The Breakdown - Muneeb Ali Explains Blockstack’s Big Bet on Bitcoin

Episode Date: February 11, 2020

Last week, Blockstack announced a new proposal through which node operators would be rewarded in bitcoin. The concept behind Proof of Transfer is that, for the cryptoasset ecosystem to run, electricity should only have to be converted into digital scarcity once.  In this interview with @nlw, Blockstack CEO Muneeb Ali explains how, by tying the security of Blockstack’s Stacks blockchain to bitcoin, and allowing miners to be rewarded with BTC, Blockstack might be setting a new precedent for how the crypto ecosystem looks to bitcoin as a base layer.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It's Tuesday, February 11th, and today we have something just a little bit different. One of the most contentious issues or questions in the entire crypto space is the idea of what blockchains are good for, what tokens are good for? Now, on the one end of the spectrum, you have folks who really believe that there is only one good use case for blockchains, which is money, which is Bitcoin. On the other end of the spectrum, you have people who believe that there is a fundamental shift

necessary in how the entire internet is architected, and that services need to change from being fundamentally centralized and controlled by specific corporations with specific incentives that do not necessarily match the incentives of users or the needs of users, to something that is more user-owned, where the distinction between network users and network owners is, in fact, obliterated. The second vision is, of course, a lot of what underpinned the growth and explosion of Ethereum and the ICO movement,

and the whole goal of having decentralized applications that could take functionality that previously required centralized intermediaries, and turn it into something different. Now, while much of the focus in Ethereum has shifted to decentralized finance protocols, there are still plenty of people across the space, not only just in Ethereum, but beyond, who are looking into decentralized social networks, decentralized social applications, and a huge array of other types of decentralized apps that can change the power balance and recreate the Internet in a fundamentally different way.

One of those platforms is Blockstack. Blockstack describes itself as a decentralized computing network and app ecosystem, and their focus is to empower users to actually control their own data and identity in a way that's impossible in Web 3. Last year, Blockstack made news for running the first SEC compliant token sale, an extremely burdensome process, which cost them millions of dollars, but which did show that with the right resources and patience, you can actually work within the confines of the existing system, even if it's not ideal.

Blockstack were back in the news last week when they announced a new proposal they call proof of transfer. The idea of proof of transfer is that it anchors the security of the Blockstack's blockchain stacks to Bitcoin, and that participants in the ecosystem of Blockstack actually are rewarded, not just with the native tokens of the ecosystem, but with Bitcoin itself. It's a very different approach to security and a very different approach to the game theory and incentive structure of network participants than anything that we've seen before, at least in the recent era. On today's episode of the breakdown, Blockstack CEO Munib Ali joins to talk about how this decision was made, why proof of transfer came about, and how

Bitcoin is poised to be at the epicenter of the cryptocurrency ecosystem, even for advanced functionality that isn't on the development agenda and shouldn't be on the development agenda in his estimation for Bitcoin. It's an interesting interview and a fascinating experiment that has implications that go far beyond Blockstack, but may be about how Bitcoin fits into this ecosystem in general. All right, welcome back. We are here with Munib Ali, the CEO of Blockstack. Muneb, thank you so much for joining today.

Absolutely. Happy to be here. Okay, so we were just talking about this a little bit. And something I think is really interesting and maybe the meta context, right, for someone who's like, okay, why should I listen to this interview is I feel like Blockstack has found itself in this interesting role of being something of a leading indicator for the industry, right? You guys tend to have an interesting perspective on where the industry is as a whole, and you reflect that in some of your strategic decisions.

Now, the most obvious example of this is the fundraise that you did, which was the first reggae plus fundraise last year, basically. went through the SEC's actual processes in a way that is very different and out of sync with perhaps the rest of the industry, but in a positive way, obviously, as it relates to regulators. And now you guys have made a new interesting announcement as it relates to how participants in your network are going to be rewarded. So I want to get into all the details of the new proposal. But first, for folks who haven't spent much time with Blockstack, I'm wondering if you could just give us a little bit of the story, kind of, you know, what you guys are trying to build

and where you are in that process. Absolutely, happy to. And yeah, I think for that comment, I think we internally here at Blockstack tend to think in terms of first principles. We look at what the industry is doing, but just take that as a single input, and we try to make independent decisions.

And I think sometimes that comes across as we would end up picking paths that were non-obvious or picking paths that not a lot of people are looking at. So maybe, maybe that's what you're noticing there. Certainly with the SEC qualification last year, I think that was a very unique approach. Let me give you a little bit background on myself and how the project started. So I have a background in distributed systems, right?

