The Pomp Podcast - Stuart Popejoy & Will Martino, Co-Founders of Kadena: The Intersection of Public and Private Blockchains

Episode Date: March 22, 2019

Stuart Popejoy and Will Martino are the co-founders of Kadena. In this conversation, Stuart, Will, and Anthony Pompliano discuss their work at J.P. Morgan, what they think about JPM Coin, why they're bullish on building a hybrid public and private blockchain, and why the energy consumption argument is incorrect. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- Totle is a rare blockchain investment opportunity, one that offers a live product, active customers, an established revenue model. Totle solves three significant problems with blockchain asset exchange: 1) Security 2) Complexity and 3) Pricing. Over $4 trillion of blockchain assets were exchanged in 2018 and growth is forecast for at least the next 10 years. Totle’s sophisticated platform powers the blockchain economy with safe, simple decentralized asset exchanges at the best price for traders, wallets, businesses and other financial apps. Totle’s B2C Web App and B2B API are live and serving customers today. Visit totle.com/pomp for more info. ----- ZenLedger simplifies crypto taxes for investors and CPAs. We provide the best software for importing crypto transactions, calculating gains and income, and auto-completing tax forms like 8949, Schedule D and FinCEN. If you had losses in your crypto investments, ZenLedger can help you save up to $3,000 on your income taxes, with our tax loss harvesting tool. ZenLedger is also a TurboTax partner and has the best support for EOS owners. Finally, a simple tax tool that saves you a ton of time and headache!Visit Zenledger.io/OffTheChain to get your taxes done with ease, and as an Off the Chain listener, save 20% of your 2018 tax forms! ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Stuart Popejoy and Will Martino are the co-founders of Kadena. In this conversation, we discuss their work at JP Morgan, what they think about JPM coin, why they're bullish on building a hybrid public and private blockchain, and why the energy consumption argument is incorrect. I really enjoyed this conversation, and I hope you do as well. I'm sure a lot of you have used Kayak to find the best flight. Total's kind of like Kayak, but it don't find you no flights.

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pomp. Boom. Another ad. Zen Ledgers for all you accountants and crypto investors out there trying to get through this bear market. They're a fast and simple tax reporting tool that saves you a ton of time and headache. Ain't nobody like dealing with their taxes, so let Zenledger do it for you. You can learn more by visiting zenledger.io off the chain to get your taxes done with ease. And as an off the chain listener, you'll get 20% off your 2018 tax forms. That's right. Listening to this podcast makes you smarter and saves you money. One more time, zenledger.io off the chain. Go check it out. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions

and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, two for one special today. I've got Will and Stuart here. We got a whole bunch of stuff to cover as usual. So thank you both for coming. Thank you. It's great to be here. Yeah, thanks for having us. For sure. Let's go through your guys' backgrounds real quick and then we can jump into what one of your former employers has decided to do in crypto. Sure, I guess I'll kick it off. I'm Will Martino,

co-founder and CEO of Cadena. My background is engineering. I used to do distributed systems work. I did the distributed systems initial research for the company, as well as moonlighting as our formal verification engineer. I got into crypto at the SEC of all places. I was there leading a quant group, the quant groups engineering group, and building forensic data analysis tools that are now nationally deployed. And was there when Valerie founded the cryptocurrency working group and raised my hand to be the first tech lead when that group was formed. Tell them why you did that. And why I did it, because part of being in the government is that you get to be in the room and help to influence things at an early stage.

And I saw the potential of the technology and of the space itself and wanted to and felt it was kind of almost my duty to be in the room. And if I needed to shout from the rafters, oh, my God, don't ban it. This is like this is going somewhere and it's good for people. And it turned out that that voice was not needed at all. From a regulatory point of view, the idea of an immutable ledger is amazing. That someone can't cook the books is just, it's too useful to be avoided. So instead, I just was auditing and helping with some enforcement actions, some examinations. And yourself?

My name is Stuart Popejoy. I'm a co-founder of Kadena and president. And before Kadena, I'd been working at JP Morgan. And I built the I built the tech team of the research group, blockchain research group and hired Will and a bunch of other extremely intelligent people worked with Amber there as well. And we're all day been doing trading software for about 15 years before that in New York, building both exchange software and front end trading software, high frequency, low frequency, all that kind of all that good stuff. while we were at jpm we got to basically talk to everybody this was circa 2015 and 16 so we got to basically everybody wanted to talk to jp so we got to talk to everybody um vitalik came in uh digital asset trade block the hyper ledger foundation was formed so of course ibm was in

there um and uh the other thing we were doing was trying to build solutions for the bank and that's how cadena kicks off is because we came up with a way to do a scalable private blockchain uh people talk about scalability in public blockchain but scalability is an issue in private blockchain too and people don't even know because a lot of people don't you know well a lot of people don't know anything about private blockchain so a lot of private blockchains aren't blockchain that's another uh you know kind of interesting thing is that things that people are calling blockchains are not really blockchain you're looking at ibm and these kinds of companies so before before we get into public versus private and some of the challenges and benefits of each uh i gotta ask

guess where's the jp morgan jamie diamond jp m coin what the heck is the plan right i mean obviously while you guys were there i think you guys kind of got a front row seat let's say just to the um the mindset right so kind of let's talk first just mindset wise uh how does a bank like jp Morgan look at blockchain technology, even cryptocurrency, and how do they see themselves potentially fitting into that? And then we talk about that specific implementation of it. Well, one thing I would say right off the bat is that there's a big divide between what Jamie Diamond might say and what the bank chooses to do at any given point in time. So for instance, the blockchain group was basically JP Morgan wanting to be at the front of these efforts and

