On The Brink with Castle Island - Muneeb Ali (Blockstack) on Bitcoin-based Smart Contracts (EP.156)

Episode Date: December 9, 2020

Muneeb Ali, cofounder of Blockstack, joins the show to talk about the launch of Stacks 2.0 and its evolution from a securities offering to a freely tradable instrument in the U.S. New developments with Stacks and a novel legal opinion What constitutes sufficient decentralization and how Blockstack took cues from regulators Why Blockstack felt empowered to list their token on public US exchanges The current state of Blockstack governance Reflections on Ethereum's purported transmutation How Blockstack did the first reg A+ securities offering for a cryptoasset Why securities registration is worthwhile for token issuance Whether the SEC disclosure framework is suitable for the issuance of a token Alternative disclosure and securities offering frameworks for registered token issuance Whether Blockstack was willing to treat Stacks as a security in perpetuity Why security tokens haven't taken off in the US so far The evolution from Stacks 1.0 to Stacks 2.0, and the differences between the two Why Blockstack chose to build on Bitcoin, and how they managed to do so in an efficient manner Why Blockstack chose not to build a distinct chain in its own right Why Bitcoin's inflexibility as a base layer makes it a suitable underlying protocol How Muneeb thinks about Stacks value accrual Blockstack's transaction-based consensus mechanism relying on Bitcoin Why Blockstack chose not to use OP_RETURN The relationship between Blockstack usage and BTC value accrual Muneeb's response to the criticism of their regulated token issuance model Key readings: Wilson Sonsini's Summary of Memorandum Regarding the Status of the Stacks Tokens Upon Adoption of Stacks Blockchain 2.0 Sponsor notes: Withum is a forward-thinking, technology-driven advisory and accounting firm committed to helping our clients be more profitable, efficient and productive in today's complex business environment. Our Digital Currency group is proud to partner with members of the cryptocurrency community. Get to know us at withum.com/crypto.

Hello, everyone. Welcome back to On the Brink. This is Nick Carter. This episode is brought to you by Witham, a top 25 accounting firm in the U.S. with a digital asset practice. More about them later in the episode. Today's episode features Munib Ali, who is the co-founder of Blockstack. Very interesting development with Blockstack. Their law firm, Wilson Sansini, has released a memo, effectively stating that they believe that the Stacks 2.0 tokens, which is kind of the second O. incarnation of the BlockSack tokens would no longer be securities and thus would be freely tradable in the US. So very timely, this news dropped about 30 minutes before I was due to record with Minib, totally out of coincidence, actually. And we clearly have a lot to talk about. We cover the

transmogrification process from being a registered securities offering, which they got a lot of flag for, to now being more of a commodity-style instrument. And of course, we also cover what BlockSack is all about why it's built on Bitcoin, how it potentially augments Bitcoin. Really interesting conversation. Let's dive right into it. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy,

with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. All right, Meneb, welcome to the show. Thanks so much for coming on.

Thanks for having me. This is the most timely podcast recording ever because literally one out, 20 minutes ago, I think. Reuters came out with a piece saying stacks is going to be, they're going to be tradable on exchanges. And so you're kind of moving to a new era here where the tokens are kind of understood to be, I guess, commodities or, you know, not strictly speaking securities any longer. So congrats. That's pretty incredible, honestly.

Thank you. And yeah, I, I just tweeted something out and things are blowing up in my feed, but I'm I'm here on the podcast. Yeah, I know. I'm sorry. You should be out there on the front lines. Instead, you know, you're here recording. We didn't have this plan, by the way, for the benefit of the audience. This is a total coincidence that the news came out.

It's just a coincidence. And yeah, let me give a little bit background there, right? So last year, I think 2019, we had this Walt C Journal article that came out, which was the breaking news around us getting the first ever qualification from the SEC. So I think that was a historic moment. I'm very proud of our team for the work we did. Basically, you know, securities regulations have been around since 1933. And that was the first time that something that is not equity in a company, like basically a crypto

asset, got qualified for a public offering in the U.S. by the SEC, meaning that we figured out all the legal accounting frameworks, all the issues that the regulators might have to let us do a kind of like a compliant public offering in the U.S. And what came out today is a little bit of a part two of that, right? That in traditional public markets, like, you know, if a company like Facebook is going public, they would do the offering, the IPO, and then trading would start kind of like the next day, right? And that's because those markets are well understood, all the rest.

regulations and everything that happens there. And what we've released now is kind of like the part two of it, that how do you do a offering, right? So something that might look like a security, meaning I think at a high level, it's more like there is more dependence on a single party. And when you're building crypto protocols, which are open source, which are meant to be decentralized, there's a little bit of a unique tension. here where initially there might be a group of people who are working on the core protocols

and the public infrastructure. And then at some point, they launch it and then they're no longer in control of it. I think the best understood example of this would be Bitcoin itself. So imagine when Satoshi, you know, if it's a single person or if it's a group of people, when they were working on the Bitcoin code base, clearly it's a group of people that can't be identified, you know, and they control what happens with the code base or the network a lot at that time, right? But the beauty of actually, you know, what Satoshi did is interestingly, I think in my view, the way he launched, he was also compliant with U.S. securities regulations,

right, because it was a pure mining launch. The asset didn't really exist. And I don't think I don't know if it was on purpose or not, but it was actually quite beautiful and elegant that even if you apply U.S. securities regulations to that launch, it was done in a pretty elegant manner. But in general, I think that when, you know, someone is starting a crypto protocol and you need to do core R&D, which was a case with us, so, you know, we're a bunch of computer scientists, mostly from the Princeton Computers' Nice Department, where I did my PhD. And we raised venture capital to effectively do R&D.

