Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - David A. Johnston: DApps Fund, DApps Whitepaper & Best Practices, MSC Protocol Foundation

Episode Date: November 3, 2014

David A. Johnston is a very active member of the Bitcoin community. Aside from speaking at about every Bitcoin conference there is, David is the Managing Director of the DApps Fund, a board member MSC Protocol Foundation, as well as Co-founder and Executive Director of the BitAngels Network. On this episode we go deep in to decentralized applications, and who better to talk to about DApps than the creator of “Johnston’s Law” which states “Everything that can be decentralized, will be decentralized”. We talked to David about the recent whitepaper he co-wrote titled “The General Theory of Decentralized Applications, DApps” which defines the different types of DApps and a number of best practices with regards to funding, token distribution, business models, etc. We also discussed the DApps Fund, BitAngels Network and the Master Protocol, and his involvement with those projects. Episode links: DApps Whitepaper "Decentralized Applications - the future of Bitcoin and virtual currencies?" - CoinSummit San Francisco 2014 Crowdsale Best Practices Paper DApps Fund BitAngels Network Mastercoin Foundation This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/051

Hello, welcome to Epicenter Bitcoin. The show which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sybisankwrychir. And my name is Brian Prowin. Our guest today is David Johnson. David Johnson is sort of one of the most active guys, I guess, in the Bitcoin community. He's doing all kinds of things.

So he's a board member of the MasterC, or MSC Protocol Foundation. He's also the managing director of the DAPS fund number one. that's a sort of fund that invests in decentralized applications. I think it was probably the first one, but David will be able to give some background on that. He's also the co-founder and executive director of the Bit Angels Network, which is an angel network, so a network of early stage investors who invest in Bitcoin companies and decentralized blockchain technologies. And he's also speaking at pretty much every Bitcoin conference that's taking place anyway. where in the world, which somehow he manages to do it all the same time.

So, yeah, it's great to have you on, David. It's good to be here. Appreciate you guys having me on today to talk about decentralization. Hey, it's in the title of our show. We had to have you on at some point. That's right. So perhaps to get started, do you want to give us a bit of a background about yourself and perhaps how you got involved in Bitcoin originally?

Sure. So I was a serial entrepreneur for the last 14 years, building mostly software and technology companies, but also a few in biotech. And I found out about Bitcoin in 2012 through a programming friend of mine. And I had already become a voluntarist and a libertarian by my political beliefs. And when I found out there was a non-governmental currency. that couldn't be inflated by politicians, I was like, okay, I would like to change all my fiat dollars for Bitcoins.

And so it was still pretty rough in 2012. It wasn't easy to change over fiat to Bitcoin. Certainly not as easy it is today. And so it took me four months to actually change over all of my fiat. So you went all the way in 2012. Yeah. That worked out pretty well. No inflation. I know the dollar is going to lose value every year, and I figured non-inflationary currency could do better than that.

So, yeah, it was, and it really exemplified the pain points in the whole legacy financial system for me, because every time I tried to move money, I would hit these restrictions. Like, this is the maximum amount you're able to wire today, and this is the maximum amount you can send through MoneyGram, and this is, you know, oh, you did two transactions. of the same amount through Moneygram flagged, all that money just disappeared. There's no repeal process. It's probably fraudulent, so they disappears into the ether, right? I mean, it was like I was up until midnight some days, you know, withdrawing the maximum amount I could from the bank, or I found myself constantly waiting for some transaction to clear within the banking system.

Like, really? It's going to take five days for the money to move and then five more days for it to clear. it was extremely frustrating, but that whole experience just encouraged me more and more. It's like, man, I got to get out of this old system as fast as I can because it's obviously broken at its very core. So, yeah, it took me about four months, but I was able to convert all of my fiat over into Bitcoin. It was also frustrating because the price was starting to move at the time too, right? Because it was going from 10 to 20 to 30, and I was like, come on, it's got to be a faster way.

I can convert these funds into Bitcoin. But no, I mean, I found out about it. I looked at it mostly originally for economic reasons, but obviously I started to nerd out on all of the back-end technology, the blockchain, really wrapping my mind around, all of the things that the blockchain would impact and just sort of kept reinforcing my belief that I needed to get involved in this full-time. And so what happened is I went to the first Bitcoin conference

in San Jose held by the Bitcoin Foundation in May of 2013. And I asked to be a speaker there, and they put me on one of the panels. And it was just this amazing energy that I found there of some of the smartest people had ever met. Every other person I met was a mathematician or a cryptographer or, you know, from the early days of the internet. And they'd sort of heard the call of Bitcoin to come to this place. And you have to remember the energy, like,

there were supposed to be five or six hundred people there and all of a sudden, 1,200 people show up to the San Jose conference. And it was just sort of pretty incredible. And what I saw was there were a lot of people doing some really incredible stuff and a lot of people that wanted to invest in those projects, but there was no angel group, no place where you could, you know, group together due diligence and have investor leads and take presentations and stuff like that. So after the first day of the conference, I was hanging out with Michael Turpin.

and Samuel Maas on the roof of this bar at one of the after parties. And I was like, you know, Michael's like, it's weird that there's no angel group in this space yet. And I said, well, let's start one. Right. And Michael's like, okay, we'll call it the bid angels. And I was like, all right, I'll put up the website. And then he's like, okay, well, we'll do our first meeting tomorrow. And I was like, okay, well, I'll make an announcement on Reddit.

We'll invite a few people, see how many people show up. So I literally built the website that night. and I made it an announcement on Reddit in the morning, and then I made an announcement in one of the sessions, and we invited maybe six or seven people, and then 25 or 30 investors showed up to the meeting that afternoon. So it was obviously there was huge pent-up demand for like a place to come together and talk about all these projects

we wanted to invest in. And the ethos of the group was pretty simple. Like, we've all got a pile of Bitcoin. if we reinvested in these Bitcoin companies, perhaps our rest of our pile of Bitcoin will become more valuable. So that was the basic ethos of the group, and it just kind of snowballed from there. We ended up with five or 600 members

and being the world's largest angel group within about six or nine months. And it was pretty cool ride. The first year we invested about $7 million worth of Bitcoin into different projects. Probably one of the biggest was the Master Protocol. during their crowd sale in August of 2013. And that sort of sparked everything for me to start focusing on these decentralized projects

that were really using the open source tokenized Bitcoin kind of model. And ended up starting the DAPS fund in March of this year. So that's kind of been my evolution from entrepreneur to helping found the angel group to moving full-time into venture capital. So that's been my evolution last couple years. And that's how I got started in Bitcoin. Cool. Well, it's pretty crazy that you in 2012 went sort of all in on Bitcoin.