not be left behind because you have Goldman Sachs, you have every other bank looking into blockchain you know making investments they didn't want to be the last ones to market and in fact this is one case where JPMorgan really knocked it out of the park if you think about JPMorgan it's got a tremendous brand in blockchain because of quorum even this JPM coin thing they did recently they're making waves people are paying attention to them I think you know the Jamie Diamond stuff is almost just kind of like off-the-cuff like it's stuff that I mean I could say a lot more about it than that I'm not you know maybe it's

not totally relevant to this yeah well just as they look at it so when they want to be a leader right too obviously they see some value in the technology is it something where they look at it and they say hey we want to build tools and products that we can use to sell the clients is something where they say we're going to use this technology for internal efficiency gains uh maybe there's something else like how do they think about uh the technology um and where maybe they can play in the ecosystem well i definitely think it's client facing it's all about and that That was something that we learned, that was a valuable lesson we learned at JP Morgan is that if you can't talk about, you can't just talk about like cost savings and efficiencies

and safety, you got to talk about new money that is coming down the pipe because of something that blockchain can make happen. And that's something that I think a theme that they've stuck with in the new JPM coin efforts and all that stuff. So I think they've always been wanting to, I don't think they're actually, they're definitely not focused on build because you know they've essentially abandoned quorum i mean nobody knows who's working on quorum right now but they have obviously have an abandoned blockchain from a product perspective so it's i think it's very much of a product and client service and wanting to

differentiate uh wanting to you know basically respond to their customers needs got it and uh jpm coin obviously for those that don't know um is uh my understanding is it is a uh currency that that they've created internally to move money for themselves and clients in a more efficient, lower cost manner, right? So it doesn't look like they're yet going and trying to sell this externally. It doesn't look like they're yet going to retail, although there's been some kind of public comments that maybe in the future we might go do that. But for right now, it's more internal use to move money. What's your guys take having worked there on, you know, good idea, bad idea, likely to be successful? What do you think the challenges are?

Can I just talk through a little bit? Yeah, it's a great question. The first blockchain that actually got built and deployed at JP Morgan was Juno, which is the project that Stu and I were working on before we left. And it was kind of the version zero of what has become JPM coin, the thing that existed before Quorum. And from the bank's perspective, this system looks like an accounting system on steroids. And it's the now when I say on steroids, I mean, it's this incredibly safe, completely resilient system that does allow you to do kind of cross cutting accounting throughout the bank for pretty dramatic efficiency gains.

Now, there's a first step in the migration to getting it working. The actual system working is a bit big. But once you've done that first step and you actually have it working, you can start plugging in new things very quickly and start getting really big efficiency gains. And this is one of the things that a lot of people who look at private or enterprise blockchain and they say, oh, what is that about? And this has been the market trend for the last couple of years, although very soon, I'm suspecting in about a month or two, it's no longer going to be taboo to say enterprise and blockchain in the same sentence on the West Coast. We're not quite there yet, but I've been dealing with it for years. We're really close. And there's a certain background that gives you a huge amount of excitement when you see the potential of these systems.

And that is, if you've actually worked big kind of enterprise back office, like with those big databases, those big gnarly things that are just this immense problem to deal with on a day-to-day basis. And part of the reason is that, you know, at first you can do a lot of this stuff just with, you know, Oracle or with Postgres or just a traditional database. But as time goes on and as you bring on new developers and certain things weren't quite documented properly or certain things weren't quite designed properly, you end up with this kind of mess that grows and grows. And this is found not just in banks. It's found at e-commerce sites. It's found all over the place. Once you hit a sufficient size, that back-end database that your business runs through becomes kind of a mess. and people who have that experience

and have been in the trenches and you really need to have been in the trenches for a few years and felt the pain of getting that call at 2 a.m. on a Sunday because prod died and the backup failed. And now there's just this mess that you have to go and jump on a train to come to the office and go and fix it.

When you've been and lived that life, when you see what a private blockchain can do, you get really excited because it's so freaking safe. And it allows you to treat pretty much everyone almost as an adversary so that even your future self, if you forget, oh, I was supposed to do this before I do that, the system itself will be able to enforce, you know what, you did this wrong. Instead of it allowing you to just kind of, with the existing technology, just be a bit more permissive.

And then longer term, you build up this legacy debt that you can't get away from. What's interesting is you specifically said, you know, blockchain is an accounting system. And one thing that I've talked quite a bit about at this point is every asset, every stock bond currency commodity being digitized in the future. So if you think of Bitcoin as just a digital currency, right, there's going to be plenty of other digitally native assets. A blockchain is the accounting system for the automated world, right? And it's kind of this idea of if you were keeping the books, right, in the analog kind of cash flow type business, it can get complex, but literally a person could sit there with a physical paper ledger, write everything down, do some math, and we got the answer. That's not possible for a human to do in an automated world where things are flying around and there's value in micropayments and kind of multiple counterparties to a single transaction and all the stuff. And so you need a better system, right?

So it's almost like what you're describing is the it's not just it's an accounting system. It's an accounting system that it takes the accounting world from like a single variable type input system to a multivariable input system and allows you to do more complex computations more securely and almost have a greater sense of confidence that the number or output that you see is accurate. And I think that's the big problem that a lot of the enterprise blockchain folks see, which is a problem that you're describing. What I wonder is, does that get outside of the enterprise world? So if that use case specifically for blockchain technology exists in the enterprise world, do you see a similar type application for either retail investors or kind of outside of the large, what's called the Fortune 1000 type companies? Is this a problem at Main Street business, Joe Blow's Pizza, or even for a retail type individual like a consumer? Do they interact with it in any sort of accounting function or is that just for those kind of really large corporations globally? I mean, it's – so there's already a little bit of precedence here, which is that you have airline miles.

