Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Alex Wearn: Decentralized Capital and Government Currencies on Ethereum

Episode Date: October 17, 2016

A topic which is often discussed is the limited use of Ethereum applications without stable cryptocurrencies. Prediction markets are a prime example of this. When one makes a prediction using Ether, he or she is in fact entering into to speculations: one being the outcome of the actual prediction, the other being the price of Ether when the prediction resolves. Projects like Maker DAO try to solve the problem by developing complex systems to ensure that a blockchain token keeps its value in sync with fiat currencies. But Decentralized Capital is taking a different approach by issuing fiat-pegged tokens on Ethereum that are backed by bank deposits. CEO Alex Wearn joined us to explain their approach to providing a fundamental piece of Ethereum infrastructure. Topics covered in this episode: The problem Decentralized Capital is trying to solve What the architecture of Decentralized Capital looks like The relationship between Crypto Capital and Decentralized Capital Why the ability of freezing and confiscating assets is required Some of the best use cases for Decentralized Capital The regulatory environment of Decentralized Capital The Decentralized Capital business model Episode links: Decentralized Capital Website Decentralized Capital is Live article Introducing Decentralized Capital Video Decentralized Capital and Dapp Integration Compliant Decentralized Exchange IDEX Decentralized Capital's DVIP Memberships This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/153

Hey everyone. We're looking to hire a part-time communications manager to join the Epicenter team. You can get more information about that position at epicenter.tv slash apply. So if you're interested in learning more about that, if you think you have what it takes, go to that website and you'll find the job description and the instructions on how to apply for our communications manager position. Thanks. This is Epicenter, episode 153 with guest Alex Warren. This episode of Epicenter is brought you by Jack. Jacks is the user-friendly wallet that works across all your devices and handles both Bitcoin and Ether.

Go to JAWX.io and embrace the future of cryptocurrency wallets. Hi, welcome to Epicenter, the show which talks about the technologies, projects, and people driving decentralization and the global blockchain revolution. My name is Sebastian Gutsu. And my name is Brian Fabian Crane. We're here today with Alex Wern. Alex Wern is the CEO of Decentralized Capital, and he has a long experience of working with software. software, IBM, software management did an MBA, and then he started, well, he joined this company called decentralized capital.

So thanks much for joining us today, Alex. Thanks guys. Great to be here. Yeah, so this is a topic that we've talked about a few times in different ways. This is a sort of topic of having a fiat currencies on a blockchain, stable assets on a blockchain. And so I look forward to kind of revisiting that, especially in the context of Ethereum. also what was interesting about decentralized capital is that their Ethereum startup that's

very focused on being compliant and doing like K-Y-C and compliance with regulation, which is something that's kind of a new thing. I don't think we've seen that in any of the other Ethereum projects that we have on. So yeah, I look forward to talking about all of that. But maybe to get started, Alex, do you mind sharing how you got interested and involved in blockchain and Ethereum in the first place. Sure, yeah, thanks. So I guess it started in around 2011, 2012. Like many people saw this thing called Bitcoin come out and was just immediately curious.

As an economist, I was a little skeptical of the idea of a currency that isn't necessarily backed by a government or doesn't have kind of a guaranteed redemption, an entity kind of issuing and backing it. But certainly you can't argue that the technology is fascinating. the ability to create this distributed ledger that everyone can agree upon the balances without having a central authority to manage it. So in terms of kind of the genesis of decentralized capital, I actually have my brother, Phil, to thank for that.

So he was even more involved in the community early on. It was actually a co-founder of EtherEx, which was one of the very early Ethereum projects working on a decentralized exchange. So he was working on that for a little over a year. And during that time, I kind of realized that for, a decentralized exchange to be successful, you really need a way to represent fiat currency in that environment. If you want to create the most liquid pairs that exist on centralized exchanges, you really need to be able to represent dollars, euros, yuan, et cetera. And then when looking at

kind of the different options for doing so, we chose the route where it's collateralized by a bank deposit. So, you know, there's other kind of approaches to this stable coin problem. And decentralized capital has taken the approach where we accept deposits from customers, hold them in a bank account, and then issue back a token that represents them that can be traded anywhere on the Ethereum blockchain. So the core problem you're trying to solve really is that people want to use blockchain applications, Ethereum applications, but they don't want to be tied to a volatile currency. Exactly, yeah. So the real focus, I think, you know, kind of mentioned the idea of exchanges and decentralized exchanges and creating that crypto-fiat pair. It's not possible unless you have a token that actually represents fiat that's on the blockchain, just because it can't interact with a regular bank account, right? But then if you kind of take that use case and expand it further, then it's really well suited for all sorts of Ethereum applications, in particular ones where there's a smart contract that's holding assets for an extended period of time.

So the example that I like to talk to a lot is the idea of a prediction market. So there's currently some prediction markets that are live that are focused on the outcome of the U.S. presidential election. And some of these have been live for months now. And the wagers are currently denominated in ether. And you've basically, if you purchase one of these prediction tokens, you've basically entered into two speculations. One, the outcome of the presidential election, the other being the price of ether when this event resolves. And as you've seen, you know, certainly the recent price has been relatively stable. But if you happen to have purchased that asset, you know, the night before the Dow event,

then you would have lost 50% of its value and it had nothing to do with the actual event that you were speculating on. You know, the election itself may have not changed at all, but the value of your prediction token has changed dramatically. So just thinking through that, you know, that's a good use case for our assets, where if you have a token that represents dollars or euros, whatever kind of your local, traditional currency is, then you can engage in that prediction market without simultaneously speculating on the price of the particular cryptocurrency that you're using. Interesting. And yeah, that's definitely one big issue with prediction markets is that, as you mentioned,

you're betting against two speculative sort of events. and that's one of the hurdles, I guess, to making decentralized prediction markets enter sort of commonplace amongst speculators. Let's talk about the architecture of decentralized capital. We've had a few projects on before. I guess there's one that kind of comes to the mind, which tried to tackle this problem of pegging your cryptocurrency to a fiat. currency. That was a new coin. And I haven't followed that project very closely, but I think

right after we had them on, that whole system sort of fell apart and the peg was no longer maintained. Well, let's talk about then the architecture and how perhaps it's different from other markets or sorry, other stable coins that are based on this coin and share. combination. Sure. So you can, essentially there's kind of two sides to the business that we have. One is the Ethereum token side where we are creating and minting these assets that represent different government currencies.