I wonder at the time, did you think of it as a risky decision or were you convinced this was going to work? When I think about technologies that I want to get involved in, I really what I look at is the fundamentals, right? So if you compare the fundamentals of the Bitcoin technology to the existing financial system, the advantages are really obvious and really stark, right? You know, you have a self-settling system that can transfer value anywhere on earth, do it instantly to any person on earth that has access to the Internet.

That's really powerful. And there was nothing risk-wise that I could think of that would change, those underlying fundamentals. You know, I really like, I believe it's a quote by Mark Andresen, talks about if you imagined the world and said, if this technology existed 20 years ago, what would the world look like today? Like if the blockchain had existed 20 years ago,

what would the financial world look like today? And what you imagine is probably where things are headed, because it'll take some time to overcome the momentum and the institutional bias of the legacy system, but things will tend towards the most efficient system. Things will naturally gravitate towards the least friction, right? I mean, if people can make a remittance payment to their brother in Nigeria by sending them a text,

like it's going to tend towards that versus paying money gram 10 or 20% of your money. Right? So everything else is sort of just doesn't matter. everything else is a much smaller consideration. Will this government or that government not like the technology? Who knows? But there are enough jurisdictions around the world where those jurisdictions that are friendly to crypto technology will get the benefit.

It's sort of like saying, well, this internet thing will never take off because some governments are unfriendly to the values the internet stands for. And it's true. I mean, North Korea hasn't been very friendly to the internet. But then again, there's a reason that Google and Facebook and nobody else, you know, internet-wise, is located there, right? Because it's a hostile jurisdiction to innovation. So I sort of have enough confidence that that plurality and diversity and competition of jurisdictions is sufficient to overcome sort of any attempts to slow down the technology.

Like, I mean, if New York wants to pass the bit license, you know, it seems to me like the equivalent of banning computers in the late. 80s in New York. And okay, well, the rest of us not New York are going to keep using computers, but, you know, sorry New York. I'm sorry you missed out on computers. So, you know, I mean, if they go through something too onerous, it'll be like killing

fintech for the next decade in the city of New York. They can do that, but, you know, it's not a smart move. Yeah, I agree. I mean, my point of view has always been kind of similar to years in that way, which is that governments and regulation, et cetera, they can do

a lot to delay things, they can move it elsewhere, they can deterrent masses, they can make startups fail, et cetera, et cetera. But in the long run, if it's a better technology, and to me, it seems quite obvious that it is, you know, it will win out. Right. Exactly. And especially with this technology, where the very nature of that it makes it difficult to regulate, and I mean, I think perhaps we'll talk about the legal aspects and the legal status a bit later. there's a couple things you want to get to before we start diving into this kind of very complex topic

and sometimes a bit annoying but but yeah before we do that you talked about you're involved in the Master Protocol Foundation we want to briefly touch on that could you give a brief two minute introduction

for those who have no idea what MasterCoin is on the MasterComp project. Sure. So the brief history is that in 2012, J.R. Willett put together a white paper that proposed building a protocol on top of Bitcoin for some of the more advanced features that the core devs were nervous about including in the core Bitcoin software. So a lot of this is issuing digital tokens on top of the Bitcoin. protocol, building a decentralized exchange, building these financial tools, these open source tools for people to be able to move value on top of the Bitcoin cryptographic ledger.

So, you know, the Bitcoin core developers, rightly so, are fairly conservative about what they put in the core protocol. So it doesn't make sense, and it's very risky, the idea of shoving everything into the core protocol. So the beauty of Bitcoin is that it's a very low-level simple protocol. Everything has been very well tested. And so I think his approach made sense where, you know, okay, let's create a separate protocol that will sit on top of Bitcoin that will use the cryptographic ledger.

It'll have a separate token. And it will enable some of these more advanced features. So JR tried to, you know, basically corral developers into building this new protocol and eventually decided that he was going to hold a crowd sale, which happened in August of last year, where he raised around 4,700 Bitcoin, which at the time were about a hundred bucks each, and basically set up the plan to, okay, we're going to develop these advanced features, release this new coin, and build out these wallets that support these new features. So it was really the first crowd sale to go to the Bitcoin community and say, here's

what we want to build. Here's the white paper if you believe in these aspects supported. So it was really interesting because I was running the Bit Angels as the executive director at the time. And JR came to the Bit Angels and I ended up putting together the informational report on sort of all the back research I had done on the protocol. And I talked to JR sort of like every day for five days. And eventually came to this point where I put together this report and released it to all the Bit Angels. And a lot of them ended up supporting the project. And so it's sort of evolved from there where now we have web wallets that support things like

issuing tokens. We have the Omni Wallet that does the decentralized exchange, which is the first time we've removed the counterparty from the exchange equation. And people can do completely pure to pure trades directly on top of the Bitcoin blockchain. So that's a huge advance. It also removes any fees that, exchanges pay because you're basically just using Bitcoin transactions as a medium of moving around these tokens. And so that's come a huge way. And there have been a ton of other projects that have

sort of emulated all of the features, counterparty, color coins has been implemented since then, even though their proposal even predated the master coin. There's also Next. And there's all these projects that we take for granted today. Like it's only been a few months, but we all take for granted. Oh, yeah, it's easy to issue a digital token. You just push the button, and digital token comes into reality. But really, it hasn't been that long. That capability only got launched in April on the core implementation. And it's only been recently where we've had the full functionality of the decentralized exchanges and everything.