So that is a walled garden and an accounting system. It's just not very flexible nor extensible. But credits and that type of thing have existed for a long time. your intuition is or your thought on like where this is going what it looks like is definitely right although i would take it actually a step further and point out that certain markets aren't actually digitized yet so insurance is a good example when you go and make an actual electronic marketplace it takes a lot of lift from the engineers to go and build that but it for things that look the same or that you can use the you can kind of make a core and then just repeat it

stamp it out a bunch of times, that lift, that initial effort is worth it because you get all these efficiency gains and it becomes much more automated. But insurance isn't like that, where every single contract that might be bought and sold and sliced up and whatever, they're all a little bit different. So you can't just have a common kind of equities market for it because the things just aren't standardized enough. And blockchain allows you to not only have this incredibly robust, automatable accounting system, but it allows you to have almost importable services. This is admittedly going one step beyond where we are today. Right now, smart contracts can't interact with each other in a safe manner. Parity multi-sig

is the best example. Kadena's smart contract language pact has solved this issue. And it allows us to begin to talk about this idea that we could go and make a digital insurance marketplace where all of the kind of the overlapping set of all of the integrations that you need to represent these assets digitally can exist as individual contracts that are individual services. And then every time you have a new asset that you want to represent, you can pull in the little bits that you need and go and actually digitally represent that contract. And it makes sense because you're not repeating all that work every time. The majority of the work are these overlapping things that it needs. And it's actually pretty easy to represent the individual asset.

I might add something to that, to the point you were making, how does this make its way out to main street is that when you look at something like, uh, making state channels safe, um, you know, this is something, this is something that actually represents something that you need a very sophisticated and agile financial services company to pull off. And now we're talking about these things just working in a decentralized fashion. So that's, that's a way that like the, you know, like the small business that's able to take advantage of fast payments because of state channel is able to build off of this very complex system that is in theory been made to be unbreakable and safe now the problem is that if you base it around something like create two

that's going into constantinople you know or like the issue a lot of things come back to smart contracts and that's why you'll hear us keep taking the discussion back to how are you going to make sure your smart contracts don't have bugs how are you going to make sure that all your stakeholders know what the code is like it's important that people be able to read the code and so we we think of a world where you run a smart contract you could actually go inspect that code and while you may not understand all of it you can you can read the critical bits and you can be like i understand that this smart contract is safe that's why i'm going to use it so you know some of the things we see with the it's it's not just you know it's not just ethereum has done

amazing things and they basically brought smart contracts to the world and you know and we benefit from that just like everyone else but there are some core things that have made it so unsafe that and things that are that they're like create two and constant i don't know if you're familiar with that but these are things that make it something that makes something like a state channel become very perilous things to undertake and so that we think that these are the kinds of core bits that people have to get right so that we can bring this because you know these are going to be complicated systems but if they're built right then people just it becomes like the internet You know, people don't worry about it. You know, you use SSL. You don't think about it. That's where we're going to end up.

Let's talk about public versus private blockchains and then we can talk a little bit about what you guys are doing specifically. How would you guys describe public versus private, just given that you've worked on one of the best known private blockchains out there? uh we increasingly were distinguishing between them less because a lot of the value add is the same for both and i think to a certain extent people have gotten hung up on the difference and even from a technology point of view a proof of stake system uses the same technology as a private blockchain a proof of stake system is a permissioned blockchain that has been designed to run in public so i think these distinctions the distinction starts with bitcoin which is an open access system anybody can mine anybody can come into that system the system's uh resilience

comes from its protocol itself it's nothing about the people who are running it um a permission blockchain a private blockchain is simply one that's that maintains that same level of uh assurance but does so by knowing who's participating in there and being able to work with their you know cryptographic identity to and therefore be faster therefore have fast confirms and all that kind of stuff but proof of state is trying to take that technology movement in public um and the other reason why we think the divide talking about them in a different breath is a bad idea is because this is what allowed companies like ibm and r3 to bring private quote blockchain unquote products to market that aren't blockchains they don't offer

any of this assurance that one of the most fundamental things about Bitcoin is you sign that transaction, that you put that output out there that you can only spend by signing that transaction. In IBM, they just throw that away. The user signature is not an important part of the system. It all becomes internal to the system. And so it really, there are ways you can say it is fundamentally not a blockchain, but the interest of marketing, in the interest of selling software. And also because there are

some certain things that people expect from a private blockchain, such as confidentiality, that are challenges for a blockchain. Not everything we're going to do as humans belongs on a blockchain. And that's another thing that's similar. In the end, we're not going to be doing that different of things on public and private blockchains. And right now, people think they're two different worlds. And I think it's public key cryptography, it's smart contracts, it's a safe system, it's a resilient system. This is true across the board. And how does that, the fact that you don't think about public versus private being kind of this very clear line in the sand, you guys are building kind of a hybrid approach, right? And so maybe talk a little bit about

why you think the, well, first of all, what is the hybrid approach and then why you think that's the better approach versus either going 100% on either end of the spectrum? Sure. So when we talk about hybrid blockchain, let's actually start with the example that's kind of popular right now, which is JP Morgan Coin. So JP Morgan Coin is a private blockchain that's running inside of JP Morgan. Admittedly, it runs on Quorum, so it won't ever really hit prime time. It's just not going to have the throughput or the scale to get there. But let's say that we're to migrate onto our private blockchain solution called Scalable BFT. So this runs our smart contract language pact, and it runs one of the two consensus protocols we have,

which is scalable BFT. Private deterministic, you know exactly who is replicating and running the nodes, and it's a traditional enterprise private blockchain. That system gets a lot of teeth when it is able to integrate with other blockchains, whether they be public or private. Now, when we talk about hybrid, we're thinking about the idea of you have this private system, this known kind of walled garden that's doing smart contracts and is controlling, has better privacy controls around information. And it is linked to a public system. So in our case, this is going to be ChainWeb. We're one of the few proof of work protocols out there that are coming out this year. We use a braided proof of work consensus protocol to solve the scaling issue that proof

