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KEVIN WERBACH: Awesome.
Thanks so much for having me.
So, pleasure to be here to
talk to you about the book
that I just published,
"The Blockchain
and the New
Architecture of Trust."
The starting point is
that we are, today,
living through a
global crisis of trust.
Trust in companies,
trust in governments,
trust in the media, by many
measures, have been plummeting.
The Edelman Group does an
annual trust survey of people
all around the world that they
release at the World Economic
Forum in Davos.
And as you see, in
2019, their finding
was that only one
in five people--
20% of people-- believe that
the system is working for them.
And they found that
the gap in trust
between the elites and
the mass population
was the highest
they've ever seen.
And I don't need
to tell you this.
In fact, you might not
be surprised to know
there are even some people
who don't trust large Silicon
Valley tech platforms anymore.
This is the world
that we live in today.
So the question is,
what's the answer?
Well, you probably know
I'm going to tell you.
The answer is blockchain.
Got a problem with fake news?
Blockchain.
Got a problem with
insecure voting systems?
Put it on the blockchain.
Finance industry
too concentrated?
Well, we'll just blow it
all up with blockchain.
Now, about a year
and a half ago,
when I was writing
this book and we
were in the midst of the Bitcoin
and cryptocurrency bubble,
there were a lot
more people speaking
in these kind of hype-laden
terms, saying, OK, blockchain
is the solution,
whatever the problem is.
Now, with the subsequent
cryptocurrency crash
and the fact that many
of these predictions
have not materialized as
fast as people thought,
there's a great
deal of skepticism.
I run into many more people
saying, is this real at all?
Was this all just hype?
Is there anything that
blockchain is useful for?
And so what I want
to talk to you about
is getting beyond the hype,
beyond the wild promises
that suddenly the world is going
to be transformed because we
have this technology, but
also appreciating what
the real value proposition is.
I worked, 20-odd years ago,
at the Federal Communications
Commission on internet
policy back in the 1990s.
And back then, there
were a tiny number
of people on the internet.
All dial-up, over-the-phone
network, almost all
in the United States.
And yet those of us
who were online then,
those of us who were
engaged in figuring out
the legal and regulatory
issues, were totally convinced
that the internet was
going to change the world.
And yes, we all got
ahead of ourselves
in the hype and excitement.
We had a dot com bubble
back at that time.
But the reality is, the
internet did change the world.
It was true that this was a
fundamental technology advance
that today, of course, has
swept all around the world.
And blockchain gets me
excited because it's
the first basic
technological change
that I've seen since then
that has the potential to have
a similar kind of impact.
Now, I'm not saying,
necessarily, it's going to.
I'm not making any predictions
of when and how exactly.
But it's a very basic
change to the way
that we do business
and the way that we
build networks and systems.
And so that's why I think it's
interesting and worth thinking
about the applications,
even if we get away
from the expectation
that everything's
going to change tomorrow.
And the reason that I think
it's such a basic change
is that what's important
is not, ultimately,
Bitcoin or cryptocurrencies
as a new investment vehicle
or as a new form
of money, or any
of these particular
implementations today.
What's important is really
something much deeper.
It's about trust.
And this is not just me talking.
If you go back to the original
Bitcoin white paper, released
by some person or persons
going by the name of Satoshi
Nakamoto about 10 and a half
years ago on the cryptography
mailing list, this
is what Satoshi
says that he or she
or they were doing--
that the idea was to create
a system for transactions
without relying on trust.
Now, that seems a
little strange, right?
Without relying on trust?
Basically, the argument was
that trust is the problem.
The problem is that we
need trust, traditionally.
And so the promise
was cryptocurrencies
and other blockchain
systems can be trustless,
that we can have
transactions without having
to have any reliance
on anything trusted.
And the contention
that I'm making here
and that I make in the book is--
with all due
respect to Satoshi--
that's wrong.
That's not actually
what Bitcoin did.
It's not actually what
the blockchain does.
It doesn't eliminate trust.
How could it?
Why would anyone find
something like a cryptocurrency
of any value at all
without a level of trust?
Yes, the technology
enforces scarcity.
It ensures that you can't easily
double-spend the same coin.
But there are many, many things
that are scarce and still
have limited value.
Value comes from
people collectively
believing that there
is value, being
willing to take
something and use it
for something of importance.
So trust never fully goes away.
And for some
evidence of this, you
might ask the customers
of QuadrigaCX.
QuadrigaCX is the largest
cryptocurrency exchange
in Canada, or at least
it was earlier this year,
at about 100,000 customers,
about $200 million
on deposit for this exchange,
where you could buy and sell
cryptocurrencies like Bitcoin
and ether and so forth.
And Quadriga announced
earlier this year
that its CEO, Gerald Cotten
had died while visiting India
a couple of months before.
And then they said,
well, we're very sorry.
He had the only key.
He had the cryptographic
private key
to all of the crypto
on the exchange.
They said, there's
one cold wallet
that has all of your money,
and our CEO had the key.
He's gone.
We can't find it.
That's an awful lot of trust.
Think about it.
If you went to a
bank and they said,
OK, we're going to
take your money.
Here, watch us.
We'll put it in the vault here.
We're going to close the vault.
And the bank branch president
has the key.
And if she loses the key,
we can't open the vault.
You'd never put your
money in a bank like that.
That's way more
trust than anyone
would have in a traditional
financial institution.
And yet users of
QuadrigaCX had that trust.
Now, turns out the story
is much crazier than that.