So we have D-U-S-D, D-E-U-R, etc. That are tokens that can be freely traded on the Ethereum blockchain that represent the corresponding government currency. And then the question that it kind of raises is, how do we know that these tokens have value? In this case, we've taken, I guess, a bit of a more conceptually simple approach where the assets, the tokens are actually backed and collateralized by deposits in a traditional bank account. So we've partnered or we're working with a financial institution, crypto capital, that allows us to interface with and store customer funds at large multinational banks. So kind of the way it works is a customer who wants to gain some of our assets, to purchase some of our assets, would send, us funds either via a wire transfer to crypto capital or purchase via Bitcoin. Once we've received that,

in the case of Bitcoin, it's actually immediately sold on the open market into the currency that the customer is purchasing. So if you wanted to buy 100 DUSD, you would send us, I don't know the price today, but approximately 0.18 or something like that, Bitcoin, which would immediately be sold on the open market and turned into a $100 deposit that would be held at, by crypto capital at one of their banking partners. We then issue the corresponding asset, the DUSD, back to the customer. They're then free to use that at any of the Ethereum

applications that's coded to accept them. And in most cases, that means any Ethereum applications. So our tokens comply with what's known as the ERC 20 token standard, which is something that's been adopted by the community to ensure that these different applications and all of these different assets on the network are kind of interoperable. So some of the applications currently support them as default tokens.

And if it's not a default token, most applications have made it so that users can add them themselves just by using the contract address, the symbol, as well as the precision of the token, how many decimal places it has. So a few questions here. I guess we'll dissect this architecture and the different components and partners involved. The first one is you described this company crypto capital. So essentially from our discussions earlier, they provide a solution through which exchanges and companies working in the cryptocurrency space can basically just plug into their existing relationships with banks and allow for that interface with the traditional financial system. So if you're in exchange, for instance, you know, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, you, on the, on the open markets. On, on, on that side, uh, and given the fact that your company's called decentralized capital, at first instance, it's, it seems a bit, a bit misleading.

to say decentralized capital when in fact those funds and the fiat funds and the issuance of those funds are done by a centralized entity. Can you expand on that? Sure. So I mean the naming was just coincidental. We didn't mean to cause any confusion with decentralized capital and in crypto capital. But basically, yeah, as you described, they provide services to existing large exchanges such as Krakken, BitFinex, that do exactly what you just articulated. They help them bring in fiat currency into their ecosystem. So they help us with our KYC AML process, and then they also have the relationship with the banks that then store the funds of our customers. And we've been very transparent about this since day one. You know, we're a software service provider to crypto capital

customers and the assets that they hold. So we are experts at the Ethereum architecture, you know, creating these assets in such a way that they can be securely transferred on the Ethereum network. And then they are experts in finance. So they actually came out of it was a group of former bankers of, I guess currently still bankers, but they were receiving a lot of applications from different crypto companies and realized that there was kind of an opportunity for a business model here, where they could be the ones that hold the relationships with the banks and do the screening on the kind of the crypto company side and then help provide those services where,

where needed, really that fiat integration that you mentioned. And so then how does one know, well, like what's the trust model here? How does one know that those fiat reserves actually exist at crypto capital? Sure. Yeah. So we've instituted a proof of reserves process on our website, such that anyone, there's actually a page on our, on our site, decentralized capital.com slash reserves, where anyone can go and see in real time both the amount of assets on the blockchain.

So we link to the block explorer ether scan. We link to our contract there so anyone can see the number of assets in existence as well as the transactions that have occurred. And then there's also a link to a page on Crypto Capital's website that represents the API call for our account balances. So that you can see kind of in real time that our dollars, our euros are fully backed in terms of what we've issued and are currently floating around on the Ethereum blockchain. crypto capital itself is a licensed and regulated entity and we've also published or currently working to publish the report it's generated monthly that shows that they're in good standing that they kind of have the funds that they claim to have on their accounting and financial statements but so diving into this a little bit if you guys publish API response I presume I mean that's not something

I can verify that that it actually you know, you actually got this response, right? It's just some text you put on a website. Or is there any way for me to verify that? It's actually, sorry, if I misspoke, it's a URL on Crypto Capital's website. So we actually don't have any control or our impact on the server that's offering this information. So granted, you know, you are trusting that Crypto Capital is being honest in the information that they're providing. And that's where we try to take that level of transparency one deeper and provide kind of the reports

and information that shows that crypto capital is in good standing with the regulators that are responsible for making sure that they're operating in compliance with the financial regulations that apply to them. But do you think that model is scalable? Because right now you guys are sort of launching and you're like, okay, you know, that's good. That's fine. But, you know, assuming that Ethereum is going to actually become very successful, a lot of people start using that, having, you know, millions, tens of millions, what we've seen with cryptocurrency exchanges, you know, held by a single entity like crypto capital that seems to go, you know, not so well together with the whole trust model that's really at the heart of cryptocurrencies. So do you think there's going to be

better ways of managing that in the future? Sure. So crypto capital does have relationships with multiple different banks. So there is kind of a diffusion of the risk, you will, on their side, where they're actually not holding it with any one financial partner. They're held, you know, they have accounts at different large firms. So that kind of helps separate out some of the risk of default for those firms themselves. Additionally, we are also working to get other financial providers that would be performing a similar function as crypto capital, recognizing that, you know, we'd like to kind of diffuse that risk on our side as well by bringing on board as many entities who are interested in being kind of the custodians of these funds

that are backing up the assets that we're issuing on the blockchain. And, you know, we acknowledge that it's not going to be for everyone. You know, if your goal is true decentralization and not reliance on some third party that you have to trust, then, you know, we are not the stable coin solution. And that's where people are looking at things, you know, they're trying things, for example, new bits. And, you know, we do think that, you know, potentially some of those problems can be solved. But today, a lot of them are relying on kind of this over collateralization model, you know, locking up three times the collateral of a cryptocurrency in order to issue, you know, some sort of stable asset. So if you want $10 of USD, you have to lock up $30 worth of ether.