of work traditionally has. We'll be launching with around 10 chains braided together in parallel, maybe 20, hard forking to 50 as congestion increases. This will allow us to have somewhere between probably 100 and 1,000 transactions a second. Describe the braided, right? I don't think a lot of people have heard that terminology before or understand what that is. Sure. So ChainWeb is, the root of the idea actually is quite old. It was first proposed in the Bitcoin forums maybe five or six years ago. It's called Betacoin or Blockrope. And it was the idea that you could have two Bitcoin chains. Right now, when you make a new block

in Bitcoin, it points at its previous block. The idea of braiding two chains together is that you have two chains that are being mined in parallel, and that whenever a new block is made for one of the chains, it references both its previous block and that of its peer chain, that of the sister that it's getting tied up with, that it's getting threaded together into a rope. And this idea was initially for security, because by having more blocks in a given period of time, you'd keep the difficulty the same. So you keep the block time the same. The difficulty would actually decrease, so come down by half in this two-chain variety. And the throughput would actually double. And oddly enough, the security actually goes up because you're doing more blocks in a given

period of time, sort of how Ghost brings down the confirmation time for Ethereum. And our major contribution to this line of research was figuring out that we could use graph theory to dramatically expand the size of that type of network. Traditionally, it was thought that they could scale to maybe eight or 10 chains in parallel, and then that was it. We found a way by adding this notion of what's called the diameter in graph theory, which means that it takes a few steps to get from one place to another, from a node in a graph to another. Kind of the best way for people who haven't gone online and read our white paper or seen our talks on the subject to understand it is that it's similar to sharding in that you have parallel

ledgers so if you have an account on one chain that doesn't mean you have an account on another in the network you have to go make that account and you can burn coins to go from one chain to another you can also load balance smart contracts between the various chains but um the main difference with the proof-of-stake sharding approaches is that the mining the miners are replicating and mining off of all of the chains which is something that sharding approaches for like shasper doesn't really involve so this means that the consensus region the people who are replicating and validating all the chains is still a majority of the network. So you keep all of the security that you get from a Bitcoin approach, but you get dramatically higher

throughput for actually the same cost energy wise. This is the interesting bit about it. As you go from a 10 to a 20 chain network, you decrease the difficulty per block by half. You decrease the reward per block by half. The miners overall are basically spending the same amount of money to mine the network, because most of the energy and the resources required goes into the actual hashing and mining of the blocks, not the replication. So adding 10 more chains to a 10-chain network, pretty much inconsequential. So this is our system. It goes into testnet in about a month. We're very, very happy to be putting it out there and having people be able to kick the tires and start load balancing smart contracts for the first time.

who would want to use this right meaning uh are there specific types of assets or issuers um or enterprises who say i need i have specific needs or criterias that public chains don't necessarily solve private chains don't necessarily solve this is the perfect solution right like for you guys who is that perfect kind of target user well there's a few and i'll let's do um do the ones more on the business and enterprise side uh the first one is that um the people that we see the most excitement from are actually solidity developers, people who know the pain of that language. Usually when we talk with an enterprise or business client, we start talking about, oh, it can integrate with all these different backends. Oh, it has formal verification.

With a solidity developer, we literally start the discussion of what PACT is with, it has error messages. And that usually is enough to get them interested to go look it up because it doesn't have error messages, which makes it very hard to write serious code. On top of that, one of the big features of PACT is that you can actually upgrade a smart contract if it's broken. So when you make a smart contract in PACT, you say you give it a name and then you tell it how it's governed. This can be anything from it just throws an error so you can't actually upgrade it. This would be Ethereum style governance or it has a multi-sig key set or a set of keys that two of three or five people in the room right now. So three or five of us would have to sign

off on a transaction to upgrade the code, or it can be something that's a decentralized vote. So let's say the DAO happens on the platform. You could have a decentralized vote that would upgrade it to fix the contract, kick the hacker out and recoup all the funds. People have been confusing governance for a while. There's protocol governance, which is inherently political and you're never going to get around it.

What upgrade should we give to the language? How should we change and grow over time? there's smart contract governance and there's no reason in the world that if you know parity multisigs wallet breaks someone who has ethereum needs to care about how it gets fixed there should just be some easy like this should have been something they could have designed in from the beginning so that we don't have to bring the entire community to talk about you know what should we get rid of the kill switch well no if you get rid of the kill switch in the evm then it's actually going to expose all these other contracts to books even though yes it will fix

parity multi-sig so for that a lot of the people you know the ones that we you know our target audience people who really are interested a lot of the time are people who really believed in ethereum and really brought into the marketing and the vision um but weren't able to realize that vision on the platform because solidity just wasn't able to service what they wanted uh the throughput wasn't there and that kind of at the end of the day just wasn't safe enough to use the the only thing i basically scalability is just a huge problem for blockchain so like even a crypto kitties or basically any app immediately becomes a victim of its own success and uh so that's what everyone's trying to do with layer one scaling solutions we're unique in that we're

proof of work layer one i think we're the only one yeah um and uh and the main thing we say about that is that we offer we offer the ability to scale your platform over multiple chains and so what that really is about is just being able to push assets or push resources across chains but it doesn't happen there's no magic there it happens using uh simple payment verification you know the the chains prove to each other it's not terribly fast but what it creates is that the potential for an ecosystem where you can have like service providers making these things in other layer two solutions work with chain web as a layer one solution so that everybody needs this this is just one of those like foundational problems with uh smart with uh daps right now is that they just

