The a16z Show - a16z Podcast: Blockchain vs/and Bitcoin

Starting point is 00:00:00 The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Welcome to the A16Z podcast. Sonal and I are sitting here with Adam Ludwin. Adam, welcome. Thank you. Adam is one of the co-founders of Chain, and you guys are a block. chain technology provider to large financial institutions. And right there, I think this is interesting because you're not a Bitcoin provider.

Starting point is 00:00:39 You're not sort of involved in that ecosystem in the same way, at least. So let's launch into blockchain and Bitcoin and where we are today and what the distinction is and how those two things are being applied in the marketplace. Sure. Well, Bitcoin was the first fully functioning digital asset the world has. ever seen. And a digital asset is one that is minted, created natively at the outset as a digital token. So a Bitcoin is a digital bearer token. And a bearer token is something that, where the ownership of that asset is defined by whoever has it in the moment. So whoever bears it.

Starting point is 00:01:20 Right. So if I have a dollar bill and I hand it to Sonal, there's no question of who owns that dollar. She now owns it. But with digital, the way digital financial services work is that what actually we do, for the most part, whether it's credit cards or sending securities on an exchange, trading securities, we actually send messages saying, I'm going to give you my asset, and then later there's some settlement process. So if you're a merchant who takes credit cards, you know this because you don't get the money right away. You get the money right away with cash, but you don't get the money right away with a credit card. If you trade on a stock exchange as an institution, those securities don't

Starting point is 00:01:58 settle right away. There's some risk that happens afterwards. It's a question of, is there going to be a settlement or not? And we all pay for that. So what Bitcoin did before anyone else or any other instrument is it really created the first digital bearer token where I could just send you Bitcoin over the internet. And as soon as I hit send, the recipient has it. And now there's a record of that ownership of who bears that token at that moment on the network, on the blockchain, which is the ledger for for keeping track of that. And that's a big deal. It's as big a deal as voiceover IP. I think it's the most close comparable to what's happening in this area of technology. Voiceover IP, of course, was a shift from an analog switch line network for moving our voice,

Starting point is 00:02:53 which was very expensive and had many interlocking components and and of course didn't use the internet as the medium to a world where our voice traveled over the internet. Interestingly, with VoiceOver IP, the end-user experience wasn't dramatically different at the beginning. You picked up the phone, you dialed grandma, you talked to her, you hung up the phone. You didn't necessarily know or care

Starting point is 00:03:20 that the architecture behind the scenes was completely digital. Right. But what you cared about was that, cheaper, that maybe the call clarity was a little bit better, that you didn't have to pay more for long distance. So you got all these features as a result. And the same is now happening in financial services. So we are going to see a shift to a totally IP-based, internet-based architecture for all sorts of financial services. Some like to call Bitcoin or this area of technology, you know, money over IP, which I think is a fairly good analogy. And now to this debate,

Starting point is 00:03:56 this question of is it about Bitcoin or is it about the blockchain? I actually think we could take it a level lower, which is to say, is Bitcoin going to be the only financial instrument that operates in a digital way? No. No. What about gift cards? What about airtime on your mobile phone when you're sending it from one SMS card to another, or one SIM card rather to another using SMS? What about energy credits on a smart grid? What about stock certificates? So as soon as we start to imagine the world functioning the way Bitcoin functions, but across every other asset class and across every other type of financial instrument, we begin to think, okay, well, maybe we can apply this technology to other things. So unless you think Bitcoin is the only financial asset the world will ever

Starting point is 00:04:40 have in the future, then you can probably start to begin to think about applying blockchain technology elsewhere. And that sounds, that's exactly what chain does, correct? That is what chain does. So we, we've taken inspiration from Bitcoin, and we've taken a lot of the fundamental technical architecture from Bitcoin, and we've generalized that to apply to other asset classes. Now, technically, there's a very important difference between, say, a gift card issued by Starbucks that wants to function this way and Bitcoin. And the big difference, I've already sort of pointed to it, is that Starbucks is involved. Starbucks is going to issue that, and you're going to get, you're going to go redeem it at Starbucks.