And we think that's just a very poor allocation of capital in that case. And that if you're, you know, willing to put your trust into, you know, these large banks that have been around for a while and have, you know, kind of these financial insurance systems, you know, these systems that are meant to insure and kind of make depositors whole in the event of any issue, then this is a better solution for providing that stable asset in the Ethereum network. I definitely agree. Like, I mean, what I was talking, what I was touching about earlier about the decentralized aspect doesn't necessarily mean that I don't think that this is an interesting model and that

it has the potential to very sort of easily allow people to onboard into Ethereum. Simply, I think that it's probably one of the things that you get a lot of, you may, if not already, get a lot of criticism for from some part of the crypto community for not being completely centralized. But I guess, as you said, this is something that is up to everyone to decide whether or not they want to use this type of service or something that's completely decentralized. I think for a lot of people that are interested in getting, you know, into using DAPS, that kind of thing.

This can be a great solution. Now, coming back to the issuing component, putting aside crypto capital, but coming back to your business and decentralized capital, can you talk about how those assets are issued? Yeah, so we've got kind of a multi-part contract system that serves as a kind of a system of checks and balances that helps ensure that there isn't much risk from our perspective in terms of the fact that we have the ability to, from a central place, you know, from ourselves, be able to kind of issue and send out these assets to customers.

So really there's kind of four different key contract pieces. So there's the name reg contract, which basically points people. It's a consistent contract address that people can use to interact with our assets and points to the back-end contracts, as we call them, which allows us to do updates to functionality without having individuals have to migrate or kind of move and know a new Ethereum address. Additionally, we've got the back-end contract that's got a couple different pieces. So there's the minting piece.

So this is, and I should first add that all of these contracts and all this functionality is controlled via a multi-signature approach. So no one individual in the company has the ability to issue or generate these commands. You know, we are in separate locations, and these keys are all stored offline on USB, such that when we issue these commands, we actually send them to a separate Ethereum node that's online to have them broadcast to the network. So that's one way that we kind of diffuse the risk of this approach of generating assets. Additionally, we have kind of the control, the powers, if you will, separated into different key sets, different key stores. So one of them are the minting contracts,

so the minting keys, which allow us to issue and create new assets. So in that example earlier, if you want to buy 100 DUSD, we would use our minting keys to actually bring that DUSD into existence. And it's only done after we've received the deposit from the customer in order to ensure that the assets on the blockchain are always less than the amount that we have in reserves. Once generated, they actually are deposited only into one wallet, which we term the hot wallet. The hot wallet then has a separate set of keys that we use to then send the assets out to the customer. However, that can only be done after a third set of keys. approves the amount to be transferred from the hot wallet. Those keys are kind of looking at the crypto capital API as well as our website to understand, you know, was this deposit real? You know,

was this, should we actually approve this amount of assets to be sent to the customer? So you can see that kind of, you know, we have these different layers of control such that, you know, we don't expect anything to happen because, like I said, we're storing the keys offline and signing transactions offline, but should any of that to be compromised, we've got these different gates, if you will, that kind of ensure that there's the damage that these assets wouldn't actually be out, released out into the wild. Because, of course, the kind of nightmare scenario here would be that somebody hacks you guys and then issues a million DUSD while there's only Fiat reserves for a thousand.

Exactly. Yeah. Yeah. And we've kind of explored a couple different. approaches to this, right? We've also got, I mentioned that idea of an oversight system that approves the amount that's being sent out from the hot wallet. We've also thought of a system that could essentially, you know, hold a key and if it sees, you know, a certain amount being created, that's just out of the ordinary, you know, it locks everything down just while we have an

opportunity to investigate. You know, so that could be used to, you know, we're probably touch on this a little later, but, you know, we're performing kind of analytics on where our assets are being used and kind of where we see them moving on the blockchain. And that's something else that we could have kind of a machine learning approach if it sees something that's out of the ordinary and indicative of a security issue could actually lock down the network while we have an opportunity to investigate. So, you know, we're open to suggestions from others in the community, but this is kind of the system that we've architected. And I should mention that our contracts are open source and are available on GitHub. If anyone else wants to take a look and see kind of the approach that we've

taken to security here. Let's take a short break to talk about Jacks. Jacks is a multi-coin wallet created by the people at the Central. Now in the past, if he had a whole bunch of cryptocurrencies, it was a pain to handle them. You either had to leave them on an exchange, which was insecure, or you had to have all these different wallets, which was a hassle. Fortunately, now with Jacks, those medieval days of darkness, misery, and suffering are over. Jack supports multiple cryptocurrencies and new ones are being added.

But it's not just storing cryptocurrencies you can do with Jax, but you can also exchange them directly from within side the wallet thanks to their ShapeShift integration. And since there's only one seed, Jax makes it super easy to back up and sync to the other devices. Jax works with Windows, MacOS, Linux, Android, iOS, and has browser extensions for Firefox and Chrome. So go to Jax.io, that's J-A-W-X-I-I-I-O to download the wallet and get started today. Mike Jacks for the support of Epicenter.