But people already sort of take it for granted that they're building all these cool things on top. Yeah, and it's crazy that the master coin, right? The crowd tell you talked about, I think that was in August, no of last year. Correct. I think it probably got a lot of its notoriety from being the first crowd sale, so probably if I'm wrong with being the first project built on top of PayPal. Sure. Yeah, absolutely. And, you know, a lot of the original concerns were, okay, is this guy just going to run away with the money? And so to address those,

what ended up happening is after the crowd sale, there was a nonprofit foundation formed, the MSC Protocol Foundation. And the foundation basically, was entrusted to pay out developers for the bounties, for building the software and all the rest. And it's done all of that. You know, I'd love to get to a point where that whole process can be fully decentralized, but we just don't have the tools yet to, how do you assess the quality of code and reward a programmer automatically based on the assessment of that code? There's some cool proposals coming out, and I'm really watching closely the different distributed bounty proposals.

but the technology is just not quite there yet. So in the meantime, the best we have are nonprofit foundations that, you know, you have lots of board of directors that can watch over and make sure everything's being done transparently. And so to alleviate those concerns, MSC Foundation was actually one of the first nonprofits in the world literally opened all of its books where you could see every transaction ever done by the foundation who it went to for what bounty, and that was all updated in real time. So it was like, well, the community has put a lot of faith in what we're doing. We've got to

be really transparent about this. Now, we've come a long way, because we have all these other protocols now. How do you think, what's the sort of positioning, if you think of this as a marketplace now where there's Ethereum, counterparty next, Mastercoin, colored coins. Where do you see a master coin in that ecosystem and do you think master coin has lost in competitiveness? Because I guess those perhaps had a chance to build on top of it or can you run us a bit through that? Because it's very hard if you're not really deeply into following the actual projects to sort of understand a lot of these fine differences between them.

Sure. So I think that's a really good question. And the first thing that I would preface it with is often people think of these as companies, and they're not companies. This isn't Apple versus Google, right? This isn't Facebook versus MySpace. These, for the most part, are all open source technologies. So I like to think about them more in the frame of programming languages. Like, would you say, you know, JavaScript has replaced C++? You wouldn't really think about it in that. terms, right? Because C++ is a lower level language that might be great for writing a trading engine, and JavaScript is a language that's great for building a web interface. Yes, but similarly, there are also some languages that have completely surpassed and replaced others. Before C++, there was C, before C, there was B, and so forth. Exactly, and that's okay. You're right, you have iterations and generations of these languages that develop, and they build

off the learning from each other. So if we end up with a much more efficient system that, you know, issues tokens and does all these features, right, that benefits everybody. Right. So, you know, but that's firstly how I frame it is. All of these projects are learning from each other. All of them, you know, can take best practices from each other. And they don't necessarily have to compete in a lot of ways that a traditional company does. The second thing is, you know, what I'm seeing is a lot of specialization. And, uh, a lot of specialization. And, uh, a lot of lot of the specialization is around sort of what these protocols focus on doing. So, you know, Ethereum has a much different mission set, which is around building a platform

for running scripts and letting people build applications on top of their, their blockchain, versus something like MasterCoin, where it's about creating tokens or holding crowd sales or decentralized exchanges, things like that. So what I'm seeing is a lot of diversification and specialization in each particular protocol. So let's take counterparter, for example. I know the counterparty guys, I've watched the development since the very beginning, and it was really borne out of a desire

to do a different feature set than the one that MasterCoin was focused on developing at the time. MasterCoyne was focused on developing the coin issuance and the crowd sales, and there were a group of people that were like, we want to build gambling, we want to build CDFs, we want to build these other sets,

of features, you know, and they weren't really priorities in the development roadmap of sort of setting the foundations of issuing tokens and things like that. And so those guys split off and said, okay, we're going to go develop those features. And they've been sort of really aggressive in building out sort of these different advanced features. But at the same time, you know, I feel like the master protocol has carved out a niche where it's been very well tested. there are tens of millions of dollars of value now held and traded on top of it, thanks to Madesafe and other projects that have issued their tokens on top of the Master Protocol. And so whereas with counterparty, you know, there's been sort of a lot of experimental features. And if you wanted a sandbox to go play in, you know, for CDFs and other things like that, even if they weren't sort of fully tested and maybe they'd have to be rolled back, that was sort of very attractive.

So it depends on your use case, you know, and the size of what you're doing and whether it's experimental or whether you just want to store a lot of value. I believe that the MSC Foundation and the MasterC community has done a really good job of constantly testing things. It's avoided any major exploits of the underlying protocol and be able to build up a really good reputation for those sort of serious projects that look at that and say, okay, we want, you know, the platform that has done all that. testing. So I think there's so much room for innovation here. I mean, we're disrupting a, what, $800 trillion industry in, you know, derivatives and banking and finance, you know, that there might be enough room for a couple of projects to tackle different aspects of that. So I'm not too worried about the competition thing. I say more power to all of the people that are working in this space. And, you know, their success is our success. And whatever they do

great, we're going to emulate and whatever we do great, hopefully they emulate that. No, I agree. I mean, perhaps I'm not the only one, but I often get the feeling like these projects are competing against each other when we're just getting started here. They do have everything to learn from each other and they should work together. But as people watching sort of these projects take off and launch new initiatives, it's hard not to see them as companies, like you say. And to see them as programming languages. I mean, I don't think that, that's a good analogy.

I mean, I don't think that, you know, when the guys developed the Go language, they were thinking that there was somehow in competition with, like you say, in JavaScript or C++ or some other language. But perhaps at some point, you know, the cream will rise to the top. And a lot of these projects, you know, the larger ones that have gained more traction, will in fact have a larger user base. and others will have a hard time coming in because you are dealing with money, right? You are dealing with some financial value, whereas that's different from this,

that's different from programming languages, I suppose. Yeah, I think the point you're making, a lot of it is also about network effects, and when you're with money, you have huge network effects. So that's going to be something that I guess plays out a lot in the long term. And it's a topic, we sort of want to come back towards the end when we talk about side chains. Because that I think plays very much also in that network effects question. Sure. Absolutely.

