's about whether the limit should be raised and by how much. Can you give like a quick summary of the two sides and then why you support increasing it? Well, Gavin has been writing about this on this blog for some time. The argument for increasing it is fairly straightforward. It's that if we don't, Bitcoin will run out of capacity and running out of capacity is bad news.

That means worst things break quite badly. But even at best, even if things don't break, some users won't be able to use Bitcoin. They will be kicked out of the system. Effectively, there won't be enough capacity to handle them. And that would be bad. And the simplest way to increase capacity is to increase this limit. And then the arguments against are somewhat varied, and I find them to be a little bit vague.

But they basically boil down to a concern that if Bitcoin grows, then if the hardware requirements for running a Bitcoin node go up, then it's sort of in some sense less decentralized. So those people would rather have Bitcoin be decentralized and not work than working and slightly more centralized. Yeah, I mean, that's how I would characterize it. Some of them would characterize it as saying, well, people will invent other ways of moving money around that don't involve making Bitcoin transactions. They believe they'll be off-chain, as they say, like they'll be done through other services that don't record every transaction on the blockchain? Yeah, services, other networks, other systems, basically. Some of the things they propose would integrate with the blockchain in some sense. But, yeah, it would mean a sort of different sort of infrastructure for routing of payments.

Okay. And so now switching over to Bitcoin as a, you know, just kind of the broader applications, what's your take on sort of what's going on there? And I know you're the creator of what I think is a very interesting project called Lighthouse, and we can talk about that. But I'm just curious sort of broadly, what's your take on kind of Bitcoin adoption and applications? Bitcoin adoption is going okay. If you plot the graphs of transaction traffic, it is growing.

and it's settled into a fairly standard seasonal growth pattern. This is pretty standard for online services. I've seen this sort of pattern many times in the past. So that's quite reassuring that we're seeing this. At the same time, I would like to see it grow even faster. Bitcoin doesn't have unlimited runway in the speech. So I'm quite interested in finding ideas that could help increase usage and really find some sort of killer app or, you know, killer research.

reason to be using Bitcoin in people's everyday lives. And you created this new application called Lighthouse, which I think is one of the most interesting Bitcoin apps I've ever seen. Can you describe what that is? Yeah. So Lighthouse is a decentralized Bitcoin-based crowdfunding application like Kickstarter, effectively, or Indiegogo or similar sites like this. The idea is you can create a project that has a goal, target amounts of money that needs

to be raised for the project to go ahead. and then people can pledge Bitcoins towards that goal. And unlike other attempts at this where you actually have to deposit your Bitcoin with a trusted third party, Lighthouse is a completely peer-to-peer and decentralized approach. So you can actually pledge money to a project in such a way that it stays under your control until the moment that the project has raised a full amount. And at that point, it moves into the wallet of the project creator. But you don't have to, you know, that the money is never in some kind of strange state

where it's controlled by someone else but theoretically still owned by you. And how does that work technologically? It uses features in the Bitcoin protocol that Satoshi put there right from day one. We don't know exactly how he intended them to be used because he didn't talk about them much, but they can be used for crowdfunding.

One of the features that Lighthouse uses is a way of signing transactions so they can be merged together. So you can actually create a kind of partial Bitcoin payment that won't be accepted by the system until it's merged with other similar. payments to create a final valid contract, it's what we call it. I mean, this is one thing people, I think an overlooked fact of Bitcoin is that there's a

scripting language involved or embedded rather inside of the protocol, which you know, which you are one of the experts on. Yeah, for a long time, you know, for a long time it wasn't very well known because Satoshi's white paper didn't mention it and he didn't talk about it in, you know, his mailing list posts either. It's actually quite astonishing that he built such a complex system and then, just left it there for people to find, you know, it's, it's one of the, one of the more staggering cases of missing documentation of ever. So you could only, you could only find

the scripting language through the code itself. Yeah, yeah, everything that's known about the scripting language was actually reverse engineered out of the code. I mean, there was all this talk about things like Ethereum, which was a Bitcoin with scripting, yet Bitcoin itself had this already, at least, at least some version of it, you know, of that paper built. Yeah, Bitcoin has had this since day one. Yeah. And I think things like Ethereum came out of the desire to have a more powerful scripting language, actually. Although it's a bit strange because we've never really fully used the capabilities of even Bitcoin's fairly limited language.

Yeah, you would think step one would be to use the existing language, run into limits, and then expand as necessary. With the obvious caveat being that as you expand it, you might run into security issues and things, right? I mean, if you have a Turing complete scripting language, presumably there's a ton of vulnerabilities as well. Right. I mean, I think one reason that the Bitcoin scripting language hasn't been expanded is that, you know, we keep finding interesting ways of abusing the existing one.

So, yeah, designing these sorts of things is something of a new research area. The Bitcoin language is simple, but, you know, it can still do quite a lot, actually, if you're creative with it. Now, Lighthouse took you, like, I think you told me, like seven months or something to build. Like, it feels like there's infrastructure, perhaps there's opportunity to build infrastructure on top of the Bitcoin scripting language. to make other applications like Lighthouse easier to build? Yeah, Lighthouse's use of the scripting system is actually pretty basic. So the complexity there wasn't really imposed by script or its limitations. The complexity was primarily around designing the user interface to make it simple.