So for almost like more than a decade before starting Glockstack, I've been doing research in distributed systems, which for people who don't know, it's the area that looks at next generation computer networks. The original internet was kind of invented by people from this research community. And I did my PhD at Princeton. And I have been involved with various projects that try to kind of like build a next generation internet. So there have been many clean slate internet design projects, for example, at Stanford and other places. And part of the reason why I did a startup instead of trying to pursue some of these kind of like ambitions through a more academic route, is that I feel like those ideas never get really translated into commercial solutions.

They never get deployed in real life. So I sometimes describe Blockstack as the idea that escaped the research lab. So my PhD pieces was on Blockstack. Me and my co-founder, Ryan, met at Princeton University. And then really, this was about how can we build a more secure internet infrastructure that addresses a lot of problems that we face with the internet that we know today. And I think blockchains happen to be a really interesting solution for the problems that we are trying to solve. So this is, I think I'm pretty OG at this point given that the company was formed

in 2013, predates Ethereum, and we've been building a lot of very interesting solutions over time. People should think of Blockstack as software for a user-owned internet. So there are several layers of the stack, the Stacks blockchain being the foundational layer, if you've done a bunch of work on storage and authentication and other developer tools that people need to be able to build and scale out their applications. So I think there are now more than 400 decentralized applications built on our network. And we are extremely excited about the developer traction that we've been getting over the last year, especially. You should think of Blockstack as being in heavy R&D mode initially.

We raised venture capital, hired a bunch of computer scientists, and were heads down doing R&D. And then we started deploying out our infrastructure and have been focusing on getting a lot of lot of developers on it. So that's kind of like the background and which ties into our thesis on, basically think of it this way that at this point, it is very clear that a next generation internet or Web 3, if you want to call it, will be built on top of blockchains. I don't think it's a controversial topic anymore. If you talk to people and you say that Web3 would be built on top of blockchains, they would largely agree that yes, that's likely what's going to happen. I think the next question is where there's more competition or more arguments going on and

there about, okay, but then which blockchain or how exactly would it get built? And I think the proof of transfer or POX that we have recently released is actually a very big bet. And it's a very, very unique bet in a way as well. What we're really saying is that the 800 pound gorilla in this space is actually Bitcoin. And we haven't seen a lot of work that effectively says that Web3 would be anchored into Bitcoin or it would emerge on top of Bitcoin. And I think the reason for that is that because of Bitcoin's security, the scripting language with Bitcoin is very limited by design, right? And I completely agree with that design.

And Bitcoin basically prides itself in not changing. So I think people don't envision that if Bitcoin is never going to change, how would it ever support Web3 functionality? But I think Web3 functionality can actually emerge on top of Bitcoin in the new blockchains like the Stacks blockchain that is trying to use Bitcoin in new innovative ways. So I think that's again tying back to, you know, what you said, for one reason or the other blocks that ends up making unique design decisions. I think this is consistent with that. Yeah. So, I mean, the interesting thing is that basically, you know, to your point, when people

discuss which blockchain, a future iteration of the web will be built on, presuming that they are in that zone and in that conference. There's a whole critique that says the sort of things that Web 3 enables censorship resistance, et cetera, don't really matter to users because they only care about convenience. But let's hold aside that argument for a second. For the people who do believe that there is both a need and a mandate to build a new version of the web, the conversation does technical, often come down to the technical specifications of which chain they think is best suited to do that. And the interesting thing, it seems to me, about this proof of transfer proposal is to some extent decoupling the security part of a blockchain from the feature functionality and the developer functionality part. So I guess maybe now this is a good segue to have you explain a little bit more about exactly what proof of transfer in this proposal looks like and how Bitcoin interacts with the system. Absolutely. And I think even with the argument of a next version of the internet, it's interesting to see that, you know, the internet is not a technology that was given to us by aliens. It was invented by people who happened to be still alive and amongst us, right? And most of these internet founding fathers like WinServe or Sir Tim Ferriss Lee or David Clark, who was the chief protocol architect of the internet, they all seem to be.

to agree on the shortcomings of the internet and they all seem to agree in the journal direction of Web 3. I think it's a different story about users and how they're dependent on these centralized large tech monopolies, but as you said, let's keep that topic aside and then dive into the technical tradeoffs and the different options available. So I think proof of transfer or P.O.X, as we call it, is basically the idea that you need to go from electricity to a proof of work-based cryptocurrency only once. Once you have that and once you have it in a secure way, with Bitcoin, you don't need to repeat the process, right?