Starting point is 00:05:23 So you're not going to have a decentralized issuance according to a fixed schedule by anonymous miners. It's Starbucks saying, hey, here's 500 Starbucks points or here's five Starbucks dollars. And you can think of a gift card like a merchant issued currency. So already we see, okay, well, Bitcoin doesn't actually fit quite well perfectly there because the only way to leverage the Bitcoin network for Starbucks would be to kind of hack the network and layer a Starbucks dollar into the Bitcoin network,

Starting point is 00:05:52 which is an approach called a colored coin. And the challenge there is, again, you're still dependent on the Bitcoin network. And you may not want the Bitcoin network. It's not exactly well suited from a design principle perspective for that use case. So what might a suitable blockchain network look like for Starbucks and other issuers of these merchant currencies or gift cards?

Starting point is 00:06:17 So those are the types of starting points that we begin with. And then our company partners with large institutions. In that case, for example, we're working with First Data. And First Data is a huge issuer of gift and is interested in, okay, how do we make, how do we evolve the model to make it more efficient and introduce new features and better customer experience using this totally digital format? And that's what our company does. We partner with these institutions. And then we deploy a network with them that is geared to. to that asset class.

Starting point is 00:06:52 So we're really, again, trying to take this digital asset model that Bitcoin pioneered and apply it across the board. So it's, well, it's Bitcoin without the Bitcoin. I mean, it's blockchain without the Bitcoin in some cases. Or you could have both ways, I suppose,

Starting point is 00:07:08 but it's not a requirement. You don't, you may want Bitcoin as the currency token in a particular use case. In many cases, you just don't. You know, the argument that you cannot separate Bitcoin in the blockchain is absolutely both true and false. So the true version of that argument is that when it comes to Bitcoin itself, it doesn't work without the entire solution that includes the blockchain, includes decentralization, includes miners. That's how Bitcoin works. Those are the design principles of Bitcoin. But as soon as you say, how might we digitize a gift card? How might we digitize a security?

Starting point is 00:07:47 how might we digitize a minute on a mobile network? Then the question becomes, okay, if that's the asset, then already we're assuming we don't need Bitcoin as the asset. So what type of technology or what type of network do we need to deploy to facilitate the movement of those assets? Well, let's pause every minute, though, because I do think this is a common misconception. We should spend a moment just really getting to the bottom of it because the whole evolution of these networks in the past, the reason a lot of decentralized efforts have never worked

Starting point is 00:08:21 is because it's really tough to figure out how to allocate resources, how to get people to keep those resources going, how to actually move things, not just move things around to your point, but also just keep it going and have incentive to keep it going. And so the whole reason that I don't think we can completely disconnect the Bitcoin aspect of blockchain is that the entire system works because people are incented to mine. And those mine, resources are what is keeping the entire network going. It's baked into, in the past, we never had that, which is why it's never worked before. It's inherently baked in. Yes. Bitcoin is an incredibly elegant solution to creating a totally decentralized monetary system. And this is why I

Starting point is 00:09:04 like to tell people like, Bitcoin is never going to go away. It will, Bitcoin will never go away. It will live on for as long as the internet lives on. And the reason for that is, as you'd pointed out, there is an economic model in the mining process that incents those miners to keep mining. And it works. It's six years old now, and it's still humming along. It's improving. There's a community of developers who are helping to scale the protocol to make it more robust and more secure. And so for those who are interested in either not participating, in the sort of existing financial system or can't participate in the existing financial system,

Starting point is 00:09:53 Bitcoin is very well suited. So take, for example, this week. So this month, the price of Bitcoin skyrocketed 70%. We're in the middle of a big bull market, right? So it's over $400 now. It was in the 200s for a long time for the last nine, 10 months. And if you look at why, the answer to why the Bitcoin price is going up or down

Starting point is 00:10:14 is always the same. it's demand because the supply is fixed. So price is always just a function of demand. So now I have a very simple question you say, okay, well, where is the demand? And there's a great article on Zero Hedge, which did an analysis and basically demonstrated very, very clearly

Starting point is 00:10:33 that the demand in this case is coming from the Chinese who are anticipating a currency devaluation, which has been announced in China. and are using Bitcoin as a means to circumvent capital controls. So there's a great use case of wanting to be outside of a particular financial system and leverage something that's a lot like gold, but a lot more efficient. You don't have to ship it across borders. It's not heavy.

Starting point is 00:11:03 You can just use the internet to store value and move it anywhere else in the world and then get out. So Bitcoin will continue to serve those types of use cases where, and many, more to come, but where you, you know, you want to be essentially in, uh, outside of the, the traditional networks. Um, everything in the gray market, uh, which, you know, people tend to think, oh, that means, you know, Silk Road and illegal activity. Yes, that's inclusive, but everything you do in the cash economy, you could call the gray market. You know, if you, if you run a little restaurant, you pay your waiters and your, your bell, your busboys under the table, that's gray market activity. It's cash activity. Um, if they have smartphones, you can do that with Bitcoin now, right?