So there is a company that is doing hardcore R&D work and building this public infrastructure initially. And then we did these token offerings to basically distribute the asset or raise capital, again, going into the public infrastructure. So the core issue was that where is that switchover point? How do you go from I am dependent on this company or this group of people to something that is like fully decentralized, even from a securities regulations perspective? I know that decentralization has other aspects as well and, you know, it's a spectrum.

But right now I'm talking about purely from a U.S. securities perspective. And that is the framework that we released today. That, you know, there's an entire legal analysis by Wilson Suncini. And Wilson Suncini, for people who are not familiar, they're one of the top law firms in the U.S. They helped us with our SEC qualification earlier as well. And they're the law firm that, you know, for example, took Google public. And they're kind of like putting out a legal framework and a memo and effectively saying that here's the analysis through where which here are the different conditions and we can kind of like dig more into them.

But as these conditions are met, these tax cryptocurrency can no longer be considered as security. And it's something like Bitcoin, right? And it can trade like Bitcoin in the US. And so, Meneb, is this kind of you are broadcasting this out to the general public and regulators, your new analysis? Or was there kind of a consultation with the SEC as well, with they said. Yeah. So the interesting thing here is that I actually cannot comment if we've had discussions with the regulators or not. So I think fair enough, but the analysis is out there, right? And we can we can kind of like dig into that. I can tell you this much that I feel very confident in the approach that we have taken. So with the criteria for

sort of decentralization or being leaderless and, you know, having a more kind of open source, distributed governance. Are you taking those from the sort of quote-unquote Hinman test, where, you know, Bill Hinman had his speech a couple years back and laid out kind of a path here or from other statements that members the SEC have made? How are you construing those statements? Yeah, it's a pretty kind of like comprehensive approach, but But even the Hinman speech, right, it was boiling down to the age-old how we test, right? And that's the same framework that we use as well, because that's the, that's effectively the backbone of is something a security or not as far as the courts are concerned, right?

So it's interesting that, you know, Orange Grove type of a court case still actually is relevant when you're discussing is something a security or not. So I think it's heavily based on the original Howvey test, which is what the SEC usually refers to as well. And what we do is we effectively, by the way, like even when we did the offering, the offering last year, our stance was that Stax is a utility token, right? It's used as gas in smart contracts and transactions and so on. But we were being extremely careful and we were basically saying that in the U.S., if there's any doubt, let's just treat it as if it's a security. So it's a little bit like, you know, and in our offering, we actually gave people heads up that it's entirely possible that the network becomes more decentralized with time. And at that point, it would clearly not be a security.

So in some ways, what has happened now is that we've been looking at the framework and there have been several kind of like changes or evolution in our ecosystem. For example, there are now five, six independent entities in the ecosystem looking at various things, right? Like there is a nonprofit Stacks foundation. There is freehold that kind of like, you know, self-organizes community members. There's a Asia or mining focus entity, Damon based out of Hong Kong. and so on, right? So there's a, there's, and then we were very careful about true legal and management separation between these entities. Like I have nothing to do with these Sacks Foundation board. It's not a, you know, like these different players are actually truly independent. It's not like,

you know, something where it's the same people who are kind of like involved everywhere and so on. And a lot depends on how the network gets launched as well. Because my company, the company that kind of like started the R&D on the core protocols, we don't plan to be a minor on the network. And we also carefully looked at like holdings of several players in the ecosystem, that what are different like holding thresholds that might be problematic. So it's like the ownership of the currency is fairly decentralized, the miners are going to launch and operate the network.

We are not going to be miners, right? And then how does the future governance actually work? And we borrowed very heavily from Bitcoin over there. You know, just like how Bitcoin has certain threshold levels for accepting changes to the protocol. The Stacks blockchain actually borrows a lot of those designs. And I think it's very hard to make those changes and you need a lot of minor support to be able to do that.

Were there other blockchains where you borrowed or took inspiration from the governance modes aside from just Bitcoin? Yeah. So interestingly, we did our research, right? We looked at a lot of things. Like, for example, you know, one would think that, you know, some of the SEC enforcement on EOS that might have certain information. I frankly didn't find it to be that helpful. Like it's like, you know, the regulators, they tend to look at these cases. in a very much like a case-to-case basis.

And plus, if they're not saying anything, like let's say they're not saying anything about the US token right now, that actually does not mean if it's in the clear or not. Like they're only saying what they're actually saying, and they had a problem with the 1.0 US asset, right? Like the ERC-20 token that was issued on Ethereum. So we tried. It's truly like, you know, no one has done this before.

So there is like very little information available that can be helpful. I would say that Bitcoin and Ethereum are the only two assets that the SEC has explicitly said. Especially like I think Ethereum's case is a little bit interesting where the analysis tends to be that it might have been a security at some point. But it's no longer a security. But then there are no further details. what happened for that transition to happen, which is the key question, right? That's what every crypto entrepreneur wants to know, and that is the question that we answer with the legal framework.

Yeah, the CFTC has also been quite clear in saying that they believe that Ethereum is a commodity, and I remember seeing Heath Tarbert speaking in D.C. and he was inviting exchanges to create derivative products on top of Ethereum with the assumption and with their explicit view that Ethereum had become a commodity and was sort of under their ages. But again, they were a little more restrained in terms of saying why specifically they felt it was no longer a security. Right.