And that's what I was just going to say. We can hold that off for the later conversation. But I'm very optimistic about interoperability. Right. It's not a situation where you use C++ in your program, and it prevents you from using JavaScript in other parts of your tech stack. Right. I think with the blockchain technology, we're going to get to a point of interoperability,

where I can say, oh, I'll use an Ethereum script for this part, and I'm going to use Made Safe Storage for this, and I'm going to issue my token with Master Protocol and hold the crowd sale, and I'm going to do a CFD through counterparty, and I'm going to add all these different features. And so when you think about in that context, programming languages make a lot more sense

because they're interoperable. And right now we don't have a lot of interoperability, but that's coming, and that's coming a lot faster than I think most people expect. Okay. I think that's a great point. Let's come back to that towards the end, because I think that is a very important point

when you think about side chains. So let's talk about your write paper. So you've written a right paper. I have it here. We were both reading it today. I think I read it earlier once, but I reread it. So the general theory of decentralized applications, so it sort of just runs through

what are decentralized applications, how do they work? And it's really nice. It's very easy to read, and a very sort of good, comprehensive introduction to the topic. So we have lots of points to talk about here because there's a lot of content here. But perhaps we can start with the sort of obvious first question. Can you define what the centralized application is?

Sure. And what I'd love to do first is also recognize that I didn't write it in the vacuum and I didn't write it by myself. True, there's a lot of other authors listed too. Yeah, the other co-authors deserve a lot of credit. Samuel Maws, Jeremy Kanda, Nikos, Frazad, Ron Gross, Sean Wilkinson, Steve Mason. I worked with these guys over a period of a few months, and we took a lot of other community input. We put the whole white paper up on GitHub and called for people to give us polar crasset improvements, but we basically boiled down a decentralized application to four core characteristics.

The first being that has to be open source. Nobody's going to build a decentralized application on proprietary technology, as we've seen from Bitcoin, just continues to reinforce the fact that open source allows you to bring in all of the minds of the world to work on a particular problem or build a particular project. Right. So that's sort of obvious in this space. It's got to be open source. The second thing is that having a digital token associated. with that protocol really offers us a tool, I think, for the first time to monetize open source. Instead of building a service company or a red hat on top of the open source and getting

paychecks from that, developers can actually monetize the open source itself based on people using the protocol and building demand for the token. So I think having a digital token associated with each different application is a beautifully elegant solution to monetizing these types of projects. And Bitcoin really proved, right? Here's a multi-billion dollar project, has no CEO, and it has no Salesforce, and it has no management, but here it's, you know, paying tons of people to build hardware, and it's paying people, you know, through all these startups and companies to work on the code and to contribute to it. You know, that's pretty amazing when you step back and think about that as like a model we can use to build technology.

The third aspect is Satoshi had the brilliance of building this on a peer-to-peer architecture and not having a single point of failure. If you look at all the predecessors to Bitcoin, a lot of them failed because they had a central point of failure, whether it was for the data storage or whether they were exposed to regulatory risk in one particular jurisdiction. by building a decentralized system, you push those responsibilities out to the end nodes, right? You push them to the users. And the users can decide how to do Bitcoin in their jurisdiction. Maybe they can't run an exchange, but maybe they can be a minor.

Maybe they can't be a minor, but maybe they can have a merchant service, right? And it gives you this huge diversity because everybody can do it differently in their own jurisdiction. The fourth aspect is the idea that there's this cryptographic consensus mechanism. In the case of Bitcoin, it's proof of work, where we can automate handing out rewards for people adding value to the network. Obviously, in the Bitcoin blockchain, that's captured in the form of the block reward, which was originally 50 Bitcoins every block. Now it's 25 Bitcoins every block. And that way of gauging whether people had added value, in this case, hashing power and basically computational security to the Bitcoin blockchain, was an amazing way to remove all the middle management layers from this system and just reward

people directly for the value they contributed. So I think if you can replicate those four characteristics for other technologies, you can build something pretty powerful. Right. So I think Madesafe and Ethereum are both really good examples of this, right? They have their own token. They're fully open source. They've decentralized the storage and the operation of the.

their end product, and there's a consensus mechanism, proof of resource in the case of Madesafe, or the consensus mechanism that Ethereum is created for miners adding computational power and confirming scripts in Ethereum are both really clean, really good examples of how to build this technology. Now, I just want to caveat this by saying, I don't think this model necessarily works for every project, but I think it does make sense if you're... building something that has a network effect, that has switching costs, and that can be built in this open source decentralized manner. And the other thing I want to say is it's not easy to do

this. It's harder to build something in this decentralized way. But it's a lot more scalable. It's a lot more sustainable. And ultimately, I think it's going to have a much larger impact if you build it in this way, versus taking the easy out, well, well, I'll just create a company, and we'll do a proprietary thing over here in the corner, and we'll serve only these people, and we'll have some management and have some salaries.

You can do that, but it doesn't scale, and it doesn't create world disrupting systems in the same way we can with distributed systems. That's my core belief, anyway. What's interesting in your paper is that you specify that, in fact, Bitcoin itself is a DAP. Sure. And then you go on to classify the different types of apps.

And so you talk about three different types of apps. Can you go into some detail as to the different layers of decentralized application? Sure. So it's just a simple framework where you can think about decentralized applications that have their own blockchain as sort of the foundational type 1 decentralized applications. You can think about platforms that build on top of that. So let's take Bitcoin and Mastercoin, for example. Bitcoin has its own blockchain.

Mastercoin builds on top of that. But it itself is a platform where people can issue tokens. And people, let's take Tether, for example, is issuing their digital token on top of the MasterCoin protocol. So that would be an example of Tier 1 Bitcoin, Tier 2 Mastercoin, Tier 3, Tether. And so you can think about this in the same context as you. you think about software today. Another example would be for instance, a Bitcoin counterparty in storage, right? Exactly. Okay. Yeah, exactly. So anywhere where we have a fundamental, you know, blockchain that acts as a cryptographic ledger or some other consensus mechanism,

people that are building on top of a platform on top of that. And so, you know, you could have more layers. You could have less layers. It's not like a hard and fast thing. It's just a framework to think about this, but think about it in the context of software. You have operators. You have systems, Android, iOS. You have platforms that operate on top of those operating systems, Google, Facebook, iTunes, whatever. And then you have applications that work on top of those platforms, right? You know, Google doesn't write all the websites. It doesn't write all the applications, right? People put them on top of the Google Play ecosystem or the Apple App Store system. And so I was just thinking about it in that type of framework. It's in technology, in general,

we see stacking and specialization of technology. And I think that's happening in Bitcoin. Now, one thing that I was thinking about when thinking of these different layers is the inoperability between layers, but also the dependency on the underlying layers. So if you think of the state at which Bitcoin is currently, I mean, it is a relatively new technology. There's not even a version one out yet. many would consider that Bitcoin is still in beta, in fact. Sure.