One of the interesting things about that aspect, too, like how you're managing security is that you have the ability to freeze assets and to confiscate assets, which probably takes off a lot of people when they hear that, right? Sort of blockchain and the ability to freeze and confiscate assets. So can you explain, first of all, how does this work technically, and what's the thinking behind this? Sure. So technically we have different sets of keys that can issue commands that freeze the assets from moving anywhere on the network.

That can be either a specific target where we target a specific wallet, specific address that's holding our assets. It can also be a network-wide freeze. And then on top of that, once the assets are frozen, we have the ability to take back those assets and bring them back into our possession. And really, the reason that we have that is a legal and regulatory one. There's just certain things that, you know, we could not allow our assets to be used for, given that, you know, we are integrated with a traditional banking system. And these assets represent, they're kind of like a bearer asset on these underlying deposits. So, for example, if our assets were popping up on, you know, the often used example of an assassination market or some other sort of dark net market, we can't just turn a blind eye to law enforcement if they come to us and say, hey, we need your help, tracking. down these individuals. We need your help, you know, getting your funds back from, back from these

criminals. There's a full list of use cases on our website that are prohibited. But in general, it's just, you know, don't break the law. It's pretty extreme things, you know, bribery, corruption, you know, extortion, drug trafficking, all that sort of stuff. And basically, our goal there is, you know, we're not going to use these unless it's kind of, you know, legally necessary. You know, we're certainly not trying to prevent users from using our assets, and it's not in our best interest to do so, right? So this is only in the event that it's truly necessary, and it's kind of, like I said,

it's a requirement so that we can operate legally and within the confines of all the existing regulation. So are you taking then a sort of proactive approach by whitelisting services that your assets can integrate with, or is this an approach where you would address, issues, you know, and it frees accounts if, you know, someone were to report your assets being used on, say, the assassination market, as you mentioned. Yeah, so at the moment our assets can move anywhere to any address. So we're taking the blacklist approach, as you mentioned. So I talked a

little earlier, you know, we're building an internal analytics tool that will allow us to see, you know, different contracts, different places that our assets are moving. So pretty quickly, we'll get an understanding of what these different applications are, if they're getting any sort of volume with our assets, anything such as like a dark net market, you know, if that pops up on Ethereum, we're going to blacklist that immediately, just because that's something that we can't support and we have no interest in supporting. And the expectation is that, you know, if you're a customer trying to use something on that site, there are plenty of truly decentralized currencies that, you know, that you can use in that case. So we expect that, you know, this ability to,

enforce these rules will also help to act as a deterrent just because if we, you know, it's a risk that if, you know, if we catch someone doing this, you know, we will absolutely freeze and confiscate those assets if they're being used for legal purposes. That puts you in a really delicate position, I imagine, because for one, you know, if you look at dark net markets, for instance, in certain places, it's very legal and possible to say buy magic mushrooms on the internet in others, it wouldn't be. Or, you know, if we talk about things like donations to certain political parties, some places might see that as a problem, others may not. How are you going to arbitrate that kind of very delicate decision on whether or not assets should be frozen or not?

Yeah, so we admit that this is kind of a learning process, right? This is something that, you know, is kind of unprecedented and that we're figuring out as we go. For something like a dark net market, if it pops up, it's going to be blacklisted. We understand that there could be purchases on there that are legal in some specific jurisdiction. But basically, we have to follow the laws of the UK where we are incorporated. And in that case, most things being most transactions on a darknet market, we are unable to support. And so the easiest approach is for us to just blacklist those altogether. other. The goal being that, you know, we think the majority of Ethereum kind of commerce is going to be

perfectly legitimate, perfectly legal businesses where people want an alternative to something like Ether, where they want access to the currency that they use in their everyday life. And really, that's the business that we're focused on, right, is being that payment processor, that representation of fiat on the Ethereum blockchain for all the awesome, amazing, you know, legal apps and applications that are coming up. What about peer-to-peer transfer? Are you also restricting those in some ways? Or are you, for example, restricting the amount that a person can get of a certain asset?

Yeah, so we're going to institute kind of low-level KIC requirements for purchasing the assets, which, you know, if you are not verified, kind of limits the amount that you can purchase at any one time. in terms of transactions once they're issued and on the network, there's actually been some precedents from FinCN in terms of guidance that once the assets are created, they can move freely to third parties without having to do additional KYC AML. So in that case, once we know who the customer is, who's buying the assets, we issue them to them, and then they're freely tradable on the Ethereum network

to any other peer, any other wallet. We acknowledge that if we're successful, that could potentially change just because our assets are designed to represent legal tender. And if it gets to some point where our assets are, you know, something that can be used to make a lot of real-world purchases, it's certainly possible that we now have more regulation that's required in terms of understanding where our assets are moving. But kind of the precedent so far has been that the regulators want to know when money is moving in and out of the system, but that the movement of the virtual currency itself can be done with. without knowing who the individual is.

So similar to how a Bitcoin wallet provider isn't subject, doesn't have to do KYC, AML on their customer. And if you think about what they're trying to prevent in terms of money laundering, it makes sense. Their goal is to prevent people from getting ill-gotten cash, cash from criminal activity into the traditional banking system so that it can be used to purchase houses, cars,

education, fund traditional assets. And so far, virtual currencies haven't really gain that level of adoption such that they can be used to make those purchases. So instead they've taken, which I think is a pretty prudent approach of regulating the entry and exit points, really those gateways where you're converting from fiat currency into crypto or crypto back into fiat. Okay, very interesting. So we've been doing this podcast for quite a while now.