I think what happens is that. that you could look at the state of a crypto asset at a given point in time. So if you look at Ethereum today, you can gather the facts to basically say that, here, there's no company behind it where this should be treated as if it's the equity of that company. But where it becomes trickier is that was the pre-sale of Ethereum

actually compliant, right? And a lot of people out there would say probably not, right? It might have been an illegal distribution of securities, but it just happened that the SEC didn't do anything about it. So I think that's where these things stop being helpful, like in the sense that if you're a crypto entrepreneur and you want to do an offering in a compliant manner and then let your asset trade in the U.S. in a compliant manner, these things are not helpful to you. And the path that we have taken with first the SEC qualified offering and now with the legal framework for decentralization. that actually answers the hard questions, that how do you do a compliant offering, and then how do you more explicitly transition to something that is decentralized and it can trade like Bitcoin? And by the way, I know that given the news, we completely got sidetracked, but I'm happy to

talk more about the original topics that we wanted to cover. Oh, we'll get into that. Don't worry. But this is just, I can't believe the timeliness of this. So maybe to rewind a little bit, so you guys did a reg A plus offering. Was that the first time that a kind of crypto asset had been sold under, you know, distributed to investors under the sort of watchful eye of the SEC? Yep.

I think that was probably the first one, right? Yeah, that was sort of others subsequently, right? Yeah, that was the first one. And I think then like one, one other project followed pretty quickly. I and X is that the one you're thinking of? No. So this is props. And they were actually like, you know, they were using the same legal kind of law firm.

And I'm kind of like, you know, been actively talking to us as well. So actually it was like the day after or something like that. And then INX did something very interesting as well. So it was not the reg A framework in their case. but they pretty much went through the same type of troubles. I think it's an elegant model because you are conducting kind of appropriate and very rigorous levels of disclosure. And in fact, it's like getting an X-ray.

You know, everything is out in the open, which is so, so different from just, you know, the like standard token sale model where you just have a white paper and very, very little documentation on sort of, you know, the company that's behind the offer. and, you know, the nature of the token and what it entitles you to and what the token holder rights and so on. What you did was very different.

I mean, you had, you know, extraordinary levels of documentation and disclosure. Yeah, absolutely. And I can give context on what it is and how it was challenging as well. Like, basically think of this way that the crypto industry kind of like evolved to almost like, you know, expect, you know, the. like malicious actors and even like, you know, scam type of things or not having information. Like even if, you know, it's a well-meaning team, you just don't have enough information about who these people are, what exactly they're doing or everything is a little bit of a black box.

And, you know, you have a shiny marketing kind of like white paper and people are throwing money at stuff, right? And they understand that these things might be risky at some level, right? You compare that to the public markets and it's night and day where there's such a high bar to information disclosures. Like every single important thing needs to be disclosed. And you know who the main players or managers or board members are, what their holdings are, what they can and cannot do. So it's almost like night and day. And we were for the last one year after doing the offering pretty much like this only crypto asset that,

So internationally, Stax was trading on exchanges like Binance because the regulations are different there. Over there, it's already not considered a security, right? So it can trade on Binance. So it's trading and we are in the, you know, coin market cap top 100 asset, but we are doing SEC public filings and reporting, right? Whereas it's like, it's like as if I'm running a public company and we have very strict like internal policies or legal reviews or everything that we can and cannot say, like, we are following all of that as if you're running a public company pretty much. And, but in crypto,

people don't even understand like what this is, right? Like they would even, you know, sometimes get confused by the amount of detail or information available to them. And they would ask like simple questions and they will get like a, you know, legally approved two paragraph answer to what they're kind of like looking at. And it's a. And in some ways, it's challenging because you're going against the industry, right? The industry is just not used to these type of disclosures, which I actually think that overall, like, I'm glad we did it. And I think overall it's a healthy thing because every single important thing about this project is actually disclosed in public information. Like, you know, financials, holdings, business dealings.

Like if we would enter into any substantial business contract, like the entire contract, the entire contract. contract would be publicly available. So imagine the kind of, you know, shady things that happen in crypto. And now you have a project where it's completely transparent. Like you can just go and literally search anything about it in public file. Well, I do wonder about disclosure so much in this industry because you're, it seems to me that the standard of disclosure required from the SEC for public companies or for offerings like yours is comprehensive, but it sort of treats the, you know, it's designed with, you know, equity offerings in mind. And something like a block stack is very different. Obviously, you know, you guys kind of situated in the taxonomy differently, view it as more

of a utility token, a computational gas kind of thing, you know, digital commodity. Do you feel that it was kind of trying to jam a square peg into a round hole with these disclosures that are designed signed for equity offerings? Yeah, so I think we had to develop certain frameworks for, you know, like, for example, like compensating employees, we had to come up with these almost like restricted token units, right, RTUs. And sometimes it's fun as well, right? Like, you're just, everything is new and you have to kind of like go there and invent it.

But on the disclosure side, I felt it was. it was not that hard because we would just treat the tokens as an asset on our books and follow like some of the disclosures about it. Like, you know, if let's say, you know, Albert Wenger from Union Square Ventures, he's a board member, we would disclose how much equity they own and then we'll disclose how much tax cryptocurrency they own. So we will basically do disclosures on both assets. Some of the complications were actually more around. accounting frameworks, like, you know, just imagine the amount of time effort, but also money that we are burned on educating people, like educating auditors. Like, as part of the requirements,

we actually have to get audits. And then the auditors, like, initially, especially, they didn't even know, like, how to audit these things. And obviously, with time, they learned and they became better at it. And I do think it's good for the industry. Like, like, if you look like two years down the line or something, I think it's entirely possible that the auditors understand what they're supposed to audit. More projects start doing these type of public disclosures because it's just good for the ecosystem. You want your token holders to know all this information.

And so I would say like some of the challenges, they might be like, you know, first time challenges because things were so unique and there's an educational gap or, you know, coming up with the frameworks themselves. But once the frameworks are there, I think it might become more of a smoother process for other people that might follow.