And there are some issues that have been coming up and that some say need to be addressed, such as skillability issues, the issues with 51% attacks, some claims to the security of the electric curve algorithm being vulnerable and things like that. So I think people would agree that there are quite a few things with the core Bitcoin protocol that need to be issued and probably will be issued in the next few years. What are your thoughts on the fact that a lot of these decentralized apps are building on top of Bitcoin? Would that pose a problem in the future where the underlying technology would somehow be lagging behind and not being able to sustain all the things that we're building on top?

I guess the first question and second question should be concerned about the fact that an update to the Bitcoin protocol might be. and break some of the functionality of the things that we have built on top? So let me say two things. First, I'm going to say I'm not concerned, and then I'm going to walk through an example of why I'm not concerned. It still is early days, but Bitcoin is built in a pretty beautiful way, where all of the records, every transaction ever, I have a copy of it on my Bitcoin core node. I can export all of those transactions, actions, and let's say, for example, Ethereum becomes the dominant blockchain, I can transport

all of that history, all of those accounts, all the metadata that's stored in the blockchain to any future blockchain that might be better. But here's why I think a lot of the technology on top of Bitcoin will be scalable, is we have people working on really important projects that are going to solve bloat, they're going to solve confirmation times, and that are going to solve issues around speed, right? Really, the scalability. So what you're saying is that those issues

aren't going to be dealt with at the core level, but would be dealt with like class two, class three. They'll be dealt with at the core level. So it'll probably be both. But because of the network effect, Bitcoin has attracted the majority of the, time, energy, effort, mine power, mind share of the

smartest people in the world to work on fixing it, either in proposals like side chains where there are changes made to the Bitcoin core protocol, or projects like factum.org that is a layer on top of the Bitcoin protocol

that improves the scalability or solves the bloat problem. They're working on top of Bitcoin, and Bitcoin is likely to get those solutions first because it has that huge network effect. So I think it'll be a combination of changes to the core protocol, but which have to be done slowly and cautiously,

and people building improvements on top and layers on top. So let's take FACTOM, for example. There is so much data people wanted to put it into a blockchain, and there's not enough room to put it in there. I mean, talk about a huge resource. It's an immutable database, right? It's a third-party immutable database that sits in the cloud and records things forever and timestamps them.

That's really valuable. That is amazingly valuable, right? But there's a limit on how many transactions the blockchain can handle and how much data miners and people that are nodes want to store. And so factum is solving the bloat problem by letting people create these factum blocks and on factum chains, and take thousands of hashes, put them into a hash that block, and put it into a single hash, and then you take that single hash, and put it into the Bitcoin blockchain. And you're basically extending the Bitcoin security model to all of that data

through a proof of audit, right? Because you can prove that this hash here in the blockchain had to have been made by this block of hashes. And then you can go one step further and say, well, this particular hash had to have been this document in this form at this time. And so they did a really cool proof of concept. They took every Omni Wallet transaction ever, and they put it into one hash and hashed it into the Bitcoin blockchain. And now forever you could validate all of those transactions having been in that form at that time.

And once you take one more step and you begin to chain those records together, now you can basically have a proof of process where you can prove. any process took place because you have time stamps from this document, the document changed, timestamped again, the document changed timestamp again. And so what you're talking about is extending the blockchain security model to the rest of the internet, right? The internet that we can't fit on the blockchain, we can hash and use the security of the blockchain to attach it and basically loop it into the security of the blockchain. So those are the kind of protocols that I think are going to really impact how this scales. And those are just sort of starting.

to hit. So I'm pretty optimistic about us being able to scale Bitcoin because of projects like that. Cool. Well, let's talk about one of the sort of most memorable and perhaps also widely mentioned and quoted things. You wrote in that paper or you guys wrote in that paper, which is a statement you made that everything that can be decentralized will be decentralized, which is a very provocative and extreme statement. And of course very much related to the white paper. So let's talk a bit about this. Do you think this is literally true or do you think is this?

Well, it's literally a truism, right? I mean, if it can be decentralized, it will be decentralized. I mean, it's self-evidently true, right? You know, so it may be a bold statement, but it's also self-evidently true. It's not evident to me. To me, it seems like, well, it can be decentralized. It doesn't mean it's a good idea. Maybe so.

But the way this actually came about is it wasn't originally in the white paper. I actually coined it at Coin Summit in San Francisco earlier this year. I was on the stage with Vitalik and we were talking about DAPS. And I said, you know, I kind of want to coin Johnston's law as everything that can be decentralized, will be decentralized. And that's sort of where everybody had tweeted it out and it became a thing. But I've been thinking about it for years before that. I used to call it the Johnston hypothesis of system competition. And it was the idea that, you know, competing systems over time will tend to have the most efficient system win. There's a reason we're all not hunter and gatherers literally picking up our food from the bushes, right? Because agriculture was a thousand percent more efficient at gathering calories than hunting and gathering. And virtually all the world now uses agriculture as its primary means of finding food.

We see this, of course, in technology. Those that adopted the printing press had a means for transferring information much faster than those that took longer to adopt the printing press, and they had a huge advantage societally over those that didn't have that technology. So if you look throughout sort of the arc of history is we're always moving towards more decentralized, more efficient systems that are more anti-fragile.

And those centralized systems that cause things like 2008 financial crisis, they're going to get left by the wayside over time, in favor of systems that are more robust, right? That's the basis of what I came to that whole conclusion about, and that's sort of boiling down that theory and my whole ethos into one statement. Would you agree that there is an efficiency trade-off where centralized applications tend to be more efficient than decentralized one,

but decentralized ones may have all these other advantages that they're not corruptible or things like that? Absolutely. And I think Peter Todd does a good job of emphasizing that in his talks. He often reminds people, just watching a video last night of him reminding folks that centralized systems that a lot of cases are great gets done things quickly. You know, for most people, PayPal's just fine. And so it works, it works until it doesn't.