People have done forensic
analysis of Bitcoin
and Ethereum blockchain.
There actually is
no cold wallet.
The money was siphoned off over
a period of several months,
sent to various money
laundering sites and other ways
to obscure the trail of it.
This was a Ponzi
scheme, basically,
that was essentially
taking people's money.
And yet the point is people were
willing to use that exchange
to hold their assets.
Now, Quadriga is an exchange.
It's not a blockchain itself.
It works with the
cryptocurrencies that
are verified on the blockchain.
But it's a centralized service.
It takes custody of people's
keys and manages them.
But think about it.
What's the population
that would be
the least likely to trust
a centralized financial
institution to
control their money?
It's crypto investors.
These are people who
are excited about--
they're early adopters of
this technology because it
seems to be trustless.
Because they don't
want to trust the banks
and trust the government.
And yet, we know
from studies that 80%
of cryptocurrency
users put their assets
in a custodial exchange,
like a QuadrigaCX.
Now, most of them are
much more legitimate,
companies like Coinbase and
Poloniex and so forth here.
But people are
willing, even if they
are believers in the
potential of this technology,
to trust a custodial exchange.
So what does that lead us to?
What it leads us to is
that blockchain is not
the end of trust.
Trust doesn't go away.
It's a change in the
structure of trust, what I
call the architecture of trust.
Because it turns out that
there are different ways
that trust manifests
itself in the world.
Trust is not an either/or.
It's not either you trust
something or you don't.
There are traditionally
three forms of trust.
The first one is
peer-to-peer trust.
So you have a trust in a person
that you've done business with,
maybe trust in a family
member, a longtime friend.
And companies can have
peer-to-peer trust.
Companies that have worked
together for a period of time,
have a relationship,
will trust in each other.
And that's why, if your brother
comes and asks you for a loan,
you're probably not going
to request a credit report
before you give him the loan.
I don't know all
of your brothers,
but generally, if
you trust someone
because you've got
a relationship,
you're willing to not just
focus on the formalities
of whether they
can be trustworthy.
Same is true among corporations.
We see lots of examples
where, even though companies
have contractual relationships
that specify performance,
the relationship matters.
And the ongoing
relationship matters.
And so they allow
the contract to be
varied under some
circumstances in the interest
of the long-term relationship.
So this is a very
powerful form of trust.
But it's limited.
It's peer-to-peer.
It doesn't scale very well to
a large, global, impersonal
economy.
Second form of trust I
call Leviathan in the book.
This comes from Thomas
Hobbes, 17th century English
philosopher.
And Hobbes's point
was that we often
enter into trusting
relationships
because there's a backstop.
Because we can use a
legal form, a contract,
to specify the terms
of the relationship.
And if someone
breaches a contract--
if I give my money to a company,
and they go run off with it--
I can sue them.
I can bring them into court.
I can use the power
of the legal system
to enforce that agreement.
And the legal system
is an arm of the state.
So I can actually
use the government,
which has the power
to throw people
in jail, among other things, to
enforce my private agreement.
And what that does is it
actually facilitates trust
in those private agreements.
You hope you never will
have to sue and go to court,
but knowing that that's there
as a backstop facilitates
these private interactions.
Problem there, of course, is
you have to trust the government
and you have to go
through the legal system.
Now, I'm a lawyer, so
I think laws are great.
But even I can admit that
the legal system is slow.
It's inefficient.
It often gets things wrong.
So that's the limit
of that form of trust.
Third form of trust
is intermediary.
Instead of having to
trust each other directly,
we trust some central actor,
some sort of institution
in the middle of the network.
And this could be a
bank or an exchange,
or it could be a large
digital platform that
provides a great deal of value.
And the trouble with that
form of trust, of course,
is there is that intermediary
in the middle, which
has to be trusted and gains
power by virtue of being
in that point in the network.
So all these forms of
trust still exist today,
are still relevant
and important,
but they all have this limit
that there is something
that has to be trusted.
So blockchain is a fourth
architecture of trust.
It's a new structure for
how trust manifests itself.
And what blockchain
trust says is
that you can trust
something very specific.
You can trust the
history of transactions,
basically the state
of the ledger,
without having to trust any
particular actor to verify
that information.
You don't have to trust a bank.
You don't have to trust a
government to issue a currency.
You want to trust some
validator that's saying,
yes, this is accurate.
You can trust the
state of information,
the cryptographically-signed
audit log,
without trusting
anything in particular.
And this works through a
variety of different technical
mechanisms known as consensus.
Bitcoin used a particular
one called Proof of Work.
But there are a number
of other variants
that make different
kinds of trade-offs
here that all have
the feature that they
allow a level of confidence.
That everyone has their
own copy of information,
but you can be
confident that everyone
is seeing the same thing.
You're not copying from
some central master,
but you can believe and verify,
based on the underlying math
and cryptography, that
what you are seeing
is the same as what
everyone else is seeing.
So you can trust
that information
without a central
point of trust.
An important element of that
is it involves immutability.
So it is very difficult
and, ideally, impossible
to change the ledger.
It's a write-only database.
Because if anyone had the
power to reverse transactions--
if there were anyone who
could say that transaction
happened, but now I'm
going to send it back.
Maybe it was a
mistake, maybe there's
some problem with
the transaction--
we all agree,
let's send it back.
If anyone had that power,
you'd have to trust them.
You'd always have to believe
that no one used the power
to reverse the transaction.
So in order to trust that
what you see on the ledger
is accurate without having to
trust anyone in particular,
you have to believe that those
transactions are immutable.