I guess what I was trying to get at is, you know, there's a lot of idiosyncrasies for tokens that, you know, token investors care about, you know, simple stuff like, what's the supply schedule? And, you know, what are the mechanics that potentially accrue value to the token, which are obviously not necessarily covered in standard filings for, you know, equity offerings, with those, you know, did you have to just insert them with the understanding that token investors would care about that? You know, was that kind of, how did you

like harmonize that with the equity framework? So I think that our mental model was that we would just add all the additional information. And these files can become really large, right? And that's, I think that's fine. So we did that. What we were feeling was a little bit like, because this was so different from the rest of the industry, people are used to reading like a 10-page max paper versus imagine reading like a 180-page page legally dense filing.

And so the challenge was a little bit like to be compliant with the SEC or the general frameworks, you usually want to give the complete picture. So the challenge I felt was like sometimes summarizing things or sometimes just answering something in a simple way. Like I know that this is what someone is trying to really ask, but because you have to be so comprehensive and cover all the details, like you would end up with this very dense, legal, lengthy things in trying to say the same thing. So listen, if you are a regular listener of this show, you know that we take accounting issues pretty seriously. And you might think that's a little strange. But the truth is it really matters in this industry. This is why we fixate on things like proof of reserve. There is a ton of custodial Bitcoin floating around. It's really important that depositors have quality assurances. It's important that we know that stable coins are backed with credible fiat reserves. So for issues like that, that's why we have firms like Witham. Witham is today's sponsor.

They're a top 25 accounting firm in the United States, and they have a dedicated group focused on crypto. They work on tax issues, financial statements, advisory, token sales, stablecoin audits, you name it, as it pertains to accounting and audit issues in the crypto industry, they support that. If you want to learn more about Witham, go to Witham.com slash crypto. That's W-I-T-H-U-M-com slash crypto. And now back to the episode. What do you think the optimal situation would be here? I mean, would it be something like Hester Pierce's safe harbor?

Would it be a new carve out for a new type of offering with a disclosure regime that, you know, takes note of the fact that these are a taxonomically different thing or just more clarity on the existing way? What's sort of the preferred outcome here? Yeah, I think like this could actually be really helpful to Hester's. the Safe Harbor stuff. Because in the Safe Harbor, what they're saying is that, hey, here's a three-year timeline or something where you can just go ahead and do what you're doing. But towards the end of it, we'll need to figure out

if you're a security or not. But that's the key question, right? How are you going to figure out if you're a security or not? Right. So we are, that is, I think that, think of this way, that this was the hardest question that everyone in the industry, including the regulators, including the law firms, including the projects that were avoiding.

And we were basically like, let's just take that on, right? Like someone has to take a stab. Let's go deep. Like, let's do all of our research. And because the alternative would have been that we were, we would have been filing like for an IPO right now, which would have been ridiculous in some sense, right? Like, because we wanted trading to start or we wanted mining to start. And then for these things to start in the U.S.,

like there's a full public offering because we want to, Reggae has a 50 million cap on it, right? And our token value is already exceeding that. So which would have been a lot of overhead. So we did the research on like, let's try to take the challenge head on. And this is super helpful to the safe harbor because now you can say here is a framework through which projects can, you know, come to this determination that can this safely exit the safe harbor and it's not no longer considered a security.

So I think it could be really helpful on the safe harbor side. And plus recently what has happened is that some of the limits for reg CF have increased as well. So the work that we did for reg A, reg A has a, well, used to have a 50 million limit. It might be a little bit more now. But most projects don't need even that much capital to start with. And if the reg CF limits are raising to, I forget. the exact number, but maybe $5 million or something. So you can use the R-qualification framework to do something like a reg CF, then enter the safe harbor, and then exit and exit that. So hopefully

these things can be really helpful for the rest of the industry. One interesting thing to ponder would be, you know, let's say your counsel and you collectively determined that, you know, Stax wasn't ready to be a commodity, so to speak. At that point, did you have a contingency plan for it remaining, you know, effectively security in the U.S. or for you continuing to treat it as a security? You know, did you have a model where you would have to try and get it lessed on ATSs and treat it for all intents and purposes as a security for the foreseeable future in the U.S.? Yes.

So I think that could have been an option. like if we really thought there's no way where there could be a clear almost like path to decentralization but then the challenge there is that there's also no ATS or a exchange that is approved where these digital tokens can even trade

right so that's also a little bit of a dead end right like it's a unless an ATS like that exists you like you can have the legal framework and be ready to go, but there wouldn't be any exchange that's able to trade it, right? At some point, I think there were rumors that, you know, maybe Coinbase or some other exchanges are working with the regulators to get these appropriate licenses, and it didn't go anywhere. So it's safe to assume that, you know, like those licenses never came out, right? And

that would have been a challenge. Yeah, there's a bit of a chicken egg problem there where, you know, the issuers of these assets aren't willing to consider the ATS model because there's no ADSs that trade this stuff and there's no pressure because there's no issuers looking to list on them. Yes, and I think that still remains important for things that will always be securities, right? So if you have something that is a security, clearly a security and will always be, always remain a security, but you want to trade that on a digital token crypto exchange, I think those challenges still need to be ironed out. We were in this unique situation. We were

just treating it as if as a security out of an abundance of caution, whereas there was a clear path to, you know, as the NEPA grows, as there are minors, as there are other entities and apps and developers and so on, like these things will clearly not be securities. So with this We've had a long discussion on securities law, which is obviously, you know, the topic of the day here. And I personally find it fascinating. I mean, we're talking about the transmutation of what, you know, the state might be considering securities to commodities, which is just fascinating. I mean, I don't think there really are many examples to draw on. So we're kind of in new territory here.

but there is also a whole technology side here. I mean, there's a whole Stax 2.0 to talk about. So maybe we should, you know, touch on that, talk about the original vision for Blockstack and whether that changed over time or how it evolved and maybe, you know, your journey from inception to Stacks 2.0. Yeah, I think maybe this could be like, you know, two parts of the podcast. You can refer people to the legal. one and then the more general one.