Until PayPal decides your particular business isn't one they want to support, then you need a decentralized alternative where there isn't a gatekeeper. You know, I had this experience three or four years ago. I was building a Kickstarter campaign for a new natural language processing machine learning software program. And I was building this Kickstarter and I got the video together and I did all this work, built the team, built a beautiful website, all these things. I got approval from the gatekeepers at Kickstarter and they gave me the thumbs up, you know, go ahead and run your Kickstarter. we had raised 50% of our goal in just the first three days. And then Kickstarter turned it off.

No explanation, no letter, no process of appeal, just for whatever reason, we decided you shouldn't be on this site anymore. And so at that point, all of a sudden, you know, I was racing around looking for a decentralized alternative. I found Indiegogo, which doesn't have an approval process in which lets anybody put campaigns up there and I rekindled the thing and moved the whole thing over there. But it was sort of a good analogy for centralized prodigarchs work great until they don't, right? Until you're somebody they don't want to work with or they freeze your funds or whatever the case is.

So, you know, there are certainly costs to having a decentralized system, but in a lot of cases, people are willing to pay them. Like, for instance, most people don't know that Indiegogo does more volume than Kickstarter does. Kickstarter is just really good at marketing and, you know, talking about what they do. So if I may sort of rephrase your law, would you agree that, you mean that in every application, if it's possible to make a decentralized alternative, in some cases that will be preferable? and I guess if the interest is big enough, somebody will do it. So I think it's more than that, though.

I am making a bolder statement than just there will be a decentralized alternative. I believe the decentralized alternatives over time will dominate in volume, in utility, and in usage, right? So, you know, it's not a great analogy, but look at Android versus the Waldgarden of Apple, right? Which one has 80% of the market share and which has 20% of the market share?

And Apple's great at making beautiful, simple user experiences. But ultimately, you know, if they, let's say, kick all your Bitcoin apps off of the iPhone, which happened to me, you know, that makes for a pretty bad user experience, right? And that's the difference between a closed system and an open system. So I would say over time, the decentralized systems will catch up and surpassing utility centralized systems. Because by their very nature, they're more efficient. But they have different abilities and different strengths than centralized systems. Centralized systems are easier to build, but they don't scale as well,

and they don't offer sort of ultimate flexibility and sustainability. So I think over time, the vast majority of the world services will be provided through decentralized systems. I think in order for that to happen, there is, however, so I agree that there's some sort of a paradigm shift that may occur, that we're kind of starting to see, perhaps in a few years, that may be true. However, we have how many thousands of years,

however many thousands of years of society behind us, where we have always looked up to leaders, whether that be politicians or companies or corporations, things like that. And in order for that vertical hierarchy to kind of flatten out, there needs to be a paradigm shift in the way that people think. And I guess people find security in knowing that I can always, because people do trust companies and they buy their products, you know, if they use the services, people find some sort of security in it. being able to entrust. Call the number and complain.

Exactly, right. So with Bitcoin, with DAPs, you know, you don't have that. So what needs to occur in order for the caps, the centralized apps, I guess you want to call them, to be dethroned if I could coin something. I'll coin caps.

I like that. You're coining a lot. What's going on here? Opponents necessary for that to occur, you know. I guess is my question. Is it generational? I mean, do we need to create Jeremy Gardner, like I say, generation blockchain? So I don't know if I agree with the underlying premise.

I actually think we've already gone a very long way towards embracing decentralized systems. Let's look back three or four hundred years. The vast majority of human effort and human time was coordinated by central entities. one of them was known as the king, another one was known as the church. There were these huge monopolies that literally in the 1600s, early 1600s, the king would literally give a monopoly for the production of sugar and the production of wheels and the production of carriages and so on and so forth, right? It wasn't until 1624 when they passed the statute of monopolies, which basically got rid of the king's power to give out monopolies, which sort of laid the groundwork for the

industrial revolution in the United Kingdom the next century or two after that. Before that point, for most of human history, we were used to a world in which the king would give somebody the power, the sole power forever to produce a particular good. These were perpetual monopolies. So now we live in a world where we take for granted that there's nobody with a funny hat that tells me what I can believe. There's nobody that can sit on a throne and can decide who made my iPhone and who makes my table and who builds the house. I agree, but the guy on the throne is the guy on the news, right? Or the politician or the CEO of the company, you know, perhaps that maybe we're not looking at one person, but we're looking at multiple people, but we still have, like Ryan said,

a number we can call to complain. Sure. So that's exactly, I would agree with that, right? So we've moved from a hierarchy where there's a single point of central control to there are lots of central points of control in these corporations. And I think what happens is this decentralized application architecture makes the corporation irrelevant. It makes the corporation obsolete as a means of distributing wealth to those creating value in a system. When we have Lazus, which just launched recently at the Israel Bitcoin conference,

and I can jump on their app and I can literally directly pay somebody for giving me a ride. And there is no Uber, there is no lift to process the payment or decide what the rates are or any of those mechanisms. I now have a system where I don't need a central entity or a middleman to play those roles. What we're doing is this is the great alleviation of the middleman. It's the great removal of the central authority is this gives us the tool set where you can change. that dynamic and begin rewarding people directly. And so what I'm saying is we're doing very simple things we can reward people for right now. Computational power, storage, transportation, things that can be easily quantified. But what's going to happen is that we build these progressive

layers of systems, we're going to do more and more complex things in a fully distributed way. That's the future that I see, is this is going to disrupt almost every industry on Earth because it's going to remove all of that management and middlemen and basically write business logic into code, just the way we can write law into code with self-executing contracts. That's the world that I see going forward. So touching on those future cases, so a lot of people have been talking about, you know, decentralization of cloud storage, you know, this kind of ride sharing model or, you know, these things that are quantifiable and that we can easily kind of think of

and decentralize. What are some of the less obvious ones? Like, where do you see this in maybe 20 years from now? What are the type of things that we see decentralized then? So I think we'll go up this curve, right, where it's simple things now that can be easily quantified to just about everything will fall into that category, I think, in 20 years. I think this is not a 20-year revolution like the Internet was. This is an eight or 10-year revolution.