And it reminds me a lot listening to you speak to a lot of the conversations that we had, you know, two years ago where Bitcoin payment processors were grappling with a lot of the same issues. And I think for Ethereum, this is a new thing. So I'm curious, what have your conversations been like? Have you spoken with a lot of regulators? Is this a topic that comes up a lot? And what's the response been? Yeah, absolutely. So I think, you know, I mentioned earlier our decision to incorporate in the UK. A lot of that came from their approach to regulating this activity. I think those, regulator wants to be the guy that killed innovation and blockchain in their country, right? The guy that said the internet will never amount to anything and is, you know, looking back later

on and realizing that he made, you know, he or she made a mistake. So a lot of them are taking what is very kind of a prudent approach of, you know, kind of do no harm, but make sure that they can still operate within the existing legal and regulatory structure that has been created for all of the other products and services that exist today. So that's really been a lot of what the UK focus has been. And their approach can kind of boil down simply to do KYC AML on your customers, you know, when they're getting money in and out of the system. And, you know, and you'll be fine.

And I think this kind of a prudent approach, right? They don't want to kill the innovation. And they're kind of letting it grow and kind of see, you know, see where it, see where it all goes. Certainly we expect that if this ecosystem develops like we hope it to, that regulatory approaches may change. Like I said, we're currently, our DC assets are currently considered a virtual currency. But it's very possible that because they represent a claim on cash deposits on legal tender, that should we be very successful, they actually get reclassified themselves

because they essentially become fungible for the cash in your pocket. But we think if that happens, that's a great problem for us to have because it means we've been enormously successful. You also mentioned the monitoring transaction thing. In Bitcoin as well, we've done some episodes about that. For example, we had chain analysis on once that's doing that kind of thing. Are those companies already offering this for Ethereum? Is this something that is coming up?

Or you mentioned you were doing some of that stuff internally? What's the status with that? Yeah, so that's something we are pretty much just starting to explore. So there's some block explorers out there, Ether scan. There was actually one that was just released yesterday. I think it's like, I forget the name of it, but it just popped up yesterday. That's trying to give some more sophisticated kind of offerings in terms of, you know, monitoring blockchain transactions and really taking it the next level and using it to gain insights.

In our case, we'll be interested in, you know, where are our assets moving, who are the large customers, what are the large applications, you know, the largest use cases that will help us, one, kind of tailor our product. You know, we can figure out where are these assets. really popular? Are there other services or things that we can be providing that will make them more useful to our customers? And two, just help us from, you know, potentially from a regulatory perspective, make sure that we're, you know, in compliance in terms of where the assets are being used and where they're moving about to ensure that we're compliant with all existing laws.

Are you guys also thinking of developing some front-end, some wallet-type things for managing this? We've thought about it. It's further down our product. roadmap just because there's some great tools already out there and they all interact or comply with the Ethereum token standard which means that individuals who purchase our assets can easily add them to those wallets and manage them through those existing infrastructures so when I gave my my presentation a demo day I actually used my ether wallet as an example so we had the my ether wallet interface up showing a balance of zero DUSD went over

to our website to make a purchase and then came back a minute later and the balance had updated to show that the assets had been sent. So it's something that's kind of on our radar, but at the moment we don't think it's a high priority given that there's a lot of other products in the ecosystem tackling that issue. And really that's a large part of why we're on Ethereum is this whole piece, this whole idea of integration and synergy where the more applications, the more products that pop up on the network, the more valuable our product becomes. You know, the more places they can be used, the more valuable it is that we're providing this stable asset for the ecosystem.

Today's magic word is capital, C-A-P-I-T-A-L. Head over to less-stock Bitcoin.com to sign in, enter the magic word, and claim you're a part of the listener award. So what has the reception been? You mentioned that you showed off at demo day. What have you had so far as far as reception from the community? Yeah, so far it's been awesome. I think there were some comments from some of the judges. Vatala concluded just pointing out that this is a core functionality that other applications

and other pieces of the ecosystem can really build and rely upon. The idea that if Ethereum's ever going to go beyond kind of the early adopters, those who are willing to accept the volatility of cryptocurrency, you're going to need to incorporate a payment method or a way to represent value that corresponds with the currency that everyone is familiar with. And we think our model is the best way to do it. It makes sense to most users. You know, I give them my regular dollars and they give me these digital dollars, you know, these digital poker chips that can be used anywhere on the Ethereum network. Additionally, we've talked with, you know, quite a few VCs or other DAP creators. And again,

the reception has been great that they see kind of the purpose. promise of the product or they see a big use case, you know, with getting getting our assets integrated with their system. We talked about the prediction market use case before, and I think people are very familiar with that. And it makes it kind of obvious that, yes, if this takes off, stable coins are absolutely required. But you mentioned some other interesting use cases on your website.

One of them was a Fiat nominated crowd sales. How would that work? Yeah, so you could either do two approaches. one would be the individual has to use our assets to buy into the crowd sale, in which case during the duration of the crowd sale, you're protected from any exchange rate volatility. Because instead of accepting ether or Bitcoin for crowd sale purchases, you're actually accepting the fiat asset that the crowd sales are usually denominated in. You know, most of the recent crowd sales, singularity and first blood come to mind. Their crowd sale goals weren't a specific number of ether or a specific number of Bitcoin. It was a specific number of dollars. And if that's your end goal to raise that amount of dollars, you know, why not just start with the currency that you want to hold in the end? That does come with some concerns of potentially you're cutting off, you know, some individuals from the market who may want to invest in ether. So the other possibility is just that you have a smart contract that immediately converts that ether into the DC assets. So that could be done kind of in real time such that as soon as you take a donation in ether, it's converted into the DC assets to kind of protect.