Yeah, we've got a lot to talk about on both sides. Absolutely. Let me give you some background, right? So I'm a computer scientist at heart. I'm mostly been doing distributed systems research for, you know, like 15, 20 years. And I was always in the research camps where we're working on, you know, next generation internet protocols. I've been involved with some efforts where, you know, people are basically trying to

to have a clean slate internet design, meaning that, hey, the internet protocols are old and clunky and they can be improved in many ways. How do you upgrade the internet, really? And what I saw, and part of the reason why I took a leave from Princeton to kind of like do it through a startup was I always saw that these research projects would just remain like research ideas.

Like there would be a prototype, there would be a publication, you wouldn't have a real impact on the actual internet. So the idea there was like, okay, how about commercialization of the technology and actual real impact was a thing like very, very important to me? So this is around 2013 and, you know, this ambitious project comes out of Prince and me and my co-founder. We are like, hey, we're building a new internet, right? And we are building new internet infrastructure and so on.

And a bunch of folks like Union Square Ventures or Navalra Picardt and Y Combinator and others, they effectively invested in the R&D lab that these people are taking on this really ambitious thing. Let's try to back them and see where it goes. And we discovered blockchains after that. So 2013, I think Bitcoin is like, I don't know, $90 or something like that at that point. And we discover blockchains as a very elegant solution for some of the stuff that we were looking to solve. Like, for example, you know, making the internet core infrastructure more decentralized, specifically decentralized DNS or decentralized way of exchanging public keys. Right.

And at that time, like, it's fascinating to me that. So it's been exactly seven years at this point, right? So imagine this is 2013. And we are looking at this problem and we're asking ourselves the question that should we use the Bitcoin blockchain directly? Option one. Two, should we use something like Namecoin for people who remember that it's a fork of Bitcoin, the first fork actually, and even Satoshi was involved in the design discussions and so on. And it does this like merge mining thing with Bitcoin.

So it's partially benefits from the computing power of Bitcoin, but it's a separate blockchain. Should we use something like Namecoin or option three should we build our own blockchain? And the fundamental thing going on here is that Bitcoin has limited functionality at the core layer by design. You actually want that. You want it to be very secure and durable. And it has a very limited scripting language. And if you want to add any functionality, like you need to basically figure out how to do that without modifying Bitcoin.

And or over here, imagine that so Vitalik basically took option three, right? He tried looking at, he tried at some point like proposing, you know, smart contracts directly on Bitcoin. Obviously, Bitcoin core developers are not going to do that. So he went off with a separate proof of work network to create Ethereum. We tried a building on top of Namecoin. So imagine that we want to bring these apps and smart contracts. And we believe in the power of Bitcoin and merge mining kind of gives you a subset of that kind of like security guarantees.

And we tried building on Namecoin and then discovered like there's this paper I published. where, you know, we discovered how a single miner had too much compute power on Namecoin. But more fundamentally, I think we really realized that merge mining has this almost like a fundamental flaw where a miner that might be, you know, smaller on the main chain of Bitcoin might actually be quite significant on the merge mine chain, if not a lot of miners are participating, right? Plus that and then there were several other issues with, you know, maintaining separate. separate code bases and forks and this and that.

So we moved more in the camp of let's just try to build it directly on Bitcoin, right? Like this idea of we want to bring more functionality to Bitcoin and let's try to do that directly, directly on top of the main chain. And that's what Stacks 1.0 is. And we built that system while kind of like doing more R&D about how do you bring, you know, smart contracts to do something like Bitcoin, right? So Stax 1.0 is actually fairly limited. It effectively introduces these domain names or user names or very small amount of data like pointers to data storage on top of Bitcoin. It's almost like a virtual blockchain on top of Bitcoin.

And it's in production. And very quickly, it was clear to us, especially as Bitcoin price was appreciating a lot. And we were kind of like hitting the transaction volumes and really high network fees. it was very clear that this additional information of registering usernames, let's say an app gets like 100,000 users or something, they're not going to pay like $40 transaction fees to register a username on Bitcoin, right? Because that's just the Bitcoin fee.

So it became very clear that building directly on top of Bitcoin is out of the picture. And it sounds obvious at this point, but if you remember the early days or even the big blockers versus the small, blockers, it wasn't clear always that the base layer is going to become more of a value settlement layer and you're not going to buy your coffee by paying for a Bitcoin transaction directly on the Bitcoin chain. So this is kind of like the evolution, but we remained in the camp. Imagine that going off and starting a separate blockchain in some ways is actually the easier

thing to do. And I think this is an important point for people to understand that starting a separate blockchain is the easier thing to do. We didn't do that. We kept poking at this problem of like, how do you basically connect yourself to Bitcoin and you settle on Bitcoin? And the reason is that I am a strong believer in the thesis that there, a lot of the functionality and apps and smart contracts are actually going to collapse on top of Bitcoin. And part of this comes from just kind of like knowing the internet history and the early days of the internet, like more comprehensively,

there were, it feels hard to imagine right now, but there were actually all sorts of other networks back in the 90s. And there were very strong arguments like, hey, my application is different. We need like, you know,

something else from the network. And so we are going to have a different type of a network and not use this TCPIP network out there. Or there was AOL, which was like more centralized. or Microsoft was trying to have their, I forget what they were calling it, information superhighway or something like that. And then what happened is that as TCPIP became the standard,

people realize that it's just more economical, easier, better for everyone to be on the same standard and everything started collapsing on top of TCPIP. But people were innovating on top, right? So you got HTTP, you got JavaScript on top. It's almost like now TCPIP, the standard is everywhere that we don't even think about it, right? Like it's almost ridiculous to think that can there be some other network other than the internet? Right. So we take that lens that Bitcoin is that base layer. It's like TCPIP. And the biggest kind of like confusion that I've seen out there is when people say that Bitcoin is a one-trick pony and you cannot.