I mean, to get fully to mainstream, where all of these, systems of incorporated blockchain technology. Because it's like we've already got the internet around to tell people about this new internet we invented. That's a much faster adoption curve where people already have the hardware and they're already hooked in and you've got two or three billion people online and you have seven billion people of cell phones. And the monetization is embedded. Right. Exactly. So I think it's going to move a lot faster than people expect. I hear some people say, well, maybe in a hundred years it will replace, you know, fiat currencies or whatever.

You got to be kidding me. If a government isn't integrating blockchain technology in the next five or ten years, they're going to be not only obsolete, but their currency is going to be gone. And there's just no way that it's going to compete with this technology unless they adopt this technology. It's very simple. It seems that that simple to me. So should we create a fairly bet eight years from now? we have completely data. We would just have to

figure out how to quantify and define it. I'm just I'm transcribing it right now.

So if a government doesn't integrate blockchain technology in their currency in the next five years,

their currency is gone. Yeah. I think they'll like it. I like it. Well, I mean,

look at where we are today. Bitcoin is already worth more than 80 or 90 of the currencies on Earth.

We've already passed of half the world's currencies. The truth is most people don't have very good currencies. We're fairly spoiled as much as there's been huge inflation in the United States and Europe. We're still fairly spoiled compared to that $10 trillion in Bobway bill that I haven't by wallet. That's a world in which all of your savings gets wiped out every few years due to government intervention into the monetary system. That's where this is going to have a huge impact. It's the guy in Argentina more than it's me.

I'm the outlier here that converted all my fiat into Bitcoin in 2012. But the guy in Argentine, I mean, in Argentina, it's 50% inflation. I mean, he's literally losing half of the wealth he keeps in fiat every year. That's a real, meaningful, immediate reason to embrace this kind of technology. So it's about the other $6 billion. So, I mean, regarding the sort of adoption question that you said, which is very briefly before we move on to a topic that we've been coming back to and back to again, which is the legal question.

My view is it's definitely a problem that you don't have somebody to call and complain and you lose it. People are responsible and there's no one to go to. But I think fundamentally it is a user interface challenge right now. Right now these apps are difficult, et cetera. But once an app, like let's say there's a decentralized Uber and it's so, super smooth and easy and it just feels great and it works. I mean, people will use it and nobody's going to think like, oh, but what, yeah, so I think these problems are all solvable and, and there are problems in the short term, but I think

there won't be problems in the long term. Sure. I think there's one, there's one issue that will really have a hard time tackling in the user experience point of view is, you know, putting the responsibility back in the hand of the user, right? Yeah, I agree. That's the biggest challenge. your pocket, it's yours and it's your responsibility to keep it safe. Well, the same thing,

same thing with the keys. And, you know, up until now, we've had companies that we can always turn to to reset our passwords or whatnot. This is, I think, it would be probably the biggest challenge. And once we figure that out, then we can, then we can do anything. But you can even do that, you know, with some multi-sig or, I think even that is something that you be able to do. Sure. So it's interesting. We're getting to the point where the technology is making it pretty viable. If I have an iPhone and I literally use my fingerprint as my password, I'm not going to lose my fingerprint. And multi-sig, I think, will also play a big role in this. I just saw in the Coinbase blog this morning that they've now enabled

people to be responsible for their own private keys as part of their multi-signature vault. right so this gives me tools for multiple people to sign another transaction maybe i connect it to multiple email addresses if i lose track of one i've still got the other two ways of signing it so i think we can overcome those but passwords are definitely a huge problem they're a pain nobody likes keeping track of them and so we we definitely need some big improvements when it comes to how we manage our our private keys and our passwords but there are a lot of really smart people working on that i think it'd be interesting to see how maybe the internet of things, connected devices, certainly the health devices might solve this in the future by using some sort of digital signature from your DNA or something

like that as a C. I don't know. Maybe not your DNA, but I mean, something unique to you, which you'd be able to capture with... Yeah, we'll draw some blood at any time, try to log in somewhere. Well, before we wrap up, so we don't have a lot of time left, but we do want to come back to one topic that we've talked again and again, which is the sort of legal status. And I think it's, of course, very tricky with something like decentralized applications, sort of a gray zone. And it's interesting. I don't know when that was exactly written, but, well, actually pretty early, right? So in your paper, you talk of decentralized applications, and you actually go into a little bit.

that you don't want to talk of decentralized autonomous corporations because corporations has all these legal connotations, et cetera. And it's interesting, I think, today, if we look at some of the projects, not least being Ethereum, who I think are probably the ones who spent the most resources into looking at the legal side of the crowd sale. And, you know, if you look at the terms,

they talk of a presale of a product, which, to be quite frank, is it a pre-sale of a product doesn't really feel that way, but it's definitely a sort of a legal position to take where perhaps that protects. And I guess you were quite visionary or you guys were quite visionary in sort of taking that sands early on. But I'm curious. Do you honestly think that's going to hold up? Absolutely. I really do think that's the most logical conclusion here. If you think about it purely from a technical perspective, a private key is literally a password that accesses a piece of software. The only thing you can do with a Bitcoin token is send it across the Bitcoin network.

That's all it does. It has no dividend. It has no revenue. It's not a promise of future returns. The only thing this does is access a slot in the cryptographic ledger and you can send value across the system. So if you're building systems of that same nature, the only thing Ether is going to do is let you run a script, right? You can't do anything else with it.

And it's literally a password that lets you access. So from a very, very fundamental technical basis, I think that makes sense. But quite obviously, even with Bitcoin, right? You can take that stance,

but that's not the thing that the government says, right? They're all, okay, but then now if you hold funds, maybe you're a money transmitter, maybe money services, business, et cetera. So even there, the position to this is just a product that's not really working, right?