the fundraiser from cryptocurrency volatility through the duration of the crowd sale event. It also applies for these situations where the company is not accessing the funds for a period of time. One good example is actually the Ethereum Foundation where they raised their offering in Bitcoin or largely in Bitcoin. Then the price moved against them early on and actually was a large reduction in the amount of funds available for development. And that's an example where, you know, had they been denominated in a fiat currency, you know, they wouldn't have been subject to that exchange rate volatility. And we think that, you know, certainly it's kind of been the norm so far in the crypto community

to just accept that as a cost of doing business. But if this stuff is really to take off and go mainstream, you know, it's really hard to manage a business if your revenue or your cash balance, you know, is in a very volatile currency. And in that case, we think that, you know, giving people the ability to match their revenue, their capital with their expenses and their operating expenses, that's going to be a huge benefit to seeing businesses kind of adapt this type of network. So talking about crowd sale, Alex, before we talked a bit about application, you know,

you having a list of use cases that you don't support. Now, crowd sales are, you know, are they legal? Are they legal? Probably depends, but often they probably are illegal. So is that something you would also look at or would you look at each crowd sale on their own and say, okay, that's something where one can use decentralized capital for and that's something where you can't use it for? How would you treat that? Yeah, so that's actually something that we are currently discussing with the counselor.

Actually, it's kind of on the agenda, if you will, for the next call. Because it's something we don't know the perfect answer to right now. because, you know, we definitely think that a lot of these ICOs are illegal security offerings, and in that case, it could be, you know, putting us at risk if we are the capital that's being used in this case to invest in these companies. But, you know, one could potentially argue that, well, you know, they're just acting as a payment processor, and then it's up to the ICO to be responsible for complying, you know, with the regulation that applies to the crowd sale that they're offering. So we actually aren't sure on what the answer will be. But,

certainly, you know, if it's a legal crowd sale offering that's kind of, you know, consulting with, there's this firm MME out of Switzerland that's been doing a lot of the structuring of the crowd sale approach to make sure that the tokens that are issued have some sort of participation element that ensures they don't get classified as a security. In that case, we'd absolutely be interested in working with those companies and, you know, being another way of raising capital for them. Okay. Another use case you mentioned there. was on-chain cash management and sort of using it as an accounting system on Ethereum, can you expand a little bit on what that exactly is?

Sure, yeah. So the idea here is that, you know, our assets could be the representation of your cash account balance for your business. So a lot of these, you know, kind of promised applications for Ethereum are all about improving operational efficiency, reducing costs when there's kind of a strict agreement in place between two parties. So you could imagine some system where in the future a company that has built themselves as an Ethereum blockchain-based company could actually be holding their cash balances on

the Ethereum blockchain using our assets. They could be accepting payments from customers in our assets, be paying suppliers, employees, other operational costs using our assets, all through an accounting system that's using Ethereum smart contracts to kind of manage that flow of funds. So that could be something that makes kind of an operational efficiency improvement on existing accounting systems, in which case our assets are not just a representation in a ledge or in a balance sheet, but they're actually the assets that the actual kind of value themselves that's kind of moving around between these different parties. And that can obviously reduce costs because you don't have to then settle up on the banking side,

kind of, you know, making sure that these transactions have gone through, because when they're moved within the accounting system, the value itself is actually, moved with it. Yeah, so that's kind of talking about the quite a little bit further future where you have entire organizations on a blockchain or on Ethereum that all the funds are on Ethereum, the kind of governance structure as well with people signing off on payments and all of that kind of stuff. Yeah, exactly right. And we're not sure if it will get there, right? You know, that's obviously the project is still in its infancy. And, you know, but there's tons of development going and that's certainly the kind of the grand vision for a lot of people in the ecosystem.

And, you know, we think that in that case, it absolutely makes sense as a great use case to actually represent the value within one of these accounting systems. So we actually talked with some of the guys at Consensus that are working on balance, the triple entry accounting system. And they were interested in using our assets for some of their prototype stuff and representing it as the cash balance that actually moves around and is used for payment of other assets within the system. So taking a step back and looking at, say, the broader ecosystem, perhaps in some medium or longer term, where we have various blockchains,

Ethereum and perhaps some permission blockchain networks, whether those bees have closed or very closed networks or consortium-type networks, there could be tremendous potential for a fiat-denominated cryptocurrency in such an ecosystem. And, you know, potentially, you know, we may see other stable cryptocurrencies emerge that could potentially be competition to the one, the assets that you're proposing. Can you talk about how, you know, how you see that ecosystem playing out? You know, one question that comes to mind is, could we have fungibility between, say, decentralized capital assets and assets issued by another company that has a similar model to yours and also how would these assets interact with say permission blockchains for instance yeah sure so that's definitely something that we think about you know kind of like you said the long-term vision for all these different

chains with different functionality or kind of different actors that are that are operating on them so to the interoperability with with private chains that's absolutely something that you know we kind to have on our radar. The idea we actually talked with Dominic Williams of DFINITY or of String Labs who's working on DFINITY. And they mentioned they're working on kind of essentially private chain systems that would allow large corporations to bring some of their operations into this blockchain environment. But they have a lot of requirements. The biggest one being kind of privacy, you know, the need to close this system off to outside actors for a lot of various reasons. But there could be a reason then that they want to transfer value from one entity,

another from one private chain to another. And that could be a situation where our assets would be a good use case of transferring that value from one private chain to another via the public Ethereum blockchain. But we see that as kind of a longer or just further off in the future in terms of the market that we're tackling. You know, today we're really focused on solving that use case for Ethereum applications. So you need a payment processor, you need a representation of fiat currency in a lot of these these apps that are coming online, and that's really our focus in what we're trying to serve.

We think there's a lot of synergies there that I mentioned earlier, right? So as all these things come on and they're all interoperable, there's more value to the entire ecosystem. And we think that actually could get companies in the future to actually want to operate or interact with the public chain as they see kind of this value coming from the ecosystem. To the fungibility piece, that's going to be fascinating to me as an economist. I think, you know, some of these other products may have, you know, restrictions on where they can be used or they may be focused on different use cases, serving a different customer set. We fully expect that all these assets will eventually be traded on exchanges and that you'll actually have a market where you can see what kind of the crowd or what investors think is the value of each of these assets.