do anything else with it. That's completely false, right? Because TCPIP never changed. It never had to change. There can be other protocols on top that do introduce smart contracts, that do introduce these applications. And in many ways, that's actually far better because you're building on top of a much stronger security base. Like Bitcoin by far has the most amount of hash power, has a very durable base, and it has a 10 plus years of history of actually, you know, being stable and durable and running out there in production. Plus, Bitcoin has the most amount of crypto capital. Right.

We are already seeing these use cases where people are trying to drive, basically create synthetic assets like wrapped Bitcoin on other blockchains. Like, why wouldn't you bring smart contracts directly to Bitcoin and directly enable Bitcoin to be, to be used in smart contracts? So I think that's basically the thesis. And it's in many ways, like, it remains as true. through today as it was early on. I think on the technical level, what is very clear is that you cannot build directly on top of Bitcoin.

Bitcoin is heading in the direction of a value settlement protocol. We can do thousands or even millions of transactions on a side chain or in our design is like a connected chain. We can get into the technical details. And Bitcoin would only see like a settlement of it, a hash of it. And you can have smart contracts on this connected chain that have visibility into Bitcoin. So our smart contracts on stacks, you can actually trigger logic on the smart contract by just doing a pure Bitcoin transaction. So if, you know, I send you some small amount of Bitcoin, that's a $5 worth and a smart contract was programmed to trigger something based on that, it can.

And it's a very interesting design because it's fitting into that. theory of, you know, everything collapsing on top of Bitcoin in a very scalable, secure manner. Yeah, I completely share your intuition around, you know, the importance of increasing the semantic density of transactions. That's ultimately how you scale. You bundle many, many transactions into, you know, periodic base layer transactions. And the point you make about, you know, the virtue of actually Bitcoin remaining largely static. I know it'd be much more convenient if it changed to accommodate all these other use cases, but in the end, it's that predictability, which gives its strength.

So maybe just elaborate more on the linkages between the Stacks chain and Bitcoin, how they're kind of related. Yes. So basically what we designed with Stax 2.50 is a consensus. mechanism between two blockchains, right? So usually when people think of consensus, they think of I want to achieve consensus within my blockchain, right? Ethereum or Bitcoin and so on. What we're saying is we are interested in consensus between two blockchains and specifically between Bitcoin and our chain stacks. So what happens is if you want to be a minor on stacks, you're actually running both the

Bitcoin software. So you have visibility into Bitcoin chain and the Stacks functionality. It's actually the same thing. Like Bitcoin is pretty tightly baked into our software and nodes. So the miners, they compete in leader election on Bitcoin. Right. So basically, Bitcoin is going to decide who becomes a leader on the Stacks chain. Right. So there is a leader election process. where people actually bid to become the leader. And there is a verifiable random function, meaning that based on their bids, there is a random probability

like which leader gets picked, and the leader is going to write the blocks on the stack chain, and there are incentives there, right? So the key thing over here is that instead of running our own proof of work, kind of like consensus, and wasting, you know, separate energy, which we know is never going to be as much as Bitcoin, right? We actually use Bitcoin's as proof of computation, meaning that someone has already, you know,

spent the electricity and have done the hash cycles and the difficulty to produce a Bitcoin. So we use Bitcoin as a proof of computation, and miners are expressing their cost for mining in Bitcoins, right? Whereas Bitcoin miners, they express their cost in electricity and in the A6 that they've purchased, right? So that's what they're burning. And they're doing it because there's some profit to be made. So they get the newly minted Bitcoin and the transaction fees, and they figure out if it's profitable. So this is the next step of that, right? You have Bitcoin. You kind of express your cost in Bitcoin. And what you're really doing is you would mine only if it's profitable, meaning that you can get cheaper stacks or STX through the mining process than are available out on the exchanges.

So the incentives for these miners, one, there is a coinbase. So stacks is a currency that is, it's fuel for smart contracts. And that's all we want to do. I think there's a very interesting, almost like sometimes tribal kind of like arguments between, let's say, you know, Bitcoiners and Ethereum. people, right, where it's like Ethereum is money and then Bitcoiners are like, no, Ethereum is not money. Bitcoin is the only sound money or is the sovereign money. So we're in the camp that, you know, you accept Bitcoin as the sovereign money, as the protocol of value. And you are actually

tackling a smaller problem in many ways. You're trying to be the, you know, the equivalent of a Amazon Web Services coin that every time it can be happens, this cryptocurrency gets used. And people are just paying for that cryptocurrency. Right. And interestingly, so in a block, there's the Coinbase reward, like the new STX that are being minted. And STX is needed because all this extra state on smart contracts and all that extra

data that actually should not be part of Bitcoin. Someone needs to maintain that data. Someone needs to maintain that state. someone needs to execute these smart contracts. So the Stacks cryptocurrency is incentive for people to do all of that, right? And then just publish the hashes in Bitcoin. And I'll describe that a little bit more. So you get the newly minted STX, but you also get the transaction fees.