don't scale as soon as you even a token you know you throw a token out there and everyone's interested in the token all of a sudden nobody can buy it because and the transaction fees go shoot through the roof so congestion scalability um you're going to be able to go on to our network and take on as much bandwidth as you can support so if you want to deploy your smart contract 15 chains do it and then you'll get that throughput and you won't be a victim of your own success got it and uh one thing i want to touch on uh which is tangentially related to scalability is uh proof of work right so one of the big things um you guys obviously have a proof of work um uh aspect to this uh and there's plenty of people who will listen to this and say oh proof of work

is not green, right? It's just a complete waste of energy and resources. And, you know, we should absolutely stop proof of work as a security and as kind of a mining mechanism. And we should go 100 percent to proof of stake. I think you guys and myself believe that maybe all the facts aren't included in that argument. And so, you know, talk a little bit about kind of how you view proof of work and and the the greenness of that uh and maybe that it's not as bad as people think it is sure proof of work's biggest problem is that it doesn't have a public relations department okay interesting we could have had people out there debunking this from day one but instead it's taken five or six years proof of stakes main motivation just go on to let's say you know the

casper um articles or sorry the casper uh docs on github and see the motivations for going to proof of stake. It's all about being green. Now, there's the whole other arguments we made that that's a wrong engineering mindset, that we have something that is so ironclad in proof of work that moving over just because it's greener doesn't make sense. We can just say, oh, let's just try to make it, let's try to incentivize things to be more green. But at the end of the day, there's been a recent kind of a couple posts that have come out that have pretty thoroughly debunked. And it looks like there was just one guy on the internet kind of making up the numbers about all of the energy that goes into mining for Bitcoin coming out of coal from China.

A lot of people don't understand kind of how energy markets work or how the energy grid works. There's effectively no way to actually store energy long term. We're not really good at it, at least electricity. And that means that you have to make excess electricity in case the demand increases. So it's not uncommon for large hydroelectric dams to be having, I think it's something like 200 terawatt hours extra just sitting around and that's and if they don't use it they lose it yeah because you can't store it literally i think it's burned i don't know exactly what they do with it yeah yeah i think it gets it's turned into entropy i think it gets turned into actual heat and that's more than i believe double what even if you were to round up at every

single point in the calculation how much energy bitcoin uses on a daily basis so and that's just from like one dam there's a good post on this i forget the exact um the name of it but it's you know an energy trader who got into it and just said look this is all bs um there are more articles coming out about that on yeah there have been more coming out over the last month so the main point that i would want to make is that proof of stake has known security problems that need to be overcome there's a reason that it hasn't launched yet there's a reason that there have been these you know these uh the difficulty curves in ethereum to make sure that they actually have the motivation to go to proof of stake in time. And they weren't able to because it's a really

hard research problem. I don't quite know if it's going to be solvable. I kind of hope that it is just because I'm a nerd and I would like a really hard problem to be solved on general principles. But for now, we don't have a good solution to proof of stake. An actual implementation that we know is safe. So it's time to think, reopen the debate about should we be accepting the shortcomings of moving to that type of system if the main motivation under which we started to accept them as a kind of a culture in crypto was to make proof of work green and that's been debunked yeah basically the there's a flawed thought process as to why we should do something and so now should we question should we do it at all this is army ricky well in mining's a weird thing

it's one of the few industries that can go to where the power is most industries you can't just relocate you can't like you can't just say oh i want to go into the middle of the forest like you know well where are your workers you know mining can mining can go right next to that dam and they have in fact that this is where you always see mining uh you know shooting up as places where some energy source is plentiful because you just need machines there you need how many you know probably need like five people to run or three people to run a huge mining plant it's actually one of the biggest distinctions between the current financial system and um you know proof work a bitcoin-based system is that the ability to use energy in places where energy is plentiful

and cheap is unparalleled in bitcoin you can just go to the next the dam but if you're trucking around let's say i don't know 100 million or 100 000 in a uh um sorry in um one of those uh armored trucks around new york city you're burning that diesel in new york city there's no way around those things are incredibly heavy you need a giant ass diesel engine to move the money at all and the guards and the guards and the army to protect uh you guys are making me think of um and i forget where the study uh but i read that one of the greatest if i think it actually may be the greatest contributor to global warming is cow farts methane yeah because the methane right and uh and the thought process basically was somebody said you know look if you really

you want to get rid of global warming you kill the cows right and basically you'll have this thing and they were making an obviously outlandish recommendation to prove a point of you know we think it is uh the trucks or it's proof of work or you know it's all these things that that are easy for us to wrap our heads around as humans to say we should stop doing x y or z but actually when you look at the data the data suggests that it's an animal farts are the greatest contributor to global warming and so um the the reason why i know this is uh i've actually seen and been pitched businesses uh there's a certain type of um seaweed that is grown in the ocean that you can put into the cow food and it drastically reduces the methane that the cow uh emits and so the whole

thought process is uh there's a there's um people who want to create these seaweed farms in the ocean so you're basically farming in the ocean to grow the seaweed you then take it and you put it into cow food you feed that uh to the cows and you can have a huge impact on global warming and so that's the length that people are thinking about and potentially going to to try to curb some of this stuff i think proof of worth is okay because most of the large facilities are looking for the cheapest power and the cheapest power today comes from renewable energy right so we may not be great at storing it but we've gotten pretty good at having cheap renewable energy now the key is right i think tesla's working on some of this stuff etc is how do we store that energy so we