All right, so that's
basically the essence
of what blockchain trust is.
What's it good for?
Why would you ever
need a blockchain?
And so for this, we can ask an
illustrious Googler, Vint Cerf.
Vint put up this
great tweet last year
with a really simple
flowchart saying,
here's how you decide if
you need a blockchain.
Look at the flow chart.
Do we need a blockchain?
No.
And Vint's right.
There is nothing that you cannot
do with a traditional database
that you can do
with a blockchain.
It's just another
kind of a database.
So there's never
a situation where
blockchain is the
only mechanism to do
a certain kind of function.
Now, there might
be certain things
you want to do that
require certain conditions
that blockchain
is necessary for.
But basically, for
the application,
you never actually
need a blockchain.
Now, fortunately, Vint
actually said some nice things
about my book, lest you think
that you should get up now
and not be interested in this.
My point is even though we can
agree that blockchain is not
a solution to every
problem and not necessary,
there are still many contexts
where it actually adds value
where, even though you don't
absolutely need a blockchain,
you may want to use one.
Two basic categories there.
One is situations where
there's too much trust.
Now again, not that
trust gets eliminated,
but trust can be minimized.
And part of that is simply
for security reasons.
Anytime there is
a trusted entity,
it's a point of vulnerability.
It's a single point of failure.
So even if the entity
is trustworthy,
there are security
reasons why you
may want to use this approach.
But then, there
are many situations
where the concern is that
the trusted agent is not
going to be trustworthy.
That's some of the examples
that I've given you already,
where we may want to have a
system where we don't have,
essentially, a monopolist in
the middle of the network.
If you are a central
hub of trust,
you have a set of incentives
to maintain your control
over the network,
as opposed to doing
what's necessarily in
the interest of everyone
on that network.
And finally, when you have
these central islands of trust,
there's not one trusted
entity for the whole world.
So what winds up
happening is that,
where there are these
central points of trust,
many applications
require many of them.
So think about sending
money around the world,
even inside a company.
If you're a multinational
corporation,
you've got money in
your treasury in Kenya
and you want to send it to
your affiliate in Canada,
you can't just do that directly.
Because there are multiple
central points of trust
involved.
You've got to go through
central intermediaries,
through correspondent banks,
through intermediaries
that create liquidity
across the currency pair.
So you wind up having
delays and costs--
again, even if you're just
moving money internally across
borders.
So that friction that comes
up from the intermediation
that trust requires is
something that potentially we
can overcome by using one
shared blockchain ledger.
The second category is sometimes
there's not enough trust.
So pretty much any
time multiple companies
have to work together, which
is, of course, almost any kind
of business transaction
you can think of,
there's a potential
gap in trust.
So you've got a
buyer and a seller,
even in a simple
one-to-one situation.
They are each going to want to
keep their own set of records.
And when you multiply that out
across, let's say, a supply
chain and you've got
a manufacturer that
wants to ship products
around the world,
they have their own records.
They contract with a
freight forwarder that
has their own set of records.
They put something on a truck.
There's a trucking company.
There's a port.
There's clearing customs.
There's a shipper.
And the whole thing
repeats on the other end.
And if something goes wrong--
the products don't get
to where they belong--
then there has to be a
reconciliation project,
a process by which all
the parties say, well,
my records say I
put it on the boat.
But my records say
it didn't get there.
What happened?
And this leads to
tremendous fragmentation.
Because sometimes
there are errors.
Sometimes there are
problems in this process.
So we get a tremendous amount
of inefficiency, multiplied
by all the transactions
that happen in the world,
because we have all
these multiple islands
and they don't connect up.
And some things
simply don't happen.
Sometimes companies may
want to work together,
but they don't trust each other.
And they're not willing
to give up control
to one central intermediary
platform, so the activity
simply doesn't happen.
The idea with blockchain is
a shared source of truth.
The idea is once the information
gets on the blockchain,
then everyone can trust
in the information
that they're seeing,
and it potentially
eliminates all of this
massive duplication.
It also means that the
state, again, is just
reflected on the blockchain.
So instead of having to have
auditors come in and pull data
from all these different
points and reconcile them,
you can directly audit
the blockchain itself.
Or potentially, regulators can
come in and use the blockchain
itself as the canonical
source of information.
And finally, once we get
to these shared platforms,
this, again, becomes
the new base layer.
This becomes the new
connectivity layer.
It's a decentralized
platform that
then can be the foundation for
decentralized applications.
And so this is the vision of
these so-called smart contract
platforms, like Ethereum and
many of the other blockchains
coming after--
the opportunity to actually
create a decentralized computer
using the blockchain
technology and have
application functionality
and other higher-level
functionality
written on top of it.
So that's the potential.
That's what's good about this.
What's not to like?
What's to worry about?
Well, a great deal.
Because again, the
fact that you can
trust the blockchain
itself, trust the ledger,
doesn't mean you can
trust the whole system.
And in fact, we see
all of these cases
where this technology
gets abused or used
for very problematic,
untrustworthy things.
Still today, one of the,
if not the biggest, use
of cryptocurrencies like
Bitcoin for actual transactions
is people who want to
do illegal things--
money laundering, illegal
drug transactions,
terrorist financing,
and so forth.
"The New York Times"
recently collected some data
with an analytics firm showing
that those kinds of dark market
activities are still a huge
percentage of what people are
doing with cryptocurrencies.
Because the money that we
have works pretty well,
and it's already pretty
digital for doing
basic kinds of transactions.