So right now if you look at even the Ethereum blockchain, it is basically doing proof of work right now. So miners are taking electricity, they're burning. it or using it to mint new Ethereum tokens. And same for a lot of other proof of work-based blockchains that are out there. And I think in general, if you compare the hash power or security of these blockchains to Bitcoin, you'll notice that Bitcoin by far is the king of proof of work. And we're making the bet that the difference is actually going to increase over time.

There might be bigger difference between how secure Bitcoin's proof of work is compared to some smaller blockchain that is trying to start and gain attraction from miners. So that's the high-level idea that you don't go from electricity to a new cryptocurrency. You go from electricity to a new cryptocurrency in terms of Bitcoin, and then you use Bitcoin to participate in the consensus algorithm of a new blockchain. So let me get into that a little bit. So in this, so Stax 2.0 is that blockchain that is in development, right? Now, so imagine that our goal is that we want to start a separate blockchain that has new features

that Bitcoin doesn't have, and Bitcoin shouldn't have. I think that point is important to understand. For example, the Stacks 2.0 blockchain has a full smart contract language, it's called clarity, and people can express different types of smart contracts. It's very, very precise, and there are proofs around what the programs can and cannot do, but Bitcoin should not have that functionality, because that. that would go against the security of Bitcoin, and it should have just a very limited scripting language.

So there are two types of parties in our consensus algorithm. One is the Stax miners, and the other is the Staxe cryptocurrency holders. Right? So miners, just like traditional miners, they have a cost to mine. If you are a Bitcoin miner, you have your A6 or you're consuming or burning electricity, so you're paying electricity bills. and you mine if it's profitable for you to mine. So you calculate what your cost basis is and if getting the new Bitcoin from the mining process is profitable,

you will decide to mine. Similarly, there's a cost to mine through POX and that cost is expressed in Bitcoin's. So miners are kind of like spending Bitcoin in the consensus algorithm and they're participating in leader election, meaning some of them will get elected randomly to be a leader, much like normal mining process, and the leader gets to take the transaction fees,

take the newly minted stacks tokens, and write the new block. So that's what the miners do. The interesting thing here is the miner could just destroy the Bitcoin. That would be similar to destroying electricity. But instead of destroying the Bitcoin, the miners are sending Bitcoin to stacks holders. And that's where the other part of the equation kicks in, where if you are a STX holder, you can also participate in the consensus algorithm. And effectively what you're doing is you're running a full node.

You're indicating that you want to participate and you announce your Bitcoin address. So you say, let's say you have 100,000 stacks, and you're saying, this is my Bitcoin address. And then you are effectively helping the consensus process by sending some useful information on the network. You are effectively telling other people which blockchain fork your own. And this information is useful to mine, especially the honest miners. So now these holders are effectively, they're holding stacks, but they have a Bitcoin address associated with it. And the Bitcoin miners agree on this list of addresses, and they're effectively sending Bitcoin to those addresses as part of mining. Does that make sense?

So I think there are two ways to try and understand this. One is to compare it with staking, that more people would be familiar with this concept of staking as they have been around for a couple of years. So in staking, the idea is that instead of doing proof of work, you are the economic holders of that new cryptocurrency basically run the consensus out with them. So you put up your funds as almost like a stake that can be slash, right? So if you are being malicious or somehow, you know, you end up not following the protocol correctly, your funds can be slashed. So that's the risk of trying to keep people honest.

There's a potential cost factor involved. And then these folks who are participating in staking, let's as Tesos or Algorand or potentially Eats 2.0 that wants to migrate to this, you are earning more of the same crypto asset by participating in consensus. With PEOX, this is different because A, your funds are not at risk. for being slashed. So if you're a stacks holder, you're participating in the consensus algorithm,

but your funds cannot be slashed. And the second big difference, and I think this is where it becomes really interesting, especially for folks interested in game theory and economic models out there, it's an interplay of two different assets. You're holding stacks, but you're actually earning the rewards in Bitcoin.

So there are a very interesting interplay between two different crypto assets that happens. And you could be potentially bullish on both of them, right, for different reasons. And you see synergy between the two assets as well. So one other difference from proof of stake is that the security of this consensus algorithm is still derived from Bitcoin's proof of work. Because miners are sending transactions on the Bitcoin chain. So if you're a minor, you actually have visited.

ability both on the Bitcoin chain and the Stacks 2.0 chain. Everybody else, if you're just a user or just a stacks holder, you only need to interact with the Stax chain and not the Bitcoin chain. So miners are effectively participating in consensus by sending Bitcoin transactions, which means that if someone wants to go back and rewrite history, they would also need to attack Bitcoin and try to rewrite Bitcoin's history, which is, as we all know, extremely, extremely, extremely hard to do. So I think we benefit from Bitcoin's proof of work that way, which is something that proof stake doesn't happen. So it sounds like the goal is almost two part in some ways.