Starting point is 00:11:41 So there's a huge, massive cash economy. There's a huge massive number of people who want to be outside the financial system. And there's many people around the world who have smartphones who are not because they want to be, but they are because they live in certain countries outside the financial system. They're unbanked because there isn't the financial system. Right. But shifting gears for a moment, you mentioned that the core of your business, at least their initial partnerships, are with like the NASDAQ and some of the other players you have listed on your website.

Starting point is 00:12:07 So why are they like doing this? It's kind of counterintuitive, actually, because it's almost like they're willingly disrupting themselves. And they don't know that. I mean, they know that, but it'll be interesting to see how that plays out. So we is a great question. We partner with financial institutions who view this as a strategic opportunity. They view this as there's a market structure change on the horizon where a lot of the entities who are involved in clearing, settling, reconciling and moving funds are going to be disintermediated.

Starting point is 00:12:48 So is it, again, that shift from, you know, IP phones, from analog to IP phones? Exactly. It's the same idea. So if money moves over IP and all assets move over IP, we don't actually need as many of the clearing and settlement functions that we currently use today. Right. Because they exist for the fact that we're just, you know, today we send digital messages, but then there's a settlement piece after. Well, all that settlement piece after is going away. And by the way, there are big institutions we're partnered with who run networks like Visa and FISA. They run networks. NASDAQ is a very central part of the capital markets ecosystem. But the reason they've partnered with us is they've recognized that the first to deploy a network, tends to get, you know, the lion's share of that opportunity. So networks...

Starting point is 00:13:42 Isn't there like actually a saying about the early bird or something? How does it go? The early bird gets the network? Is that the same? We're kind of saying that. But, you know, there's a notion of network effects, winner takes most, and the same is going to be true here. Because ultimately the solution we're talking about is substituting intermediaries with

Starting point is 00:14:03 cryptographic networks. And so the first movers, most of whom are our partners, have recognized that if we're going to go and do this, it better be our network, and we better set the terms, and we better bring along the partners and design in a way where we have a seat at the table. So let's assume that it's NASDAQ, for example, how do those networks start to look differently and act differently?

Starting point is 00:14:26 In the case of telephone and voice, you know, at least for the users, like you said, nothing changed, although the cost of use dropped dramatically, right? what might we see in this transition? What you'll see in the case of the capital markets is that securities and other financial products or assets will be issued at the outset as a digital asset, such that when I trade on a stock exchange with you, I want to sell one Apple share. You want to buy an Apple share.

Starting point is 00:15:03 So I create a transaction on the exchange where I include as the output at my transaction that Apple stock. It matches me with someone who wants to buy. You send a $100 whatever it is when this thing goes live, $150 in the other side of the transaction. the private keys which control those assets sign the transaction and then just seconds later the assets swap and land in our respective custodial accounts again managed by private keys. So it really looks like a real world transaction

Starting point is 00:15:52 where I hold out a stock certificate and you hold out $150 and we each grab the corresponding and then we pull in the opposite direction and then we're done. Whereas today, again, we execute a trade. You don't actually get that stock for a few days. Right. You get the promise of a stock.

Starting point is 00:16:11 You get the promise. So that's what will be different behind the scenes. But for the client experience, what will be different is the bullet points on the marketing brochure. I'm just going to say, you know, instant settlement, low cost. You know, the $7 for a trade, a lot of that goes to intermediaries. the value chain who are clearing and settling, right? So the ability to go collapse that to close to zero and the ability to buy into more complex financial products where there's transparency to those products and it's not lost in all the paperwork and reconciliation that would normally

Starting point is 00:16:49 go into a complex financial product will exist. So imagine or what you will see are new products and services, lower cost, and ultimately a more robust and a more transparent financial system and trading platform. You can imagine the same then for credit card, fees, et cetera. Those things get squeezed in the same way? Yes. I think most, in general, what we envision, you know, over time is a much smaller financial system, actually, because many of the players in that in the financial ecosystem are

Starting point is 00:17:25 there because they are helping to clear and settle, helping to ensure there's no fraud, ensure that identity is in line that all the K-Y-C-A-M-L stuff is... What's the K-Y-C-M-L stuff? Know your customer and anti-money laundering. All those functions which exist because there's a huge disconnect between a digital request and then the actual movement of funds. So we will see a smaller financial market. but one that's much faster, more sophisticated, better suited to customers.