It's just the people
who want to avoid
the accountability
of that system who
are some of the earliest
adopters of this technology.
And then you have situations
like the Quadriga situation,
where the basic transaction
is a legitimate one,
but you can't trust the
people on the other end.
We saw this with ICOs,
Initial Coin Offerings.
Raised $20 billion in about a
year and a half in 2017, '18.
Huge percentage were
just out-and-out scams.
Now again, the blockchain,
the cryptocurrencies,
were valid in the sense
that you were accurately
getting a cryptocurrency
token that
represented some share
of the available tokens
on that perspective application.
But that didn't show at
all that the person selling
you those tokens was not going
to basically run away and take
all the money.
"Wall Street Journal"
did an analysis
where they looked at major
Initial Coin Offerings.
20% of them were obvious frauds.
Literally, you read
the white paper,
it was clear this was a scam.
And yet these things
raised billions of dollars.
So this is a huge problem.
Again, the fact that the
blockchain is trustworthy
doesn't necessarily
mean that the system is.
And it's not just true of
the open, public blockchains
like Bitcoin and Ethereum.
There's a whole
other world of what
are called permission
blockchains being used
by enterprises, where the
system is decentralized,
but you have to get permission
to access the network.
Not anyone on Earth
can join the network,
which makes the consensus
process a lot simpler.
And you would think,
OK, well there,
we don't have any of
these problems of trust.
Well, it turns out that we do.
PwC did a survey several
months ago of 600 executives
around the world involved
with blockchain projects.
And they asked them,
what's standing
in the way of adoption?
Well, you see here, one of
the most significant, people
don't trust each other.
People don't trust each other?
Well, I thought the blockchain
was about getting rid of trust.
Well, no.
It's people don't
trust each other.
Again, you might be
confident in the ledger,
but how do you trust the other
participants in the network?
What are some of the other
things that they said?
Well, the number one was
regulatory uncertainty.
Law, the legal
system, is something
that people want to believe in
standing behind these systems.
And the next two, the
other significant ones,
were basically about governance,
about how the blockchain
networks are
constituted, how they
are formed, how they work
together and interoperate
with other networks.
These are the elements
standing in the way
of realizing the potential
of this technology.
So in my book, I talk
about this on two levels.
First of all, I talk about
what I call Vlad's conundrum.
Vlad Zamfir is one of the
key developers of Ethereum.
And he points out that there
seems to be this tension.
That if we use blockchain and
these immutable smart contracts
for transactions, it seems to
make it impossible to use law.
Because if we have
a transaction that
is recorded immutably
sending money
to a terrorist group, the
fact that a government comes
in and says, you can't do that,
that violates our sanctions,
seems to be immaterial.
Because the transaction has
already happened and no one
has the power to reverse it.
Similarly, you can create a
decentralized application.
That is, a decentralized
prediction market,
a place where you can buy and
sell belief in predictions
about future outcomes.
And this is actually something
widely used and studied
in companies.
People use it to
predict the outcomes
of elections and so forth.
You get skin in the game.
The prediction market produces
valuable kinds of outputs
in a "wisdom of crowds" sense.
But the problem is running
a real-money prediction
market is illegal
today, or at least
is very strictly regulated,
because essentially it's
a commodities exchange.
It's really no different
from the regulated futures
exchanges that are
available to investors.
And it creates an
opportunity to do things
like create a
prediction market on
whether the President
of the United States
will still be alive in a year.
And that may be intended as
something totally legitimate,
but it's functionally identical
to an assassination market
on the life of the President.
So what do you do to stop that?
Well, the idea is,
well, it's immutable.
Nothing can stop it.
So Vlad's argument was, I
guess we have to choose.
Either we have law or
we have blockchain.
And that doesn't sound
terribly satisfying.
There's a similar problem
with regard to governance.
I call this Vili's paradox.
Vili Lehdonvirta is an economic
sociologist at the Oxford
Internet Institute.
He wrote about something
called the DAO incident.
The DAO was a decentralized
crowdfunding application
built in 2016 on the
Ethereum blockchain.
It's like a Kickstarter
or an Indiegogo,
but totally created as a
decentralized application.
You provided ether
cryptocurrency,
you got back tokens.
You could vote those
tokens for projects.
The application
provided a count,
and the ones that got
above a certain threshold
would get the tokens
to be able to use
the cryptocurrency for
building their application
or their project.
And then when they
hit the milestones,
they would contribute
the money back,
which would then go back
to the people who voted.
And the problem was this
exploded in popularity.
Raised $150 million worth of
ether in about three weeks
in 2016, which, at the time, was
a very significant percentage
of all of the
cryptocurrency outstanding.
And then, very quickly, someone
found a bug in the code.
They were able to exploit
a fairly simple programming
error, siphon off about 40%--
about $60 million--
to their own account.
This was clearly a theft.
So it was someone
stealing people's money,
and yet it was an
immutable transaction.
The smart contract didn't
know the difference.
The blockchain itself--
the application code--
said, oh, yeah, this was
a legitimate transaction.
So there was no way to,
say, give the money back.
So what had to happen
was the whole community--
not just the people
involved in the DAO,
but the whole Ethereum
community, the miners,
the coders--
had to get together
and decide what to do.
Because this would
have undermined
trust in the whole blockchain.
The fact that all this
money got stolen so quickly
would have probably
killed off Ethereum.
So ultimately, through
this very confused process,
the Ethereum Foundation agreed
to do a software upgrade.