You know, we think they'll trade close to parity, but it's definitely something that we're interested in seeing. And we've actually heard from, I don't remember who I was speaking to, but they, They said that in the past, they've actually seen some of these stable assets actually trade above par, above $1 in this case, because of the value that it provides to the ecosystem, where people are essentially willing to take a little bit of a hit coming from a cryptocurrency into these stable assets because it is a stable choice or a stable representation relative to the cryptocurrency they were coming from. So that's certainly something that we're excited at looking at in terms of all the data that's going to be created from this more transatlanticity. parent kind of pricing approach. Now, you were at DefCon recently. You made a demo there. One of the news that came out of DefCon was that,

and this is something that really puzzled me because I was like, really, was that Santander is doing something with also putting Fiat currency on the Ethereum blockchain. Can you share what the news was there, what they are doing, and how that compares with decentralized capital? Sure. So yeah, like you, we were kind of surprised that a bank was taking this step this early on to interact with the public blockchain. We actually had a chance to sit down with John Whelan, the head of innovation at Santander, who's spearheading that project and talk with him in more detail about kind of what their goals are. And really coming out of that was just a confirmation that there's absolutely room for both of us to exist and thrive.

They're focused on entirely different use cases, mainly that of their existing corporate clients. clients. So what they gave in their demonstration was the use of micro payments. So they showed an example where, you know, one of their media clients would, instead of using advertising or have a subscription-based paywall, they'd have a, you know, donate here type thing where, you know, if you read the article and you like it, you can give the guy five cents or whatever. Kind of a different approach to monetizing content for some of their existing, you know, media corporate, corporate customers. with that they expect there's probably going to be kind of restrictions in terms of deposit limits, you know, the amount that anyone address can hold because it's really focused on supporting

that microtransaction use case. So in that case, you know, we think there's still plenty of room for us to be successful focusing on exclusively on the Ethereum applications and the products that are, you know, being built on the network that need to represent potentially large stores of value of fiat currency. Yeah, I mean, to be honest, it seems like what you guys are doing makes a lot more sense to me than that idea. Because, I mean, micropayments has been enough of a challenge for Bitcoin. And then if you have Ethereum, I mean, the adoption and usage for payments is zero at this point. So that seems like a somewhat strange use case to pursue to me.

Yeah, I think it just goes back to who are your customers, you know, who's paying the bills. And as an existing bank, a lot of their revenue comes from their big corporate clients. So they're looking at solving the needs of those customers. And how can they use this technology to serve them? We are really focused on serving the needs of DAPs in the Ethereum community, which kind of manifests itself in those two different go-to-market strategies. Okay, so we've learned quite a lot about your system. So what's a business model here?

How are you guys going to make money? So we monetize both on the in and out. So when a customer purchases our assets via wire transfer or when they redeem our assets for kind of the underlying cash deposit, we charge a 0.2% transaction fee. If customers are coming in via Bitcoin, we actually do not charge any additional fees on top of what's charged by kind of the, you can call them the payment processor, Coinipult. So just to touch on them very briefly, Coimipult helps protect us from exchange. all its exchange rate volatility in Bitcoin prices. So if a customer wants to purchase via Bitcoin, they get a quote from Coinipult that basically says, send this amount of Bitcoin within the next 10 minutes. And as long as we receive it within that time period, you're guaranteed this

exchange rate for your Bitcoin. So that allows us to protect ourselves from any price volatility, any slippage there. We know that what we get from the customer will be turned into an exact amount of fiat currency in our bank account. And Coinipult charges a point. percent transaction fee for that. So the majority of our revenue is going to come from the on-chain transaction fees. So sending assets anywhere peer-to-peer to applications, all of that is free. We don't want to discourage our assets being sent around to either other potential customers or being sent to applications for use. Where we charge is on the withdrawal side. So if you've been using our assets to engage in a prediction market on augur or nosis,

and then you're the lucky winner of the prediction, you will need to then withdraw your assets, the DC assets, back to your wallet. And that's when we charge a transaction fee. It's a 0.3% transaction fee to get them out of the application. Similarly, if you have a business that operates on the network and you want your customers to pay in dollars and euros, when you withdraw those assets back to your account, that's when you get hit with the transaction fee.

The idea there being that, you know, there are alternative currencies to use in those applications, but they come with price volatility. And if you want to benefit from the price stability that we offer, that's really where we're providing value to the ecosystem. And hence, that's where we take a very small transaction fee. Okay, no, that makes sense. That's a nice, simple business model.

Now, I also read in one of you posts, where you wrote a little bit about funding, you know, the approach to funding. I know you said some things, some skeptical things about crowds, sales, it's understandable with the focus you guys are having in being regulatory, you know, compliant. So, so what's your approach there?

I take it. You aren't pursuing this sort of traditional crowd sale approach that's very popular at the moment. How do you see this going forward? Yeah, so I should just add, we love the enthusiasm. We love the fact that people in, you know, people who hold ether or Bitcoin want to see other opportunities to fund and help make the ecosystem grow. I think that's going to be one of the keys to making this thing a success, that people are kind of willing to reinvest profits from previous successful ventures and help this whole thing grow and really build on the network effect component that can be so valuable here. Having said that, we are a little concerned, especially because of how much regulatory stuff applies to our business, about the legality of some of these approaches.