Starting point is 00:18:00 The very long term, and this is sort of controversial, but I don't, I think some, but I don't think is, is that central governments will be minting currency this way. So we already have three different forms of a dollar bill today. We have literally like a dollar note. We have a coinage, right? And we have credit money where there's essentially the banking system is used to create funds. I think there will be a fourth medium, and that fourth medium will be a digital medium, where you'll be able to receive and have on deposit dollars that are essentially digital

Starting point is 00:18:37 tokens that you can use in these systems. So that's the world we're transitioning to. Do you think that the players that you're working with buy into that vision? Because right now it seems like they're smartly, opportunistically, thinking about how to get in the game and make sure they're staying relevant in this software money over IP world, actually. But that seems like that's almost too controversial or like not controversial to us, but. Yeah. Our partners, in every case, want to run the networks, right? They want to be deploying the networks and running them.

Starting point is 00:19:13 Then the question is, what are the assets on the network? So if you're a NASDAQ, it makes sense that you're going to have both securities but also currencies that are using to, used to buy these securities. So the other big role on every network is where are the assets being issued, who's issuing them? And in some cases, you know, in the case of a first data or a telecom company like Orange, they're also the issuer. But in other cases, the issuers are actually entities that are either governments or custodian banks or companies themselves.

Starting point is 00:19:54 It's not unforeseeable that Apple would issue its own stock, right? So Apple could issue stock and a flow stock that way in a much simpler process than the current underwriting and issuance process for stock. We'd love to hear more insights about what it's like behind the scenes of actually doing this because on the outside it sounds interesting and exciting. They're working together and collaborating and partnering. But what does that actually look like? Because you're talking about two very different cultures, two very different

Starting point is 00:20:20 technologies to very different minds. I mean, there's so many different things coming together. Like, can you tell us a bit more about that? Yeah. And were you, were you, did they come to you or did you go to them? I'm like, are you having to do a lot of selling or are they like, oh my God, we need what you guys have in this vision of the future? At the outset, they came to us. And the reason they came to us at the beginning was that our company chain, we started two years ago and we launched a Bitcoin API for developers so that it was very easy for software developers to build applications on the Bitcoin network. So companies like ChangeTip and BitPesa, change tip is for tipping with Bitcoin on Twitter, BitPaces for sending Bitcoin to Africa,

Starting point is 00:21:03 other remittance services, wallets, exchanges. They used our API because it made it easier to build on Bitcoin. So we were powering a huge percentage of the Bitcoin apps and services that were launched over the last couple of years. And financial institutions who were, interested in the technology got in touch with us because they said, look, it looks like you guys understand the technology. So can you come explain it to us? First of all. And then second, what's working and why? And so we were sort of this neutral technical platform partner. And so they first came to us. And when we met with big financial institutions, the thing we realized quite quickly was that Bitcoin was of interest. And they were curious about it. And they were curious about

Starting point is 00:21:48 it. But as I said earlier, they really wanted to know if they could move the asset classes that they participate in every day and they're relevant to their business. Could they move those assets in that same format? Right. Right. So that was at the outset. Now that we've become kind of the de facto blockchain infrastructure provider to these big FIs, now we have obviously a sales process and we go out and we meet people and we go to conferences and it kind of goes both ways. to the question of what it's like to work with, you know, we're a technology company, we're very Silicon Valley for good and bad. We're out here in San Francisco. And our partners are largely large institutions in places like New York and Boston and London. And, you know,

Starting point is 00:22:35 it's been really interesting in terms of learning about what it's like to sell into these organizations and work with them and partner with them. The first thing I'll say is we have we really only work with partners where the CEO's driving the agenda. In this case, it's totally necessary because this isn't like an email spam filter where an IT department can just look at the benefits and say, okay, your spam filter is better than the other spam filter and it costs this much and we'll sign a deal. This is a strategic decision to go disrupt a market,

Starting point is 00:23:09 to try to capture a part of the market. Maybe you couldn't capture before or defend against the onslaught of some new thing. depending on the use case, it's a very strategic choice to deploy a blockchain network, very strategic. So we found that when we start in the innovation lab, it never actually gets us to the point of a decision to go do this. So we found that where the CEO invited us in at the beginning or where we were able to get to the CEO or C-level executive early, we've been able to define the hypothesis and the

Starting point is 00:23:44 thesis for going out and building one of these things. And then we've been able to have obviously the organizational buy-in because it's coming from the top to go do it. And so that's the most important thing we've learned. And that's how we've focused our time. You know, the other thing we've learned that's kind of interesting and probably is not a surprise to most of your listeners, but was a surprise to us, is that at any given institution, it's very, very rare to find someone who actually knows how the whole thing works.