They got enough
of the miners that
were validating the
blockchain to run the software
upgrade to fork Ethereum.
Not just to blow up the
DAO, but to actually break
the entire blockchain in two--
into two cryptocurrencies.
One is called Ethereum, one
became called Ethereum Classic.
And the idea was
the new Ethereum
would reverse the hack.
Money would go back, and
then it would go forward,
and the hope was the second
chain would just die off.
It didn't die off.
Some people wanted--
they believed so much
in immutability, they picked up
and started mining that chain.
So that's still there
as Ethereum Classic.
Worth a lot less than
Ethereum, but still out there.
So this is the backstory.
And Vili's point is
this was governance.
There was a problem.
There was an
unexpected challenge
that someone was able to steal
all of this cryptocurrency.
And the community came
together and made a decision.
We're going to do this fork.
And he says, that's great, but
it's centralized governance.
It's no different from saying
the executives of a company,
or the large holders
of cryptocurrency--
the powerful leaders
of the community--
made a decision.
So what he says is, well,
there's nothing new here.
If you have
governance, you don't
have this decentralized
blockchain technology.
And if you have something
truly decentralized,
there's no governance.
So these are really the
same problem, the legal
and the governance problem.
And the answer to
both is the same.
It's not either/or.
Just as I said,
trust is not either
you have something
that's trusted or not.
Decentralization
is the same way.
Decentralization is a parameter.
You can have systems
that are more
or less decentralized
along various axes.
And there's value in making
things decentralized,
but there's a trade-off there.
And the reality is that
systems that strive
for widespread adoption--
systems that want to
reach the mainstream,
want to be easy to use
and convenient-- are
going to have to trade off some
element of decentralization.
It's just inherently
harder to build
systems that
operate like today's
massive centralized systems if
you decentralized everything.
And that's the reality of
what actually has been built.
And it turns out that it's
possible, in most cases,
to find hooks for legal
enforcement and mechanisms
for governance.
So we've seen even applications
and exchanges that are built
to be decentralized-- ones
that are not custodial,
like Quadriga, that are
basically just an application--
it turns out, typically,
there's a developer behind it.
There's some centralized
element of this network.
And it's possible for legal
enforcement to happen.
So this is what we've seen
with ShapeShift, which
is a decentralized
system that basically
didn't require any identity.
You can go put in your ether
and convert it to Bitcoin
without having to
identify yourself.
They had some
conversations, apparently,
with law enforcement that said
we care about money laundering.
Banks need to ask who you are.
They need to understand
the source of your funds.
They have to check to
make sure you're not
sending it off to some terrorist
group or sanction state.
And you need to do that too.
Because you're handling money.
It's the same problem.
And even these
decentralized systems
are generally, gradually,
coming into compliance.
It's a long process.
It's imperfect.
But it turns out that even
though you can build something
that is theoretically
totally decentralized,
it doesn't get used as much.
We see this similarly with
privacy-protecting coins.
There are technologies
like Zcash and Monero
and Grin that are designed to
be harder to track than Bitcoin.
And yet, you would
think that that's what
all the criminals would use.
It's not what the
criminals are using.
Criminals just use Bitcoin.
Why?
Much more liquidity, much easier
to get, much easier to use,
much easier to spend.
So even though there is some
degree of arms race here,
it's not that everything
automatically moves
to the hardest-to-track option.
And so we're starting
to see evidence of ways
to leverage the value of the
decentralized technology,
while also being
legally compliant.
Blockstack is a
company that's building
a decentralized
platform-- really
a new internet, a whole
framework of layers
for decentralized applications.
They are doing what's called a
regulation A+ token offering.
They're doing
something like an ICO,
but legally compliant,
using a framework in the US
that was created for equity
crowdfunding systems,
so getting the benefit
of being able to offer
cryptocurrency tokens,
the kind of liquidity
that that gives you, while
still fitting into the existing
system.
Again, this is taking time.
It's imperfect.
But we can see a pathway
for this to happen.
There is also a role
for technology, though.
And this is really the
answer to Vili's point
that you can't do something
that really is governed
and still be decentralized.
The same kinds of
mechanisms that
can be used for consensus
on the blockchain network
can be used for governance.
So it's possible.
And there are system is
like Tasos and Decred that
are setting up decentralized
voting systems,
where you vote your
cryptocurrency in a situation
like the DAO attack.
If the community agrees
that the blockchain should
be edited to reverse a
transaction-- if enough people
vote and agree on that,
it's the consensus
of the community-- that can
be automatically implemented.
There are systems
that also create
hybrids between
legal enforcement
and the technology
of smart contracts.
So a Ricardian contract is
something that basically says,
it's a human, written
legal contract,
specifies the terms
of the parties.
And there's a code-based,
software-based, smart contract
that exists as well.
And they're tied together.
There's a hash of the human
contract in the blockchain.
So we can verify that's
the correct human contract
to deal with situations where
there's not specified outcomes.
And the human contract
says the smart contract
that controls is here at this
address in the blockchain.
So anything that can be done
through the smart contract
system gets done that way.
And if there's a problem, it can
be kicked out to the contract,
or even to a decentralized
arbitration system,
based on the
cryptographic keys, using
what's called
multisig technology,
to be able to decide, through
either centralized arbitrators,
or even through a decentralized,
incentive-based kind
of computational jury system.
So there's a whole bunch of
these systems being developed.
Again, still fairly early.
Still at the prototype stage,
or at the early implementation
stage.
But they have a lot of promise.