One is almost to peg or piggyback against the security and the increased security of Bitcoin while also taking advantage of the demand and the interest in Bitcoin to almost play the role of this kind of reserve asset type thing that potentially uplevels the amount of demand that you guys have for people who want to participate in the block stack ecosystem. Is that a fair characterization? I think the reserve currency aspect is definitely very interesting. Even if you model this in how societies evolved over time, you had different types of objects that were used as currency, then people started relying more of gold, right? And we have Bitcoin as digital gold. And then people started coming up with gold-backed currencies. And in this case, Stax is not really

quote-unquote gold-backed, but it is anchored in Bitcoin digital gold. So in a way, there's an interplay between the new cryptocurrency and the underlying reserve cryptocurrency, which is Bitcoin. Do you think that this is, do you think we're going to see more more of these type of new novel interactions with Bitcoin going forward. Do you think it's hit a, I guess, a critical threshold in terms of where it fits in the larger cryptocurrency ecosystem? And maybe a better way to actually get at this is how long was this idea brewing? How did it come about?

And what was the process like for you guys of actually coming to this, you know, to your point, very different type of approach? Yeah, I think in some ways, like, we were. circling this idea for a very, very long time. Let me go back to 2013 when we were just running off. So this is, you know, this is a world where Ethereum did not exist, not even on paper, the Ethereum white paper did not exist. And I remember kind of like looking at options for should be,

so the goal of the project was still the same, that, you know, we want to build a user-owned internet, which means that we should be able to register usernames on the blockchain. We should be able to register domain names and we should be able to kind of like define property for internet users. And Bitcoin didn't have that functionality.

So we were debating that should be modified Bitcoin or try to modify Bitcoin or should be work with a fork. So I don't know how many people will remember Namecoin. And it used to be the number two, you know, cryptocurrency. I think Satoshi was involved with it early on. Aaron Schwartz was involved with it early on. Zuku gave this thing a name Zuku's triangle that was squared by Namecoin. So a lot of like early crypto people were involved with this project. And what Namecoin basically did was it was a

Bitcoin fork and it was introducing the new functionality of registering domain names or other types of digital assets. And the third option was we started a new blockchain and we try to kind of like re-implement a lot of this functionality and come up with the hash power and all of that. And I think the world would have looked very different out of these three different design decisions. And initially we ended up trying to build on top of name coin because it already had a certain feature set and that we wanted. And the same issues that I'm referring to where, you know, if you're on a smaller chain that doesn't have enough hash power, those are the kind of things that the name coin community noticed and we we noticed

such attacks as well where, you know, a few miners would have more than 50% of the hash power on name. The Gug project, you know, since then hasn't been very active, but the lessons from that experience are still valid today. If I try to start a new proof of work blockchain, Initially, the hash power is not going to be a lot, and any single party can come and try to take that over. Plus, like, I think in the grand scheme of things, it just seems like reinventing the wheel. Like, if everyone is going from electricity to a new type of a crypto asset, you're burning electricity, you're investing in ASX, and it sounds like a waste of resources. Whereas P-UX is finally kind of like that idea that can have a sustainable relationship with Bitcoin. Because you're also, I think there have been variations that we, other people in the industry

have proposed as well. We took a deeper dive on this, the concept of proof of burn where you go from electricity to Bitcoin and then you burn the Bitcoin to participate in consensus. I think that can also work. But I think POX is even more powerful because you're not destroying Bitcoin. You're actually distributing it as incentives to other participants. And Bitcoin gets recirculated back in. into the supply and can be used.

How has the response been to this? I think it's always interesting and challenging, as I'm sure you well know, to introduce anything new just because of the base level hostility isn't the right word. But it's a contentious market, right, with a lot of people trying to build different versions of a similar future. How has the response been from different communities? Have Bitcoiners been interested in this? Or are they just not interested in what you guys are doing?

doing, how has Ethereum responded? I'm kind of interested in what you've seen so far. Now, it's a few days, a few days since you actually made this announcement. Yeah. So I think the announcement has been very positive. I generally don't look at market conditions, but, you know, if you take that as a signal, like that was extremely positive as well. And this is kind of like at a draft stage, the paper that we released is a draft.