So on stacks, you can have thousands of transactions that are basically represented in a single hash on Bitcoin. So our blocks move in a one-to-one correspondence. It's a, I think an analogy would be if there's a lightning channel that settles every block on Bitcoin, that is pre-programmed to settle every block on Bitcoin, right? That's kind of like how the stacks blocks work. And the other kind of like interesting thing there is that we have this concept of microblocks, which are much faster confirmations on the stacks chain. But these microblocks are actually really a R&D venue where these microblocks,

can take even more transactions and scale independently on Bitcoin. Because theoretically, Bitcoin doesn't care if you're hashing a thousand transactions or a million transactions. So if our microblocks are scaling and they're actually now taking millions of transactions and still kind of like doing the one-to-one settlement every block on Bitcoin, that means that you have this really nice scalability there next to Bitcoin. And here's the important part that the finality of our data actually depends on Bitcoin. If someone needs to attack the history of our chain,

they would need to go and attack Bitcoin. And to that, I would say, like, good luck with that, right? That's the most secure form of finality that you can have. And you don't need Bitcoin miners to actually cooperate for this system to work, right? No. So we, and we, we went through that experience, right? With Stax 1.0, there was some dependence on, you know, how opt return, can evolve or can people start kind of like censoring these transactions and so on if they think that this is a lot of junk data that is being written to Bitcoin. So for this design, we actually do transfer transactions. So that's it. Like a pure Bitcoin transfer transaction is what we use for consensus on the Bitcoin site. I know there are some technical details there, but I think

they're important to get right. So two other things I'm going to get into. One is the Clarity's smart contract language, and the other is this economic dependence of the Stax chain on the Bitcoin chain and how people actually earn Bitcoin rewards for participating in consensus. Let me first get into the smart contract language a little bit. So this is, again, one of those kind of like core fundamental problems that if you want to have smart contracts, how exactly should these smart contracts be written? because, you know, these programs are computer programs are very different from traditional computer programs. They actually hold money on it, right?

And hundreds of millions of dollars, and in today, like maybe even billions of dollars of crypto assets are stored on these smart contracts. And never in the history of computing you ever had these computer programs that actually stored that much value on them. So I think it's a very important question to consider that what type of formal verification or security guarantees should be given to these programs, it's called smart contracts. And we are very clearly in the camp that the programming language for these smart contracts actually should be specifically designed to optimize for this security.

This is not a website that can crash and you can restart it. This is more like a code that controls an airplane, and it cannot crash, right? There needs to be formal verification around what a platform. program can and cannot do. So with that kind of like design principle in mind, I think it actually reminds me of a little bit of what we did with the reggae qualification with the SECC and so on. Right. And I think the common themes are that you could do something quick and dirty. That is not the correct way of doing something, but you have a early mover advantage, right? Like you

at least publish something quickly and try to get adoption. Or you can take the hard path, which is the right and you know that in the long term, that is the right thing to do. So that's a little bit of what happened with the clarity language. It's more than two years of R&D work, and it is a very precise language. The technical term for that is that it's a decidable language, meaning that developers know precisely what a program is going to do, even before the program executes. Right.

If you compare that to Solidity, which is like a JavaScript clone on Ethereum, on Solidity, you usually have a gas estimate because it's an estimate because you actually don't know how much gas is going to get consumed because you don't know what the program is going to do. The computer scientist and me gets scared about that, right? Like, what do you mean you don't know what this program is going to do? This program actually holds like hundreds of millions of dollars of crypto assets on it. So in clarity, you know precisely what the gas cost is going to be because you know exactly the execution path of the program, and you don't have to execute the program to know that.

So that's the core difference that clarity has. And then we ended up collaborating with Sylvia McAle, who's a Turing Award winner professor at MIT, and is the founder of the Algorand project. So the language is generic, right? Algarand can use it, we can use it, other projects can use it. When you use it on Stax, you get this additional property that Stax blockchain has a very tight connection to Bitcoin. Right. So the contracts actually have visibility into Bitcoin state.

We have baked in SPB proofs. So what happens here is that you can start writing logic around Bitcoin, which is something extremely exciting, right? Like if you want to build some sort of a prediction market or some application where you're monitoring Bitcoin transaction. You can very easily do that with clarity on the stacks chain. You know, when we were talking prior to the episode, you had sort of touched on how stacks had these value cruel qualities. Tell me a little bit about that, how you think about the asset and the token

from a value cruel perspective. Right. So I think over there, as I said earlier, that the main purpose of stacks is these games, gas fees or transaction fees on the stacks chain. But interestingly, the way we designed the consensus mechanism, when miners are bidding for blocks in Bitcoin, their cost basis is in Bitcoin,

that Bitcoin is actually going to the stacks holders that are actively participating in consensus. So the way to think about this is for normal kind of like proof of stake, what happens is that a bunch of the holders, they lock up their holdings. Let's say, you know, on polka dot is dot or on, you know, ETH2 is going to be Ethereum, right, not on ETH one. And you lock up your, your holdings in consensus, and then you get some sort of earning on it, right? So we're here in stacks, if you participate in consensus, you lock up your asset and, but you don't have any slashing conditions is

different, right? So you can't lose the funds. over here. But the Bitcoin that is actually kind of like being consumed in mining is being, is flowing to the stacks holders, right? And we released an economic model around it. And in the model, if around, you know, let's say 50% of this liquid supply is participating, around 10% of annual earnings can flow to the stacks holders. And I think it's interesting because it's drastically different from proof of stake. A, what you're earning is Bitcoin. And I think a lot of people, and it's the first time where, you know, people can natively earn Bitcoin from a protocol. Yeah. And Bitcoin is a valuable asset. People like treat it differently, you know, they think it's,

it's really valuable. But it has other dynamics as well, because, you know, some people might need to sell a portion of their holdings to cover tax bases and whatnot because, you know, this might be income depending on the tax laws that apply to you. Interestingly, if you're earning Bitcoin, and you're selling Bitcoin, Bitcoin is a highly liquid market, right? And you're not impacting the stacks market dynamics based on that. And where things become really interesting is, and I think this metric is, I would say, critical to understand, is as there are more smart contracts on the chain, which is the main purpose of the chain, more Bitcoin is now flowing, right?