Starting point is 00:24:13 How the whole institution works? Yeah, how the whole institution works. All right, you go into a bank. You can talk to senior people at the bank, and you ask them very basic questions about how does what happens when, you know, ex-client wants to take X action, like can you just lay out the steps? And you tend to need to get like a room full of people together for a day to really map it out. Same is true, you know, in the energy markets, telecom.

Starting point is 00:24:39 These are large, complicated companies that have, are often the result of acquisitions, are often the result of years of overlapping legacy systems, competing fiefdoms, different products and services. And so part of what is difficult and slow about working with these organizations is simply setting a baseline for what is the status quo today? And when we do it this new way,

Starting point is 00:25:04 how do things change? And then, of course, finally, the implementation, right? So the reason companies like Accenture and PWC, exist and are very successful is they they go in and implement and re-engineer business process. And this is the same thing, right? So we are finding ourselves increasingly partnering with large enterprises who already sell into the IT functions of big banks and big financial companies to actually pull off the implementation.

Starting point is 00:25:37 And so, you know, the net net is, you know, as a small tech company out here, we get leveraged through, you know, senior partnerships, identifying people in the company that really understand how the thing works, and then partnering with integrators to actually pull it off. And how do these things exist within these large organizations? Are they sort of like, okay,

Starting point is 00:25:55 here's the skunk works, financial, digital cryptocurrency gang, and we've got them off there in the corner in the basement, or is it sort of in the full light of day and, you know, they get to come to the holiday party too? So when we started two years ago, there was no one.

Starting point is 00:26:10 And maybe there was one person who just was, you know, they just had a hobby and they liked Bitcoin or something, right? Right. There's no official anything going on. We called the company chain two years ago because we had this thought that, you know, eventually people are going to realize

Starting point is 00:26:24 that it's the layer of the blockchain that is of interest, but it was kind of a bet, a gamble, to call the company chain two years ago. Then about a year ago, as you had, exactly as you had said, there was a skunk works that would get set up in the innovation lab. and it was kind of like, all right, you guys go figure it out and tell us if there's anything here, that's interesting.

Starting point is 00:26:47 And then really in the last six months, but like in a very serious way in the last three, and this is a very real time topic, senior executives have taken this on and owned this as a part of their strategy. right? They've decided that whether they're going to take an action or not, they need to know why they're not, if they're not. And if they're going to do it, they're trying to figure out how to do it. So the notion that you don't have a blockchain strategy, if you're a financial institution now, is no longer possible. You have to know what you're going to do and how. Or if you don't want to do something, you better know why you're not doing something. That's the status. That's where we are today. So it really is a C level agenda item now. And by the way, I know that because, I used to work in management consulting many years ago at Boston Consulting Group, and I check in with them occasionally. So two years ago, I said, does anyone, any of your clients asking for this? No. A year ago. A year ago.

Starting point is 00:27:47 No. Six months ago, anyone asking, I think someone, I think Bob down the hall, talked to someone about it. Now it's can you come in and present to all of our partners because they're all getting asked about this now. So it really has changed tremendously in the last couple quarters. It has a huge shift to actually be able to say the same way you used to say before, what's your internet strategy, what your web strategy, what's your Bitcoin

Starting point is 00:28:07 strategy? That's actually a huge shift. Let me ask this question. You don't have to give an answer because I think I know what it'll be, but, but does all that interest and all this kind of come to, come to see the light way of things these days? Does that mean the blockchain wins? I mean, is that then, does what could happen to derail all this? I think it means that digital assets are coming. In other words, this hybrid we have now of analog assets, and then databases, it doesn't make sense. So we're going to go to a full digital stack where the asset itself at the outset

Starting point is 00:28:46 is issued in a digital format, is moved digitally over networks, is settled and held digitally using cryptography. I mean, that is coming. Part of what's challenging for us as a startup is there is so much noise in this market right now. And a lot of people, people are going to do it wrong. You know that expression? You're doing it wrong? Like,