Just as we've been able
to see that the blockchain
network itself, based
on the cryptocurrencies,
can remain secure for
a long period of time,
it's possible to think about
these systems ultimately
addressing these
governance challenges.
Ultimately, the reality
is that these are
systems that need governance.
Because that's what they do.
What makes a
blockchain trusted is
there's a sense of legitimacy.
It's not just that you can
go in and look at the code
and you can be confident
in the level of security
in the cryptography.
Again, it's like
why people would
use any cryptocurrencies--
because they're
willing to trust it.
And consensus, in
the blockchain sense,
is not necessarily the
same as a majority vote.
You can have a majority
vote and not have consensus.
You can have a
95-to-5 vote and not
have consensus because the
5% are not willing to agree.
Consensus means after
that process happens,
everyone thinks it's legitimate.
Everyone is willing
to basically go along
with the result of the majority.
And that requires a variety
of different mechanisms.
So we have these
different levers.
We have the lever of
legal enforcement.
We have the lever
of cryptography
to make things certain about
what their outcomes are
and not easy to reverse.
We have the lever of economic
incentives, self-interest, game
theory, to be able
to push people
to behave in a certain way
without necessarily forcing
them to.
But in a situation,
most people will not
take the action
that's economically
destructive to them.
And we have the lever of trust.
Trust is still relevant here.
And it's something that emerges
from activities of systems
where people are
confident, sufficiently,
in what's going on.
Because ultimately, these
are still human systems.
The blockchain uses
a lot of technology,
but the technology alone is
not what makes it successful.
It's the confluence
of the technology
with communities, with
values, with processes,
and with a history of people
seeing that this works
and it achieves the
goals that they have.
And that relates to the
very nature of trust.
Trust is not just confidence.
I can hold a gun to your head
and be very, very confident
you're going to do what I say.
It doesn't mean I trust you.
It's the opposite of trust.
It's only because
I don't trust you
that I want to take those
extraordinary measures.
Trust requires a
fusion of confidence
with some measure
of vulnerability.
But people are willing
to take a leap of faith.
People are willing to
trust and do something
even if they are not certain.
That's what trust means.
And it's possible to get
there with this technology,
but only by coming
up with systems that
use human mechanisms for
what they're good for
and use the technology
for what it's good for.
So we are still fairly
early in this process.
I am very excited about the
technology and its potential.
There are some early
low-hanging fruit examples.
The ones that are going
to be maturing faster
and adopted faster are the
ones that are more incremental.
If you want to
use cryptocurrency
for a traditional financial
trading application, once you
are sure that it's a
repository of value,
that it works like money, you
can take it to Wall Street.
They'll securitize it
and make it tradable.
They know how to do that.
That's not revolutionary.
It's valuable.
It's useful.
The things that
are revolutionary
are going to take longer.
The fact that we had this
huge upsurge in price
of cryptocurrencies,
I think, trick people
into thinking we're
further along.
But the end point
is still there.
The potential is still there.
And we're at a point now
where many, many organizations
are looking at how
this can be useful.
Ultimately, as
with anything else,
it's about fitting the
technology and the application
to the need and to the
problem it's trying to solve.
So that's where we are today.
We are exploring the map.
There are many different
solutions here.
For example, trading off some
measure of decentralization
for some measure of performance
or some other value.
There's not one right answer.
But what needs to happen
is experimentation
and implementation to
find the solutions that
solve the real-world problems.
That's the point
that we're at today.
I'm excited about where this
could go because there are so
many situations where either
the gaps in trust or problems
with untrustworthy entities
are so significant that this
is really a technology
that we need at some point.
So thanks very much.
Would love to take
your questions.
[APPLAUSE]
AUDIENCE: In your experience
on constructing this book,
how do you feel the digital
asset market will evolve
over the next decade or so?
KEVIN WERBACH:
Well, part of it is
it depends what you mean by
the digital asset market.
So I think that, really,
the market of people
that are treating these
as financial assets, that
are saying, again, this is
a different kind of money,
and just as we can trade stocks
and bonds and any other kind
of synthetic financial asset.
This is a new asset class.
I think that's a real thing.
And I think that's
going to evolve
fairly quickly because it
just has certain benefits.
If you have something
that's truly
digital at a native level, and
it's inherently liquid in a way
that traditional financial
assets aren't, you
can have a lot more
volume and something
that's much more global
than traditional assets.
So I think in the
near term, you're
going to see traditional Wall
Street players saying, OK, we
know what to do with
this, and building
new kinds of derivatives and
new kinds of financial products
based on it.
I think the potential, though,
is really going beyond that.
And so I think the next stage
will be, for example, using
this for global
financial transactions,
for financial inclusion.
There are a billion people
in the world or more
that are unbanked.
And it's not a trivial
solution to use
a cryptocurrency for that, but
I think there is potential there
if you build out the
systems on the ground.
So I think that will be the
next stage, is seeing these
used for different things.
But there are so many
financial products today
and so many assets that
could be tokenized.
Any physical asset,
like real estate,
in theory, could be
turned into interest
in cryptocurrency
tokens that could then
be recombined in new ways.
So I think we'll
see a steady stream
once we get over the
initial regulatory hop.
And that's really
what's happening
over the next couple of years,
here and other jurisdictions,
saying, how do we create, for
example, a regulated exchange,
where you can avoid that
kind of QuadrigaCX problem
and know that, if the
one running the exchange
is basically running
a Ponzi scheme,
that they can be stopped
or have to provide redress?