Well, some of it is educating the regulatory agencies on what Bitcoin is. You know, they're most familiar with it as an application for a payment network. But we all know from a technical perspective, that's not what Bitcoin is. from a technical perspective, it's a cryptographic ledger, it's an accounting system, it's a way of moving value, but all sorts of value, not necessarily monetary value. And so, you know, I think some of this is an education process where they're just wrapping their mind around, you know, what Bitcoin is. Like, I remember the early days of the internet, you know, when people thought, you know, the internet was email. You know, and it's like if you tried to write a bunch of regulations about the early internet and all you focus, on was email and sending communications, and whether that fell under the authority of the

Federal Communications Department. It was the, you know, FCC, were they the ones that should give a license for everybody that has an email account? That would have sort of missed the broader point of the Internet. Like, yes, you can use HTTP and SMTP for transferring informational packets, but people are going to use it for search engines. social media and banking applications and all things that we had never imagined in, you know, or the mainstream hadn't imagined in the 1990s. So part of, I think, it's an educational process. We're not done in that process. We're at the very beginning of that process. They're just starting to even pay attention to this little thing called cryptocurrency or cryptographic ledgers, right?

So some of that's an education process, and I think that'll change over time, and I think it is starting to change. Even regulators and people are starting to understand that there's some technology behind this thing that is different than the coin itself. So I think we can get over that hurdle over time. And the rest of it has to do with, you know, when it comes to crowds sales, it's really about setting people's expectations and informing people what these is, what these tokens are and what they access, right? That's why I am sort of a stickler about being really precise about language.

Because if you use rough analogies like shares or corporations, you're bringing in a whole legacy context of ideas and norms that people are used to that don't really apply to this new ecosystem. So I think we have to invent our own new terminology. This is something that we talked about with Michael Jackson, who is former CEO of Skype. And he talked about the earliest of Skype and the hurdles that they sort of went through with regards to regulation. And his position was that, you know, well, when Skype was when governments were trying to regulate Skype as a telecom, well, they were saying, no, we're not a telecom or something else. So you shouldn't be regulating us as a telecom. So I guess in terms of nomenclature, this is probably the maybe the mistake that was. that the Bitcoin ecosystem is committing

is that they're calling themselves money or a payment network when in fact they're not. And as Sean Joan points out, Sean Jones is in the chat room right now. And she's saying the keyboard is allowing you to transfer value. Of course it's not the only one, yeah. I mean, I think I saw someone post somewhere because there was this, so we don't have a lot of time,

but just very briefly. So there was a news article recently and I don't know what the background is. and if there's a story there, but the SEC sent like hundreds of letters to people who'd run crowd sales, right? And someone made a comment and they said,

ah, what about Ethereum? You know, are they going to get in trouble? And then, of course, I think if Hume did it properly, at least in Switzerland, but then maybe the Americans won't care, right? So, and then the person said, like someone responded, like, yeah, definitely.

Just look at their blog. They keep talking about, like, the Ethereum price, and then talk about it as if it was a sort of a share-like thing. And I think, quite frankly, it sort of is a share-like thing. And now, even if you can legally frame it as a product and you can have your terms as a product, if it doesn't feel like a product, you don't treat it like the product, is that going to hold up in a court of law?

Is that going to be what the SEC, et cetera, accepts? I personally have serious doubts about that. No, I know it's a challenge, but I think we should be. definitely leaning towards that, right? So it's interesting with all these rumors that have been flying around for weeks, I'm not sure how much validity there is to them. So for instance, just after that article came out the other day, I saw another one by the Wall Street Journal where they interviewed me

and half a dozen other people. And Ethereum has not received a letter. BitShares has not received a letter. MasterCoin has not received a letter. counterparties not received a letter. Yeah. Like, maybe these letters are going out to somebody, but maybe they're scam coins and like real fraudulent activities, which in that case, you know, okay, send those letters, you know.

We want to root out the bad actors in this space. But I agree with you. I think Ethereum and a lot of these projects have done an enormous amount of due diligence and have really tried to be good actors in being very plain about what these tokens are, what they do, the risks involved, the software might not work, etc, etc. These are really important because, you know, regulatory agencies, their first thing is customer harm, right? When somebody complains, you know, XYZ project, you know, is fraudulent, that's what they go after, right? They go after customer complaints and they investigate that type of stuff. So I think the best thing we can do is

I put up a whole white paper on crowd sale best practices. And I took a lot of, of a lot of the stuff that Ethereum put out and pulled that into that white paper as well. And I encourage people to offer additional sort of best practices and pull requests. But that's what we ought to be doing here. Yeah, absolutely. And here's what we ought to do is build up those best practices ourselves and not wait for somebody to come and say, oh, you shouldn't do this, you shouldn't do that. We should be saying ourselves, how do we, you know, set people's expectations, how do we

make sure that, you know, bad actors aren't getting in the system and that they're not, you know, getting adopted. So I think we can accomplish that. And I don't think we need a third party to help us do it. I think the industry is already already getting there. Cool. Well, thanks so much. I think we're at the end of our show. Thanks so much for coming on. We want to talk about side chains. We don't have time, maybe next time, because it's such an interesting topic. But it was absolutely great talking to you. And I think we really covered a lot of really interesting aspects. I agree. I think we could have went out from a lot. conversation. Good stuff, guys. Thanks for another hour. But, well, thanks so much for coming on. And, well, thanks to a listener for listening. And thanks to those who were life on.

Yeah, actually, actually, Sean Jones is in the, is in the Q&A session. She's been, she's been mentioned, well, she's been making some points about, uh, about, about, about regulation, which I don't think we'll have to cover, but, um, thanks, Sean for for taking part. Well, thanks. Yeah. So yeah, to listeners, if you want to follow us on Twitter, EpisendipTC, you can also follow us on Google Plus, particularly useful because we do, this is a hangout because we're doing video now and live hangout. So you will see event notices there and you'll see when we do the next recording. Unfortunately, the time sort of varies, so it's hard to get the rhythm. But also, do leave us in iTunes review.

that helps people find it and subscribe to your newsletter, which is at Epson and Bitcoin.com slash newsletter. It goes out every Friday and gives you kind of the latest and most important things that have been going on in Bitcoin world. So thanks so much for listening and we look forward to being back next week. All right, guys. Take care.