So we are in the future looking to hold a traditional equity crowd sale. So that would be held through, you know, one of the crowdfunding, the equity crowdfunding portals that exist, likely something through the UK, given our incorporation there. And it would give an opportunity for both VCs as well as people in the community to invest in our business and actually gain equity in the company. So I wrote a blog post on this, but really we think that equity is not only kind of better for the business, because if you do the security sale properly, you don't have any risk of a regulatory issues, but it's also better for the investor because you then gain and kind of have an opportunity

to participate and benefit from the success of the company, regardless of what form that comes in. So if they change their revenue model, or if they add a new product or service that ends up being the one that's successful, maybe they have to pivot, or potentially they exit via acquisition. Those are situations where an ICO investor might not benefit and might be kind of left with tokens that are no longer valuable. And that's where we think that traditional equity is better for both the business and for the investor. We also see the ICO model adapting to that in the future. And we fully expect that the regulation piece will be kind of hammered out such that these ICOs can be performed in a compliant way

and actually represent a claim on the business itself such that the investors benefit from success, regardless of what form that comes in. So then just to pivot from there, so we are taking, we do want to, to have a way for customers to kind of have an opportunity to participate with our products. So we're offering a membership sale. So we're calling it the DVIP token. And it allows, it's a $300 token that customers can purchase and it gives them free transactions, free withdrawals for the next three years.

So through the end of 2019. That applies to any transaction that's being done on the network. So any of these withdrawals from these applications, we would traditionally charge a transaction fee. If you are possessing a DVIP token, that transaction fee will be waived. And there's a couple of reasons that we wanted to take this approach. One, having built our system, you know, this membership sale is entirely legal. It's a way to essentially package our product and sell it differently. Rather than the a la carte purchase method of individual transactions and the fee associated with it,

you can pay an upfront fee that will give you unlimited use of the DC assets for a period of time. It helps us bring forward revenue, so we can then take some of that revenue and start building out the rest of the business. One of the key pieces there being liquidity. So one of the problems that businesses like ours have is there's a big network effect component where the more people who use it and the more ubiquitous it is, the more valuable it is to the individuals who want to participate. But it's really hard to start that network. No one wants to be the first guy to the party, the first one to try to use these assets when there isn't much available in terms of kind of use cases. So using those funds, we plan to do some market making on existing exchanges where we'll make our assets available for sale,

which will help kind of spread them out into the ecosystem so that they're more widely available and then can be used on these different applications. And then third is it kind of gives customers, you know, now that they've, if they are a member of DC, they then have a vested interest in using our assets and helping the network grow. So then we have kind of a market of customers, you know, who've kind of committed, if you will, to kind of use our assets and help us grow the network. So that combined with the funding for liquidity, we think will really help us kind of jumpstart the capacity as well as the functionality of the, DC assets.

Yeah, perfect. And the point you made was, I think, a very good one, and that's a risk. People aren't fully appreciating when they're participating in these ICOs today, right? That you're buying an asset and it's underlying a certain model of making money. And of course, if you look at startups, how often change those models and approaches and down the line, you know, it goes in different directions. And then these can really, I mean, either the businesses sort of lacks flexibility because they have to stick with this initial token model or then period away and then one is sort of left with

nothing. I think that's a very dangerous thing, especially when you have, I think also business where you have both, you have an incorporated company with equity that where the tokens may be part of the business model and then they almost have an incentive as well potentially to cut out the token holders. So I think that was a very important point you made. And I think that's probably a topic that we might unfortunately have to revisit more down the line, especially as these projects mature. Now, you also mentioned to us a new project that you guys are launching, and that I think is still sort of in its very early stages called Idex, a decentralized exchange. What is Idex, and how does it relate to the decentralized assets that you guys are issuing?

Sure. So as I kind of mentioned early on in the interview, the idea for DC came out of a situation when my brother was working on a decentralized exchange. We expected that by this point, you know, if these exchanges would be kind of more fully fleshed out and there would be more offerings. But, you know, we think that it's a great complementary product to the DC assets. You know, having talked about earlier, you know, how do people get these assets if they don't want to do a wire transfer? while a decentralized exchange or an exchange operating on Ethereum is a great place to do so. And really, we think that, you know, as the number of assets on Ethereum grow, as these other ICOs are held, you know, as our assets start to get more liquidity, really having a place to exchange them is going to be critical. So we're focused on using the power of the Ethereum

network, the smart contract system, to create an exchange that's more secure than existing exchanges that allows people to swap assets with one another without having kind of the the risk that exists with existing centralized exchanges. So really trying to beef up the security side of exchanges while maintaining kind of the speed and you know kind of the functionality and attributes that people are familiar with today. Kind of the timeline on that. So we're done with the smart contract development. We've got most of the front end complete and we're really now in the process of kind of integrating and hooking up those two separate pieces. So we hope to be live within probably the next month, month and a half. And it's worth mentioning that. So, you know, this is obviously a project

that's still in the works, but our intention, you know, should this product make it to market, which we fully expect it will, is that DVIP will also be eligible for free trades on our our exchange. And really that goes back to the thing I mentioned earlier, where it's a way to jumpstart liquidity in the assets. It's also a way to jump start a user base. So if we have a bunch of people that can now jump on our exchange and get a more affordable way of trading these assets, we think it'll really do wonders to kind of jumpstart the network and the depth of the order books. Great. Well, thanks so much for coming on and sharing all of this about decentralized capital. Now, if people are curious, they want to learn more, they want to get involved, where should people go?

Yeah, so come to our website, www.com. You can join our Slack. There's a link at the bottom of the website, tweeted us on Twitter, or, of course, we're often in the subreddits. You Decentralized Capital, or myself, Alex Wern, and my brother, Phil Wern. So if you hang around the Ethereum subredits at all, you'll probably see us comment every once in a while. So feel free to interact with us in any of it. of those social platforms. And with that, we are at the end of our episodes.

So Epicenter is part of the Let's Sorkupicon Network. You can find this show and many others at Let's SopiCorps.com. And well, that's it from us for this week, and we look forward to being back next week.