and we have a Stax Improvement Proposal process where this one is called SIP 007, and it is in a draft phase right now. So I think when this gets accepted and we release the full paper after all of the security and economic audits, that would be the confirmation that, hey, we are definitely going ahead and doing this. But even at the draft level, the response has been very positive. And I think even the Bitcoin community, I think that there are some people who are, effectively, like, you know, there's just Bitcoin and there's never going to be anything else, right? And they're very much on one end of the spectrum. But I think the broader Bitcoin

community is actually, they want more innovation to happen in the Bitcoin ecosystem. And some of them, even some of the well-respected leaders in Bitcoin, they realize how sometimes, you know, more innovative things are happening in other than Bitcoin. Bitcoin is, yes, still, by far the most secure kind of like cryptocurrency that could be the reserve cryptocurrency but if you look at new teams and developers who are tinkering with

new types of ways to interact with cryptocurrencies or financial products or even web three applications, all of that is not happening on top of Bitcoin right now. And there is a significant portion of the Bitcoin community that welcomes the idea that more

innovation happens on top of Bitcoin. That's precisely what we are trying to do Imagine that the Clarity Smart contracts benefit from the security of Bitcoin, right, and it give you full flexibility to write, you know, defile like contracts or start building like stable coins that effectively benefit from the security of Bitcoin, which is good for the Bitcoin ecosystem. So I think that there's definitely a bunch of folks in Bitcoin that we have talked to are extremely excited. I think the true test is going to be when the hardliners, who especially because,

you know, stacks is a separate blockchain with a separate crypto asset, and usually, you know, they're, they're hostile towards new types of crypto assets. But I think the jury is out to see how even the hardliners would respond if they see that there's a synergy between Bitcoin and the stacks crypto assets. Yeah, I mean, I think it's fascinating. One of the reasons I was so excited to have you join is that I think that part of part of the tension between Bitcoin and other other blockchains comes from Bitcoiners having a sense that almost that they need a different level of conservatism in terms of what they are trying to build and what Bitcoin is trying to be. And in some ways, to me, what's interesting about this is that it's a new type of

experiment in terms of the relationship between Bitcoin and other assets in the space that reinforces the role of Bitcoin as a central anchor for the rest of the space, but in a way that's very different, right? It's not just philosophical, which is the point that people make all the time. It's like, oh, yeah, you support Bitcoin because you support everything, but we're also doing these other things. It actually ties the destiny together in a different way. And that strikes me as something pretty novel and certainly really, really interesting to watch. So I appreciate you taking the time today to share more about this. I think it's going to be a really, really fascinating experiment. And I'm definitely excited to see how this goes as it moves into production and out

of proposal. Thank you so much. Thanks for having me. And yes, I absolutely agree. I think of this as a couple of years ago, there was that meme around the flip. opening that Ethereum is going to flip Bitcoin. And the idea was that, hey, Ethereum has smart contracts and people can build decentralized applications with it. And it also has the payment functionality. And I think over here, we are explicitly saying that, you know, Bitcoin is the king of approval work. Bitcoin is the reserve cryptocurrency. And we want to have synergy with Bitcoin and our holders are earning Bitcoin. So you are actually in a way, spreading Bitcoin by even kind of like being a user of stats or some of the applications built

on it. So I do think that very explicit acknowledgement of what role Bitcoin would play in this world can help some of the people kind of like calm down their nervousness around, you know, what if some other blockchain comes and tries to kind of like fight with you? Like you're absolutely not trying to fight with Bitcoin. Awesome. All right, Moonieb, thank you so much for your time. It's been great having you. Same here. Thanks a lot. So there you have it. What I find so interesting about this blockstack proposal and why I wanted Muneb to join for the show is that it changes the dynamic of a conversation we hear a lot around Bitcoin. Many people who are invested in other projects and other chains

believe and will tell you that Bitcoin is important. It's important that it stays this digital gold. It's important to serve as a rallying point for everyone in the industry and for new financial people and speculators to come in to join, just to increase the flow of assets in the ecosystem. But of course, innovation is going to happen elsewhere. There are also folks who believe that all innovation will be built off of Bitcoin in some ways, and that innovation looks like layer two and other application layers where they can do things that the base layer of Bitcoin can't happen. This blockstack proposal to me is. something of a third path that does more than just pay lip service to the idea and the importance

of Bitcoin as a rallying point for everyone in the industry, but also suggests that there is more room for the interplay between Bitcoin and other chains than just simply building layer two solutions on Bitcoin. Now, of course, this proposal is, even as Munib said, still very early. It has to be approved and has to go to implementation before we can really talk about how it's going to work. This is the type of thing that is fundamentally about not just being theoretical, but about changing how people behave and how incentives work inside an ecosystem. I'm definitely going to be watching it closely, and I hope that you had a chance on this interview to understand why it seems like such an interesting experiment. Thanks as always, guys, for listening. We'll be back

with another episode of The Breakdown tomorrow. Cheers.