Once we get over
that hump, then I
think we're going to see
a great deal of adoption.
AUDIENCE: There are obviously
many public policy implications
of this whole suite
of technologies.
But even going back to the
earliest days of blockchain,
one public policy application
that never occurred
to me as a
mathematician and so on,
was the environmental
impact of some
of the Proof of Stake systems.
What are the most interesting
insights you've learned from
talking to stakeholders,
and what's [INAUDIBLE]
of communicating
what you think are--
does it worry you, or
how do you react to that?
KEVIN WERBACH: Yeah,
so environmental impact
is a huge concern.
And I didn't really
talk about it,
but the proof of work
system in Bitcoin
requires huge amounts
of wasted computation,
huge amounts of energy usage.
By some estimates,
cryptocurrencies
use as much energy as a
small European country today.
And in an age of climate
change, obviously, that's
a huge concern.
There are many other concerns
about that proof of work mining
system--
its potential for capture by
certain actors and so forth.
So my sense is
we're going to have
to get beyond that mechanism.
Because the energy
usage isn't the point.
The point is to make it
somehow costly in order to,
essentially, compete
in this lottery
to be the one verifying the
next block of transactions.
And there's no
inherent reason why
we need to use solving these
hashing puzzles as the way
of making something costly.
The problem is the
alternate mechanisms,
which are basically these
game theoretic mechanisms.
You stake your currency and
you're at risk of losing it,
which, in theory,
is the same thing.
There's all sorts of problems
and ways that can be exploited.
But none of them seem to be
fundamental showstoppers.
And so I tend to think,
as this gets more mature,
the fact that there are all
these problems with the mining
process-- it uses
so much energy--
I think it's going to
increasingly be a drag.
There's an opportunity to make
money and do interesting things
to optimize it in the near term.
But we're already
starting to see this.
We're seeing China, which is
the source of most of the mining
activity--
Chinese cities are starting to
cut off the cheap electricity
they're giving to these miners.
Because initially, they
were saying, oh, great.
It's economic activity.
It's technology based in China.
Now they're saying,
wait a minute.
Why are we giving away
all this electricity
to people who are just
using it to burn up
for something unproductive?
So I think we're going to
see that kind of pushback
over time.
AUDIENCE: Well, I mean,
concerning the gap in proof
of work and proof
of stake is indeed
exactly this architecture
of trust problem.
Because the thing about
energy consumption.
It's almost like a
theater of the blind sort
of conspicuous-consumption thing
where the waste is the point.
KEVIN WERBACH: Yeah.
AUDIENCE: Because it's one of
the few things you can remotely
validate that the
other person did,
like shoot yourself in the foot
and give me a pound of flesh
or a pile of gold
or a pile of blood.
The blood, I can verify.
In this case, the energy or
the heat death of the universe
you've accelerated.
But substituting that
for a proof of stake
invariably involves now many,
many more forms of truncation.
So I worry that some
of the things that
are most elegant
about the math that
get people excited
about it are indeed
on the proof of work
side, and that people
should realize that
the proof of stake
is not just a
different blockchain.
It's a-- all the math
you've talked about here
and then rethinking
your kind of trust.
That's where the trust seeps in.
KEVIN WERBACH: Yeah.
So in some ways, Bitcoin is
perfect in that it works.
Right?
There were many, many
other previous attempts
to do digital
currency and so forth.
And this was the
one that took off
because it's this elegant
effusion of different things.
And the proof of
work actually is
successful to keep this
blockchain secure for all
this period of time.
The problem is, it's perfect
for a very limited set
of applications.
So again, what is
the situation where
you're willing to trade off
all of those energy costs
and other problems
with that system?
There are some.
My guess is they're relatively
limited, and that most
of the activity-- even just the
basic transactional activity.
So we're already
starting to see this,
where it's impossible to
scale Bitcoin to what you
need for retail transactions.
And that's part of
the system, that it
does all this massive
duplication and waste.
But if you want to use
it for transactions,
so now they're building
systems like Lightning Network,
these second-layer systems.
But that trades off against
some of the decentralization
of Bitcoin.
So my sense is I don't
think Bitcoin's going away.
And I've called it a cockroach
and in a positive sense.
It works for what it does.
And I think there are
some things for which that
may be the best solution.
But I suspect that the
costs are such that you're
absolutely right.
It's going to be harder and
take more time and more things
to overcome to
translate out of what is
successful for proof of work.
But I just think if we are
going to see-- and look,
I'm not a perfect
predictor of the future.
I think it's possible
that that will prove to be
a much harder hump to overcome.
But then I think that will
constrain the adoption level
of these cryptocurrencies.
AUDIENCE: In a different
vein, obviously,
in talking to
policymakers, you've
had several years of
"bitsplaining" going on.
What are your favorite useful,
and more probably amusingly,
favorite useless
analogies you've
[INAUDIBLE] to history
trying to explain this
in non-technical ways?
What you think will be dominant
paradigms that policymakers
bring to it?
KEVIN WERBACH:
Yeah, so you can't
generalize across policymakers.
And just as an
editorial comment,
I hear so many people
saying, well, the regulators
don't get it.
They're inherently slow, and
they're just a drag on this.
And the reality
is, for one thing,
you want regulators to be slow.
You don't want a regulator
that's going say, great.
I get it.
I'm going to do something now
based on some presentation
that someone gave
me for half an hour.
You want them to think about,
what is going to be real here?
What's going to endure?
What are the real problems?
And then how do we match that
up with what we're trying to do?