can even improve the situation better you know moving forward there's the lake right you're talking about the lake oh yeah one of the biggest batteries in the world i think it's in britain when there's excess energy in the grid it'll pump water up into this lake that they built in the mountains and then when there isn't enough energy it'll switch the turbine and it'll produce energy as it lets the water flow back down really yeah it's from i think the 60s or something a few of are built i think one's in spain too so it's it's basically a bi-directional pump that will expend energy when needed but it will also create energy when needed as well yeah it can store it's actually not a terrible storage facility for energy it's not great but it's good enough that's

pretty crazy yeah this is the the common problem of um that the british have of their uh grid gets this huge surge in demand right around the same time every night when people go to turn on their electric kettles to go make tea and there's one specific period that is like the time that everyone is ready in the grid to be able to service this demand and it goes back down that's pretty crazy um all right i want to talk about uh smart contracts um help me understand uh what are the problems that kind of non-technical people don't know of about smart contracts if you're a developer and you're looking at smart contracts there's a whole host of issues that you guys understand that i think that the average person doesn't and so maybe let's identify what those

problems are or the areas of concern and then we can talk about things like formal verification etc why that stuff's important sure well i mean smart contracts start with bitcoin you know bitcoin implements a simple contracting language which is why you can have different kinds of signatures so you know bitcoin allows multi-sig you know that means you want to do a two out of three signing ownership protocol for releasing funds uh you get you know you specify three public keys but only two of them have to sign that's some that's the flexibility in the bitcoin system is that it allows you to script these things so that's that's where we start is the idea is that you have this resilient system that is nonetheless flexible it can do more than just

one thing it doesn't have hard-coded functionality you can do whatever you want or it can do within constraints of course and that's an important uh very very important concept in smart contracts is well what what should we be doing with these systems so ethereum comes along and says um let's try to make it into something that's far more powerful let's try to let's let's remove the restrictions off of off the system that bitcoin designed um and they started talking about a world computer that's you know like they they started saying that like oh now we're going to have this big kind of distributed machine and we're going to run everything on it that frankly went just way too far in the other direction in the sense that there that did

you know, one of the things Ethereum has is a thing called gas. It's a regulated computing environment. You can only compute so much. It needs to share it with everybody else that comes onto the system. So it needs to be fair. That means you're necessarily wanting to keep transactions short and keep them cheap. And there's a million useful things you can do within that universe. There's so much you can do with just being able to talk about different kinds of assets, talk about different kinds of interactions. We're talking about human business or other kind of transactional interactions where you want to capture that stuff. You want to be able to point to it in the future and say that there, you want to be able to do future actions based on the

previous actions. So it's quite a lot, but it's not everything. So for instance, when you hear people, you should be suspicious when you hear someone start talking about like AI on the blockchain. That's a classic example of like, no, let's not do that. Or at least not right now, because right now we haven't even we've realized maybe a uh you know a hundredth of the possibilities that we could realize with basically taking the bitcoin dream which is you know take one kind of interaction we're now going to say we're going to take all these kinds of transactional interactions and put them on a blockchain make them safe make them easy for you know the average user to design and we think that's a that's the other thing about smart contracts is that they

have the potential to be very democratizing in the sense that if you make it easy for people to reuse these tools and come up with new ways to use things you're going to get into a situation where people can put all these new products and new interactions and basically bring this kind of infrastructure to uh not just for new products but new populations you know as you know there's so many great projects where people are figuring out how to use blockchain to you know address social problems or get resources to people who normally don't have them so these are we haven't figured out how to do that safely yet we haven't figured out how to do that scalably yet and that's where we think that's that's the kind of that's where smart contracts really starts and that's

where we are right now and it's an incredibly exciting field but when you see somebody saying that they're gonna that everything's gonna move on there and that you need to have all this power inside of a blockchain that's questionable because you know the example i like to give is you know when you're using a gps system and it's figuring out you have the route to go from new york to boston which granted is pretty easy but you know um the the you don't know how long that computation is going to take and that's okay you want to be able to burst out as much computer power as you need and then just come right back on a blockchain it's kind of the opposite you want to know how much things are going to cost you want to be able to do them over and over again and

you know and scale that out and make money based on that and so that that's that's kind of where smart contracts start they go a lot of places from there but um the reason why that's an important concept is because when you make a language smaller, when you make it less powerful, you make it safer. Bitcoin is a very, very safe system because it lets you do so little. There are so many bugs that are just impossible to write in Bitcoin. We saw smart contracts as a problem that needed to be solved. When we set out to introduce our smart contract language, which is called PACT, we thought that we should be a lot closer to Bitcoin, we should be somewhere in between Ethereum and Bitcoin, and make it possible for people to write these things easily,

and make it impossible to have certain kinds of bugs. So for instance, a good example is that very kind of multi-sig, this kind of thing that it's actually a little hard to do on Bitcoin, like a lot of wallets don't support it. This is something that's just natively supported in PACT. Anytime you have a key, you can have multiple keys. And a developer just doesn't have to worry about that we don't even say key we say set of keys or a key set so this is the kind of thing that you know to write a multi-sig impact is literally one line uh to write a multi-sig in ethereum i think is pages and pages of code 392 lines analysis we were doing a demo today for um some of the uh some people we had visiting the office and i was sitting in it and i wanted to

point out to people why like key set yeah it's a little bit weird it's a new term but like why we bothered to do this. And so I went and got the multi-sig source code that's available online and had the person who was doing the presentation put it up and said, that's why. You see 400 lines of solidity and it's all to do the same thing that you do in literally one line because we thought about this stuff ahead of time. Multi-sig is important. For smart contracts also, when Ethereum was first marketing itself, it had two major promises. One was tokenization. It knocked that went out of the park. This is ERC-20, and that's where it derived all of its value and became one of the major players in the cryptocurrency space. There was a second marketing prong that was