Starting point is 00:29:08 we look at a lot of initiatives people are taking and it's clear they're doing it wrong. And so what's going to happen, what we anticipate is we're at this kind of like fever pitch in the hype cycle around this technology right now. There will be a, over the next year, year and a half, a lot of people that take half measures and they just don't get all the, they don't do what we would consider the right way. And, and they won't have great results. And they'll kind of to be like, we tried that blockchain thing and nothing there. But then there will be a handful of networks that will be deployed by serious companies that will generate real results. And then the proof will be in the pudding. But today, it's a strategic question and people are trying to

Starting point is 00:29:50 learn. For us, the imperative is partner with executives who are serious, who know why they want to do this, who will commit to it for the long haul, and let's go build those networks and change the world. And then people will see the results over time. Let's actually, we don't have too much time less. Let's write lightning around a bunch of myths and misconceptions, definitions, interesting things happening in Bitcoin and blockchain. But one to just start off, because you mentioned database and your discussion about assets that we have this analog stuff and then you have a database. One thing that I've heard come up a lot is this notion of private and permissioned blockchains, which feels really weird because isn't that just,

Starting point is 00:30:29 like a database then? So could you kind of lightning round answer? Sure. So a blockchain is a database. So we shouldn't overthink it. But it's different from a traditional database in two critical ways. First of all, it's shared. So in other words, it's distributed to every participant who is participating in the network. And then the critical difference that I think most miss is that in a blockchain, the assets are controlled by the owners of the assets. Whereas in a tradition, database, the assets are controlled by whoever owns the database. Oh, interesting, right. That's the big difference.

Starting point is 00:31:06 So it's a system whereby the asset owners retain control all the time over their assets, even as we're using a data model in a network to transact. So having to find that, what's your take on this whole move and discussion around permission in private? I think we'll have, I think the future will be many, many different networks. the Bitcoin network will be one. I think you'll have networks around prepaid and gift and loyalty. I think you'll have networks for capital markets, networks in the mobile market.

Starting point is 00:31:38 And that for the most part, they will be interoperable either directly or through integrations. But I don't think every asset in the world will be wedged into the Bitcoin network. Into a single network, right. I think we'll have many networks that are designed and defined. for use cases. Now, some people call those private or permission. I think those words connote the wrong idea. What we envision is simply just many interoperable networks. And the way in which those emerge into the world is being defined now by companies like ours and others. But regardless of path to market, I think that's the world we're heading

Starting point is 00:32:21 toward. From a regulatory perspective, it just doesn't make sense that you'd regulate like a gift card network the same way you regulate a capital markets network for syndicated loans and also different geographies and different. There are just a lot of reasons why it's natural to have different markets have, you know, cater to different or be served by different networks. Okay, so then next lightning round question that's a logical consequence of that, which is if the entire point of having any kind of network effect is that the value increases for every user and the more people that use that network, then you increase the value for those constituents, this notion of having multiple networks, even if they are interoperable.

Starting point is 00:32:55 So the interoperability takes care of some of the connection. How are we then as developers, as an ecosystem, going to build this in a way that it is truly giving that network effect? Sure. Well, I think if you look at NASDAQ, NASDAQ is a private network today with a network effect of buyers and sellers. Craigslist has a network effect. Instagram has a network effect.

Starting point is 00:33:16 There are lots of services and lots of networks in the world that have network effects. So having multiple networks does not mean we will not have network effects within the networks that are valuable. And I think the way, I think really, really important question, how do we make sure that we don't just end up with a bunch of different protocols and siloed off different networks? Then you have to spend more time plumbing the connections and actually gain the benefits of what the entire thing is supposed to enable. Right. And some networks will, like they do, will sort of accrete more power and center of gravity, right? And so then the sort of decentralized versus centralized gangs all get hot and bothered. Yes.

Starting point is 00:33:55 Well, you know, we already have some prior art here, which is there was a period of time shortly after Bitcoin gained popularity in 2012 when there were what were called alt coins, many other alternative currencies that were forks of Bitcoin. It was like a doge coin. Doge coin, light coin, dark coin. There's a whole bunch of different ones. And without weighing in on the value. of them because I think it's pretty clear now that they're not valuable. Oh, I don't know. I think the Dogecoin is pretty damn valuable.