So you don't, even though behind the scenes are these signatures and scripts and transactions flying around. You don't want the users to see that. The complexity was in things like, you know, how do you distribute? an app such that everyone can use it, right, but without blowing your development budget by writing the app multiple times. There were lots of issues that came up there. How do you move the data around through people's firewalls? Stuff that isn't really specific to cryptocurrency or Bitcoin, but it's just the plumbing needed to make all this stuff happen. And a lot of the code that I wrote with Lighthouse was intended to be reusable. And so, you know, it will be easier

next time, right, if someone wants to build a Lighthouse style app. Because they can, if they choose to, they can reuse that code. And what's the benefit of distributed kind of crowdfunding as opposed to a centralized one in your mind? I mean, because like the cynics, I don't agree with them, but the critics would say, you know, a centralized service works just fine. You, you know, only people who, you know, want to get around regulation or something would want to use this decentralized service.

Like what are the benefits in your mind? Yeah, I think that sort of argument is quite common. It's an argument of privilege, right? So these services like Kickstarter and Indigo go very often. They're restricted to certain countries, for example. It's very hard for someone in the middle of India, for example, who maybe doesn't even speak English to create a project and successfully run it on one of these platforms.

The whole thing is credit card-based. The fees can be very high. I usually say the fees for using these platforms can be around 10% of the money you raise. That's not quite fair. That includes banking fees as well as the fees levied by these companies. but it's all a part of the same infrastructure. And by using Bitcoin, you can bypass all of that. You're left with that most the exchange fees into your local currency

if you don't have a supply chain that you can use with Bitcoin. So there's actually not only huge monetary savings you can make, but it's also simpler in many ways. It's more flexible and it works all over the world. Just to disclose, I'm a personal investor in Kickstarter from back in, I don't know when it was 2008 or 9. So I love Kickstarter and I think it's a great service. That said, I think that there's, my own belief is this room for both what I would call services and for protocols.

And so services are things like Kickstarter, which are great and say serve a purpose. But the great thing about open protocols is that they invite developers and entrepreneurs and investors to build on top of them in a way that they know they can do so safely and not sort of get booted off later the way that corporate controlled platforms tend to do. And so if you just compare, for example, like, you know, the amount of innovation that's happened on top of SMTP, the email protocol. You know, there have been thousands of great companies created on top of it and services, Gmail and, you know, Outlook are the obvious ones, but there's anti-spam services and there's compliance services and there's, you know, whatever, services for helping people do more creative kind of emailing, et cetera. All sorts of interesting things have happened on top of SMTP. HDP, obviously, as well as the protocol underlying the internet, which is

unlocked an incredible way of innovation. And so, you know, my feeling is what's so great about these protocols. Like what happens the cycle of these things whenever you create a protocol is the critics say, oh, that's only for criminals. They said that about SSL, for example. There was a big debate in the 90s about encrypting, you know, web traffic because the argument was only criminals would want to encrypt their traffic. They said that about the VCR. The VCR, why would you want to tape a movie, you know, it's only for piracy. The reality is it's so that you can then take what was otherwise be a corporate silo and make it into a protocol, which lets people build on top of it. That's my own bias, and that's why I think this is so exciting.

Yeah, and I agree, and Lighthouse sort of the design explicitly, I think, recognizes that dynamic as well. So, you know, the Lighthouse app doesn't try and do everything, right? It's happy to outsource some things to third-party services like Kickstarter and Indiegogo. Whereas those services roll together, the movements of money and the hosting of projects and the marketing of the projects and reviewing and quality assurance and all these kind of things, Lighthouse and bundles them. So there's actually a website called lightlist.io, which is an online web gallery. And they actually, they host projects, they provide project discovery, they provide commenting, they're doing some ID verification of fundraisers and things like that. So they are going ahead and then building services on top of the lighthouse protocol. But they're one, they're one service, but there can be competition.

Someone else could create a competing service. So you get all the wonderful things about capitalism. You get true competition on top instead of kind of. you know, socialist, controlled corporate silo. That would be my take. I think protocols, I think contrary to the caricature that people like me who and you, I think, who support open protocols as being kind of socialist do-goaters or something. I think it's actually the opposite, which is we are actually the ones who want true free enterprise

and competition and want to, you know, create the tools for people to do that. Yeah, I mean, having these protocols is like having standardized road signs and things like that. or having standardized measurements for other things. It just smooths, it just greases the wheels of trade and helps everyone do better business, I think. So where do you see the current state of consumer adoption for Bitcoin? And what will it take to help that continue to grow? It's pretty good. I've sort of surprised every time I encounter people using Bitcoin.

It's always a nice surprise, but it happens more and more often these days. I think one reason I'm surprised is, you know, right now there isn't, if you're you're in the West and you have access to, you know, credit card payments and so on, it's not always clear why you would want to use Bitcoin. But that's not because there aren't good reasons. It's because we're not doing a good job of like telling people about them. I'm really keen on seeing us get like driving merchant discounts through the whole ecosystem, for example. So people can save money with Bitcoin and see their saving money. And then they can show their friends, hey, look, you know, look what's happened here. Look at this money that I've saved.