promised and never achieved, which is the ability for smart contracts to interact with each other. We call it smart contract interop. It has wholly failed in that approach. Something as simple as a little contract that just provides the price of Ethereum in Bitcoin that gets updated once a day is radically unsafe to use on the Ethereum network. The best example of this is Parity Multisig, where people were importing one contract, were interacting with it to form their Multisig wallet. And someone went online or someone on the blockchain and poked it in the wrong place and it blew up. And now $200 million is locked up and people still don't know how to get it back. So we bring to the table the second one. And when you start talking about smart

contracts interacting, you start talking about smart services that have a native version of currency. It's almost like taking these existing enterprise API services like Bloomberg, but making them much easier to make smaller. You also make them much safer. You give them a native currency and you can put them onto this commons that is our public network. And then you can actually start synthesizing together various kind of little parts of business workflows into larger parent ones. So for example, FedEx could have a smart contract that could be imported by someone who, I don't know, is shipping from Etsy. And it could just automate that entire transaction flow, creating the shipping label, make sure that it was sent to the right email, identify the person

who's getting shipped to, they get an email saying with the tracking number, that whole thing. It could be very easily produced. That could be very easily done by synthesizing a couple different sub workflows that is represented as the smart contracts into one parent contract. What do you think is the probability that, I don't know, a large percentage of the existing smart contracts are at a technical risk that actually they shouldn't be being used, right? So it's not that, oh, look, there are some concerns that we have about how they're structured or security or things like that. But it's actually like it's unhealthy how much risk that these smart contracts are at. And therefore, we shouldn't be using it. Is that a high percentage of the number of smart contracts that are out there or a low percentage somewhere in between?

I mean, this is why we harp on formal verification, because this is a question that is hard to answer if you don't have the ability to get a computer involved. If you're just going to go around and stare at a bunch of code and be like, hmm, I think that, you know, like basically the Open Zeppelin project, right? The Open Zeppelin project is basically doing curated code where a lot of people have looked at it and they're like, yeah, we think this is pretty good. What you want is you want a computer to basically be able to examine the entire space of any way that code could run. And this is what formal verification does is that, you know, when you test software, you think, hmm, this could go wrong if I click this way. What a formal verification does is it goes the other way. It says, I am going to prove mathematically that the entire state, the entire universal space, universal possibilities that this program can inhabit cannot make this bug happen. So this is a long winded way of answering your question to say, we don't know.

If you were to go on to Ethereum right now, you don't know what bugs are in there because there is no way for any system to evaluate Ethereum to be able to tell you. Now, it doesn't look good when people have, you know, you've had circumstances where a report came out that showed that something, some non-trivial amount of ERC-20s had this bug that could allow an attacker to do a double spend. So that's an example of something where, you know, that Ethereum, you can't upgrade your contracts, right? So that's value that's actually existing out there. Those are contracts that can be stolen from. We know this. And there's nothing they can really do about it. I mean, there is something they can do.

They can fix the bugs and move their ledger over to someplace else. But the point being is that that stuff's in people's wallets. That's going to be a pretty hard transaction to do. You know, it's a big undertaking. So that's one of the things that we think is slowing adoption of kind of the broader use cases is you need to it can't just be something where you're like yeah i've stared at this code for a little while now i'm pretty sure it's safe and i had i had will look at it too and and i you know i had pomp look at it we all think it's great no you need you need to prove that it's

that it doesn't have to actually use a computer to prove it no i think that makes sense and uh seems rational to me it's actually surprising it's one of these things that like i think non-developers and even a lot of software developers don't even realize is that we're weirdly primitive in this way, the way that we program computers, that we program computers in such a way that, you know, when you tell this to a non-developer, they're like, wait, why aren't you using the computer to find the problems already? Isn't that what you smart people do? And the answer is, no, we don't. The way we code is actually really stupid. And, you know, most applications are built this way because it's actually, this is where these things start

to harmonize. Remember when I was saying before that you want to have a more constricted language? Well, one of the reasons why we've had formal verifications for two years is because we're turning in complete language. It makes it possible in a small amount of time, and by small, I mean computer small, microseconds, for the computer to be able to examine the state space. You take a simple application on your phone that's written in a normal JavaScript or some normal programming language, and the computer's going to have to chug away for like a year to figure out every possible place that code would go because it wasn't, it's designed

for general computing. It wasn't designed to do a smaller set of things. So this is where one of these things were like, we're struggling now, but the future is very bright. The future is that we could have these smart contracts, have a computer assure to us that the bugs aren't there. And now we can just go make all these exciting products and really create this market that really doesn't exist today.

And that's one of the things that I would want to point out is that your initial question kind of presumes that there's a lot of different smart contracts out there running around because there's been a huge amount of marketing in the space. But really, the adoption of smart contracts outside of a few that get copy pasted with a couple parameter changes is pretty low. And the ones that have had five or six or seven hacks by now, yeah, I would probably say those ones are safe. And they're probably the vast majority of the contracts that are used. The ERC-20 has been broken, I don't know how many times. And at this point, well, it's probably iterated through all the problems. But when we actually have the ability for people to write new stuff and have

be safe without having to have you know a thousand people try to use it and have a break 50 times when you can actually have a computer assure you that there isn't a bug that's when we're going to start to see the adoption the experimentation really take off before i finish up i always do rapid fire questions what's the most controversial thought you guys have in crypto um stew why don't you take this one huh nobody ever wants to answer this one somebody's got to answer country i think it's just that we're at the very beginning of this and people think we're at the end um you know people think that um you know that we've that uh we're looking at what blockchain looks like and the fact is is that we're at the very very beginning of this