Starting point is 00:34:23 I want one of those. Dogecoin is fun, but it's empirically not valuable. But even though those were different networks, it was actually very easy to swap Dogecoin for Bitcoin, light coin for Doge. It's very easy because at the root, they were all digital assets. They were all digital currencies. So even if we have a world with many different networks, it won't be hard to exchange across those networks because ultimately,

Starting point is 00:34:48 we're talking about cryptographically issued and transferred assets. So it's going to be much easier than integrating to data centers with different database architectures and written entirely different ways and with different APIs. I mean, it'll be more straightforward than that. So that's one part of the answer. I know it's a lightning round and it's a long answer. No, that's great. It's much wow.

Starting point is 00:35:11 I'm just kidding. Nicely done. I was waiting to say that. I didn't even. see it coming. So the other answer is, you know, there are many competing efforts today and some of them

Starting point is 00:35:26 will just go away, right? Like not, there will not be 50 different blockchain companies serving financial companies. Like, there will be a few and there will be a healthy amount of competition and that's fine. I don't think we will have one company that will deploy all blockchain networks for all asset classes outside of Bitcoin.

Starting point is 00:35:44 And nor do we want that. Right. That seems like they would defeat the very purpose. You mentioned color coins. You touched upon that briefly earlier. Could you quickly pause and define that for us and talk about other colored coins initiatives? A colored coin is broadly understood as layering an asset other than Bitcoin or a currency other than Bitcoin onto the Bitcoin network. And without getting into the technical detail of how that works, the reason it's called a colored coin conceptually, as you imagine taking a piece of one of these coins and like marking it somehow and saying now, now, from now on, this represents a dollar bill. And if I give you this,

Starting point is 00:36:27 you can come back to me later and get a real dollar. So a colored coin was that was the first kind of technical attempt at digitizing other assets. And there's, there were many different approaches to doing that. But what we're seeing is a shift away from that approach toward building networks from the ground up that are designed for a particular asset. Okay. So that brings me to the next lightning round question, which is side chains. And I think if you could spend a couple minutes on this one because it's super interesting and read this great paper on it that came out earlier this year. Could you explain what they are and why they matter? Yeah, sure. So the basic idea with the side chain was

Starting point is 00:37:08 the Bitcoin network is big. There's $5 billion, or today $7 billion of value transmitting on the Bitcoin network. And so we don't want to tweak the network and break it to try out new features. If we're going to try a new feature, a new way that the Bitcoin network functions,

Starting point is 00:37:25 say if it's more optimized for micro-transactions or more optimized for more confidential transactions, it won't be easy to just change that on the Bitcoin network. We need some, we need like a test network to try out a new sandbox, to try out a new way to architect a network. But we still want Bitcoin. We want to see how Bitcoin would function

Starting point is 00:37:45 in this new type of network. So the idea with a side chain was we can, if you imagine the Bitcoin network as a circle, we can take a smaller circle and attach it at a tangent point to the Bitcoin network. And we can take some Bitcoin off

Starting point is 00:38:01 of the main network and funnel it over through what's called a peg into this new network. So like taking it from one country to another, it's like exchanging it over this new network and see how that approach to a network architecture would look.

Starting point is 00:38:20 So it was a way to test new features for the Bitcoin network without having to create an altcoin, like light coin, so light coin, dogecoin, those were new, they had new features, but you had a new currency there. So the idea of the side chain is like, well, we already have Bitcoin,

Starting point is 00:38:35 we like Bitcoin, let's continue to use the Bitcoin currency, but we can try new features by pegging it through this process. And so that was the original impetus behind creating a side chain. And the company that is involved in that solution and that approach includes many of the original engineers and architects of the Bitcoin network. So they're really well-versed and suited to innovating on the Bitcoin network and with the Bitcoin currency. Where sidechains potentially have, you know, a limitation is getting into, say, other asset classes, because there's this really fundamental question is, if you don't want Bitcoin currency in the particular use case or market, then why not

Starting point is 00:39:20 build the network that's suited for that use case? Why try to bring over Bitcoin and, like, connect them somehow? So side chains, I think, are going to be very, very powerful with respect to innovating the Bitcoin network, less so with respect to innovating in capital markets, in payments, and other areas. We'll see how that plays out, but that seems to be where we're at today. So then last lightning round question, and then we'll wrap up. You know, you've talked a lot about the disruption of the fintech and the work that you guys are doing and a lot of these new alternatives and things that are happening, experimentation that's happening on the blockchain. Let's talk more about some of the most interesting native apps that you're seeing, because I feel like

Starting point is 00:40:00 sometimes the conversation around Bitcoin and blockchain go so much into the infrastructural details that we sometimes forget about the most interesting apps that are being built on top of it. From your vantage point, what are some of the more interesting native and promising native apps you're seeing? And where do you see kind of holes in the developer ecosystem that you would love people to address? Sure. So I divide that into two categories. One is apps on the Bitcoin network. And then the other is essentially other asset classes.