Tipping has been really great for this as well because, you know, people can receive a tip without even really expecting it, and then suddenly they feel like, hey, I've actually got some money. I could go down to a little cafe and buy myself a drink. And it's a nice feeling that you wouldn't get without Bitcoin. So I'm sort of interested in trying to push some of these ideas through things that can touch everyone's lives in a small way. And hopefully we can get more Bitcoin adoption through some of these techniques. So Clay Christensen, who coined the phrase disruption, disruptive innovation, he defines two kinds of disruption. The first he calls kind of low-end disruption, which is basically something in coming in and costing less

for an existing behavior. And the other one he calls, I think he calls it competing against non-consumption. And that is new technologies that allow for you to, allow for you to do things you couldn't do before. So I personally am much more excited about the latter kind for Bitcoin. In other words, I'm more excited about new ways that you can use Bitcoin and pay for things that you couldn't before. So, for example, micro payments, machine to machine payments, versus save whatever the 1 to 3% credit card fees that you pay, you know, paying for whatever

online merchant. Just because, one is the credit card, you know, the credit card system has done a very good job of effectively hiding those fees. So you basically, everyone's paying those fees and the merchant, you know, it's hidden from the consumer. And basically the way it works, right, is Target gets all of their credit card stolen. Everyone has to, you know, socialize the losses. You basically, it's one of these systems where they privatize the gains in the credit card companies, a merchant processors, Visa MasterCard, et cetera, but they socialize the losses. You pay for it through chargebacks and decline transactions and getting sent a new credit card and having to change everything. And so they've done a good job kind of

obfuscating the fees, I would argue. And so it's a hard thing to compete against. Whereas if we can kind of brand new things that you couldn't do before, because we now have a system where you can push a button and pay someone without any kind of prior trusting relationship? Yeah, I think it's not an exclusive, right? So if you look at the web, you know, things like YouTube and Facebook, for example, were undoable without the web. That was like totally new markets that were created social networking and so on. It couldn't have happened without the internet.

But then a lot of people today, even now, they use the internet to read newspapers and, you know, send the equivalent of, you know, electronic letters and basically doing the same things they were doing before, just faster and cheaper. So I don't think it's exclusive and focusing on, you know, I mean, I would love it if there was a sudden killer app that made everyone want to use Bitcoin that was totally new. That would be fantastic. And this is why I'm exploring some of these ideas with Lighthouse. But, you know, I would like to see as you both equally vigorously, almost, you know, hedging bets and we'll see what happens. Yeah, so especially for more expensive things like flight tickets, the credit card fees are often not hidden these days.

Whenever I book flight tickets inside Europe, you know, I see that there's an $1112 equivalent. card fee. And if I can avoid that, and in some cases you can avoid that with Bitcoin, and that's, you know, a significant saving. How do you feel about the, I mean, the use cases in the developing world seem like they might be more pronounced than in the developed world? I agree. I think if you look at the debate around Dempesa, for example, in Kenya, it's been hugely successful there. You know, mobile money in Kenya has been massively successful. And a lot of countries, and, you know, if you've got a financial conferences and so on, if they're not talking about Bitcoin, a lot of them in the past have been talking about M-Pays and saying,

why is this so successful? How can we replicate that? But that success has been replicated almost nowhere else. And one reason is that's kind of painful for a lot of Western financial types to admit is that M-Payser was partly successful because it sort of ignored all of the Western anti-money laundering requirements and so on. You can just have a SIM card and start sending money with M-Pazer. And you don't need to have a passport. you know, an electricity bill to prove where you live, which is out of reach for many people

in these countries. And so many of these people are saying, we want the benefits of M-Pesa's for poor people. We want to see these systems become widespread, but they're not actually quite willing to actually build a digital cash system in the vein of M-Pesa or Bitcoin. And so Bitcoin itself, you know, can sort of bypass their sort of, you know, they want everything at once in some of these cases. And Bitcoin can offer the same value proposition that M-Paza has to Kenya, but in every country where people want to use it. And I think that's tremendously powerful. Yeah, I mean, the number we think about a lot here is there's now approaching three billion people with smartphones. That will probably go to, you know, five or six billion. I mean,

there's now, you know, just reading an article about a $34 Android smartphone in India. Yeah. These things are getting down to the price points where there'll be, you know, almost every human on earth will have a smartphone. The vast majority do not have bank accounts. Yeah. So those people either need some way to participate in the economy or not. I think you and I would both think they should participate. And if the banking system's not going to figure out how to do it, we're going to try. Yeah, absolutely. And it's very difficult for the banking system to serve these people just due to structural reasons. The moment they want to trade across borders, systems like impays that don't even work either. So there's a real niche,

well, not even a niche, right? There's a real serious need for many people that Bitcoin can meet there. Yeah. Okay, great. I think we're out of time. Thanks, Mike. Thanks. Thank you.