Because let's say that a thousand STX was coming out as a coin-based reward, but another thousand or 2000 is coming out because people want to execute the clarity contracts. So now suddenly the rate, the earnings rate is going up, but the earning rate is going up proportional to the usage of the network. And that's a key thing. Right. Because as the network is getting more usage, like your asset is giving you higher earnings in Bitcoin, but that's in Bitcoin, right?

And interestingly, this is where I think the circle actually fits perfectly together. We believe that we can actually make Bitcoin more valuable, right? Because Bitcoin right now is this almost like a passive asset. People hold it as digital gold. You can now move Bitcoin into clarity contracts and deploy them into smart contracts. Like, you know, there are interesting things like a Bitcoin only decks that's in the works. There are lending applications. Like basically, imagine people who would never touch Ethereum with a 10-foot pole.

You can do something very close to Bitcoin. Like, you know, I just want to get a USDC loan or something from a smart contract. You can do that with some security guarantees of Bitcoin because these assets are actually defined and anchored into Bitcoin itself. And in some ways, it makes Bitcoin more valuable, right? Because now Bitcoin can have these applications directly on top of it. versus more innovation happening on disconnected blockchains. So that's kind of like the economic aspect of it.

I mean, it totally increases the design space for uses of Bitcoin as collateral. And if this gains traction, it'll mean that there's just more Bitcoin being used as working capital. So if you're deploying Bitcoin in a contract, people always looked at the locked in defy metrics. this would be kind of the equivalent, but natively, on Bitcoin. So I totally see how that is positive for Bitcoin itself. The other thing is that if you have more demand for block space, which this would inculcate, then Bitcoin, there's a permanent pressure on Bitcoin fees, which makes Bitcoin more secure in the long term.

Yes. This is also very interesting because what happens is our miners are actively operating on Bitcoin, right? And Bitcoin is needed to mine our chain, meaning that there's demand for Bitcoin. There's a new use case for Bitcoin that, you know, some miners would be going out acquiring Bitcoin because they want to, they want to mine. Right. So imagine a success case scenario where, you know, things like, you know, Jack Dorsey is a big Bitcoin fan and he has companies like Blue Sky, where they're looking at, hey, can we actually have a decentralized protocol for Twitter and I know that he's a big Bitcoin fan.

Ideally, he might want to do it with Bitcoin, but you clearly cannot register 200 million Twitter users directly on Bitcoin, but you can do that on the Stacks chain where the ownership information is actually getting anchored on Bitcoin, meaning that, you have a private key, you registered a username on Stacks that got hashed along with other transactions in Bitcoin, and you can see the Bitcoin transaction, right? So you know, you have approved.

that, you know, this is how I own my, my username directly. And same with other applications. So what happens is when transactions like these are being included in Bitcoin blocks, miners are willing to pay more, right? Because the value of that transaction block is a lot higher, right? So there is, in some ways, I think this was your theory that the value of some of these transactions would have to be much higher to sustain the, the Bitcoin price that we are seeing up there.

One interesting thing I was following was, you know, some of the discourse around when you guys had done your reg A plus offering, it was clearly a very costly activity involving lots of lawyers, lots of disclosure, lots of back and forth with our regulators, and the Stacks token wasn't trading in the U.S. on any of the exchanges. and there were quite a few critics that said, well, they should have just done the standard model with a SAFT and then just releasing the tokens on exchanges

or doing an airdrop and having them be immediately liquid and not go through the securities registration process. In light of today's events and what you expect in the near term, would you go through this same process again if you could? Would you do things differently? or would you, are you kind of content with the path that you chose? Yeah, so I think the interesting thing here is that when I was seeing that criticism, I couldn't comment on it, right?

Because we were following these strict regulations, I couldn't comment on our kind of like exact plans or exactly how this would happen because it had to be fully detailed with all the right information there. So today in many ways is the answer that I couldn't give. at that time, that this is exactly how it happens. I do think that it was a long journey, but we kind of like have this cultural DNA that we would much rather take the right path, even if it's hard, even if it takes long. It shows in our technology, it shows in our regulation framework.

But I do hope that things become easier for future entrepreneurs, right? Because in many ways, like we were the first and we had to figure a lot more things out. And hopefully that once we have done it, I think it became. it becomes easier for other people. Well, you certainly blaze the path here. Congrats on your progress. Very excited to see how this develops. Where can people follow you, follow your work?

Yeah, so I'm pretty active on Twitter. It's my first name at Mnib, M-U-N-E-E-B. And for the project, you can go to blockstack.org. Actually, now it's like a more decentralized ecosystem So you will get pointers to all the various places in the ecosystem where there is the relevant information. And I would tell everyone to kind of like watch out for the Stacks 2.0 launch. Right now, we are scheduled for January 14th.

And I think it's the biggest thing we have ever done as a project, much bigger than, you know, the SEC qualification or this decentralization framework. That's where the bulk of the technology that we've been working on for years actually goes live. And it brings smart contracts and applications to Bitcoin, which we are very excited about. Well, we are certainly looking forward to that. We will keep an eye on it. Meneeb, thanks so much for coming on.