Starting point is 00:40:28 Right. Like art provenance or whatever. Right, right. So on the Bitcoin network, I think the intersection of social media and Bitcoin is super interesting. So Change Tip is a really good example of that where you can, instead of just liking someone on a social network, you can send them a small amount of Bitcoin, which would be very hard of the credit card or another means like cash, obviously. Also on the Bitcoin network, I think the most, can you to be one of the most powerful use cases and interesting use cases? is in essentially next generation remittances. So ways in which we can, we find people with smartphones moving money out of their country to relatives or doing it, trying to do it in a secretive way. Or stashing it.

Starting point is 00:41:15 Yeah. Or stashing it. So taking out, we're not stashing in the mattress anymore. We're just stashing in our smartphone. Yeah. What we could speculate about the future, but today on the Bitcoin network, that is really the most compelling use case. And the most, the thing that is driving demand is going around capital control. hedging against a hyperinflating currency in your home market,

Starting point is 00:41:35 needing to keep money out of the site of corrupt officials, whatever it is. And, of course, illicit use cases continue to be driving demand for Bitcoin. So those are the killer apps today on the other asset class side. Right. So besides like Bitcoin. Right. So imagine a world where you have a bunch of loyalty points and reward points today, sitting in programs locked up, completely isolated, you probably don't think of them as value.

Starting point is 00:42:04 When you think about your net worth, you probably don't include all the gift cards and loyalty points you have. Freak and Freak and Friken Flyer Miles. They just, they kind of exist and they're kind of a nuisance almost. Well, what the blockchain is going to do is unlock those and make it very fluid to move them around, to have them on your smartphone, to use them in new ways. Oh, trade them even. Or trade them, exactly. Now, according to whatever the restrictions are that the brand has, but we envision

Starting point is 00:42:30 world where, you know, Bitcoin people might ask, well, why are there so many Fiat currencies? There should just be like this one currency called Bitcoin. And there's something to that. There's another way to look at that, which is the exact opposite, which is why are there so few currencies? Why doesn't every brand have a currency that they give me to reward me for things? Right. I even heard our partner, newest partner, Alex Rampel at Money 2020 recently talked about even like real estate, like giving out like, you know, part of your own real estate as. Right. A fraction of your real estate. So when it's so easy to issue and move an asset, I think what that unlocks is way more activity around that. So imagine, for example, tweeting about Coca-Cola and then Coke pushing you, you know, a couple bucks worth of Coke coupon and then going to McDonald's and then paying with your smartphone and getting $2 off because you bought $2 of Coke. product. That customer experience flow is just not possible to do today in an easy way,

Starting point is 00:43:36 but it would be very possible and very easy with the blockchain. And you sit in the middle of this between not necessarily Coca-Cola, but big companies and consumers, how quickly, I mean, you talked about how in the last year, in the last couple of months, things have changed quickly, but how soon do we either, you know, get to do the Coke example or even behind the scenes securters are moving along these digital rails that we haven't used before. Yep. So the main, so the speed at which the market has become interested in this technology has shocked us even as a startup that moves very quickly.

Starting point is 00:44:11 And that speed is, that's all word of mouth, that's all talk, right? So things can change very quickly in terms of talking. And that's sort of why the Gartner hype cycle exists, because that first peak is not necessarily real things. It's people talking and deciding, oh, this is the next big thing. And so you get this surge of interest. But then there are just the physics of how long as it takes to deploy a network and get it up and running. And so in practice, what I think you'll see and what, you know, I can say here is you'll see the first few networks going live next year. And then I think by 2017, you'll start to see some of the first winners, another. words, you'll see that if by 2017 in a particular market, if you don't have a network running, then you're behind. You're behind your peers. And so what we anticipate next year is kind of a cooling off of the rhetoric, but a real investment in building. And then by 2017, the emergence of the first few networks that will really start to change a game and change

Starting point is 00:45:15 market structure. So that's the best guess I have based on our roadmaps and the sort of timelines that we're seeing with our partners. Adam, thanks for your time. back to work. Thank you. It's a pleasure to be here. Thanks, Adam. That was great. Thanks for having me.

The a16z Show - a16z Podcast: Blockchain vs/and Bitcoin

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