that's not terribly controversial though that's just cautious no i guess no i guess my most controversial one i mean outside of that uh that proof works biggest problem is that doesn't have public relations department um is that uh there are is that smart contracts are actually how about this enterprise blockchain is going to be a thing because it makes freaking sense this one i've been fighting about for two years but we're not going to go enterprise we're going to go the other side then it's that smart contracts and blockchain is about a fundamentally new way of expressing value and it's not about the next generation of the web we're not going to put uber on a blockchain that's just really crazy yeah we got to create new things that make sense um what's the most important book

that you guys have ever read most important book moby dick why uh well just because it's that thing of like you know chasing after something that you're not gonna that that's probably gonna kill you you know like but you do it anyway it's also just fantastic book it's cover to cover it's a page turn i agree with that huh i don't know if i have the most important i kind of cycle through them i like to digest the you know don't have a management or a mba background so i've been you know on basically flights and commutes downloading as much as i can from all the books that i just ask all the people who have a lot of experience hey what's your what's your manual on um having a conversation having like difficult conversation with employees and i'll

ask three people that two will agree on a book and then just read that book um so that was probably the last one it's probably difficult conversations reading never split the difference now which is the fbi negotiators um book on how to do negotiation that one's pretty interesting um tactical empathy is a interesting phrase we'll go with but i wouldn't say it's important yet um man for book i don't know my favorite is um uh the moon is a harsh mistress but i wouldn't say it's important are aliens real um

do they exist somewhere in the universe I would imagine so yes the high probability it'd be so boring

if they don't it just I'm sorry I just I that's kind of my opinion I'd just be like so boring if they aren't I agree

no I agree yeah what about you oh they're not in Roswell I know that much I'm from New Mexico so I know I know all about

this oh really there's no aliens there this area 51 stuff is all uh all garbage actually you know what's really hilarious about it is that when they started you know there's a bunch of air force experiments and stuff like that and so when people started seeing it they it's come out in the last few years that the that they actually go out to these people someone would go out as a disgruntled air force person who's says they're lying about this stuff man and it's a way to basically put a bunch of

misinformation out there as an effective cover for what's going on you know for whatever things so that that way when people do see some weird flying object that the government is working on or something they get dismissed as cranks this has been admitted now that like the area 51 that they were actually working with the people in the ufo community to feed them things so that they would propagate that they were so the u.s government was uh was executing psychological operations on the people of roswell new mexico they just want you to think that all right yeah oh yeah even better yeah how far does it or are they telling you that as the psychological operation all right that's fair i i've actually never talked to anybody from new mexico so that's

a that is a new data point for me uh i'm a big believer i think that the real they got to be out there mathematically yes the probability is very high that they exist um cool i i end each one and let you guys ask me one question we've never had two people on the podcast at the same time so uh we will break the rule and maybe let each one of you ask one question when do you think crypto winter is going to end crypto winter when is it going to end uh i don't think it's this year right i think we kind of go sideways for a while we uh we're doing this in the last day of february of 2019 um i don't think we've seen the bottom yet probably uh so i could even see us go a little yeah a little bit lower um at this point when you've fallen 80 85 90 95 percent whatever you

know each individual token's fallen what's the difference between 95 and 97 percent right really pretty far um but uh i yeah i think we haven't seen the bottom and uh i think we just go sideways for a while like you have to get bored right it's like when people get bored uh i've seen one or two people uh quit their jobs in crypto and go back to like non-crypto stuff so like that's interesting data points um but i think it's not going to recover this year so we'll see um and maybe you actually said this during the first question but your first rapid fire question of like what is the most important book you've read is the question that i ask other successful people want to talk to them so so i cheat because uh it's my podcast i can do whatever i want

but uh there's four books and i put them into uh separate uh buckets so one book that stands it by itself is a guns germs and steel uh which is all about uh kind of uh different societies and the growth of uh humans over time etc which i think is just uh it's a great way to have historical context on how the world got to where we are today and also what are the things that made certain societies more developed than others and all that so that's definitely a book i'd recommend and then the other is a package of three books they're not actually packaged i just read them all at the same time when i was 20 years old and they were incredibly influential um on my life is, uh, rich dad, poor dad by Robert Kiyosaki, uh, thinking grow rich and the richest man in

Babylon. And, uh, somebody sent me the books. I unfortunately don't even remember who sent me the books. Uh, but, um, I read them and they were basically like, look at this point in your life, you don't know what you want to do. Like, it's more about trying to explore different mindsets and like one will resonate with you. And you should do that by reading and talking to people and all this kind of stuff. Uh, and I read those three books, um, literally back to back to back over like a, uh, I think it was like a three month period. And I remember, um, maybe five or six years later being like, that was a point in my life where I don't want to say like there was like a hard, right. But there was definitely like, I started to think about things differently.

And so, uh, whenever I talk to kids that are in high school, college, or maybe even right after college, I always say, look, if you want to think differently than you've probably been trained classically in school, et cetera, like those three books really have a, uh, have a good way of doing that in a simple to understand way because they're not kind of preachy or um academic they're just very much hey we're gonna tell you a story and you get from it what you get from it so i don't know i told you four books you asked for one cool thanks life life goes on uh all right guys thank you so much i'm super excited for you guys to uh to launch this thing in a month uh maybe when this comes out it might be like two weeks or something but uh i uh i think that um it's uh it's really

cool context that you have having worked at uh jp morgan and kind of seen you know how they think what they've built and spinning out and working on this so i appreciate you coming and we'll have to do it again in the future yeah thanks much another word from our sponsors at total they're kind of like kayak which helps you find the best flights but total helps you find liquidity by aggregating decentralized exchanges and optimally routing trades for execution remember that's Total.com slash Pomp. T-O-T-L-E.com slash Pomp. Go check it out. Let me know what you think. Tweet at me. I'll drop you some fire emojis. Total.com slash Pomp. As we all know, crypto makes tax season a headache. Ain't nobody like dealing with this

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