No regulator or policymaker
wants to stop innovation.
I mean, I worked at the FCC.
There was no one who went
into that building thinking,
how can I prevent the
internet from helping people?
No, they were thinking,
how do I protect people?
How do I deal with problems?
How do I promote competition?
How do I protect people's assets
and intellectual property?
And the consequence of that
may have been negative,
but that's what
policymakers want.
And so policymakers want
to understand, how do we
facilitate innovation
while protecting
what we need to protect?
And I don't think there's
any perfect analogy.
What I find in talking
to policymakers--
and I work with a lot of them--
is, again, you have
to get beyond the hype
and the people who,
for whatever they say,
are just like, woo-hoo,
we're going to get rich.
And the people who say
policymakers are evil,
and we will measure
success by the extent
to which we can
do something that
circumvents the government.
There are people out
there who say that
and I think that's
terribly counterproductive.
Once you get beyond that
and you say, well, no, look.
Here's a real-world use case.
Here's a situation.
I like talking about--
there's people building
decentralized insurance
products.
They're going to Sri
Lanka, where only 11,000
of 800,000 farmers
have crop insurance.
So all the rest are at risk
of being totally wiped out.
And the problem isn't that there
aren't insurance companies,
and it's not that none of
the farmers have capital.
It's that there's
all these trust
gaps getting from the
farmer to someone who's
going to sell them a policy.
They got to trust that
their money is actually
going to get deposited
into the right place.
They've got to trust if there's
not enough rain or too much
rain, they're actually
going to get paid out.
You can do that
in an application.
You can do that
with smart contracts
in a way that's
much more efficient.
There's actually
companies doing that,
creating platforms to do that.
So that's an example
where, again, a policymaker
can understand the
value proposition even
if they don't buy that
particular application.
So again, that's why I talk
about trust, because they
understand that trust
is something valuable,
and they can relate to it.
AUDIENCE: So Facebook just
made some announcements
about blockchain at F8.
So this is kind of interesting.
It's like a centralized
figure approaching
a decentralized system.
Wondering if you see changes
happening now with blockchain,
the trust elements.
You have a big player
entering this market
that's historically
hasn't had trust.
So wondering how you think
about those dynamics.
And as you talk about
international finance,
or probably all the
current cost of doing
international
transactions, it feels
like that might be where
Facebook is thinking about.
So to the extent you
can talk about where
you think it's headed.
KEVIN WERBACH: Yeah.
So I don't know exactly
what Facebook is doing,
but we know the various reports
about what they're doing.
This gets to my point that
trust and decentralization
aren't either/or.
There are many
large, established
players that are active
using this technology.
In fact, just about every
major company in the world
has some sort of
experimental project
through using this technology.
And Facebook reportedly
is going to use this
as basically an internal
payments, loyalty points
system.
Because it turns out that
even within organizations,
there are these gaps in trust.
And there are these
problems that you've
got multiple sets
of records when
you've got multiple
entities coming together.
So I don't think that
people look at that
and say, oh, my god.
The whole point of
this was to kill off
the Facebooks of the world.
Well, no.
There was no point of this.
This is a technology that
has various kinds of uses
and it's going to get
adopted by different players.
So I think it's important
not to be religious about it.
What Facebook is
going to do with it
is very different
from what someone's
going to do creating a decen--
if you want to create a
decentralized social network
on a blockchain, that would
be a competitor to Facebook.
And so I think it's a
matter of appreciating
if they can do what they
want to do a little bit more
efficiently, they're going
to use the technology.
If they can't, they're
going to abandon it.
But, again, I think it's
less novel and surprising
than people want to
make it out to be.
It's just another example
of a company that--
and they looked around.
They got interested in this.
They staffed up a group.
And they figured out, OK,
here's an initial application
that we think will solve a
real problem that we have.
I don't know if they'll succeed.
But I don't think there's
anything really illegitimate
about that.
AUDIENCE: Where
is blockchain not
being utilized that you feel
was a missed opportunity?
KEVIN WERBACH: Huh,
that's a good question.
So the short answer
is whatever I say,
there's probably
an example where
it is being utilized there.
And so I think they're
all categories where
it is being utilized, but it's
not being utilized everywhere.
So for example, there are
many government potential
applications where governments
engage in record keeping.
So there's some
implementations, for example,
using blockchain for land
title, for recording ownership
of real estate.
The real potential is basically
using a blockchain-type system
for identity.
So government grants you
your birth certificate
or social security
number in the US.
They basically
provide this record
of your identity, which is
then the foundation for all
the services that go
on top of it, for lots
of private activity as well.
And that's a centralized
set of records.
And then we have all
these privacy issues
when your social security
number gets out somewhere.
That can be re-architected
on a blockchain platform
using what's called a
self-sovereign identity
approach.
But the idea is, you
control your identity.
You can have something
that's recording information.
And you can have
queries where someone
can make a query for something.
Is this person over 18 because
they want to buy cigarettes?
Did this person graduate
from the college
that they put on
their resume or not?
And there can be an actor
that has that information
and says, yes, without
actually having
to transfer the information
back and forth, to basically do
what's called a verifiable
claim without exposing the data
itself to privacy concerns
and without centralizing
the data in one place.
I think that's something
huge that governments
can do that will be a
foundation both for a lot
of social benefit,
as well as a lot
of active economic activity.
There's some experimentation
going on there.
The standards for
self-sovereign identity systems
are still being developed.
But I think that's probably
the biggest opportunity that I
think we're just
starting to see,
but I think it really could
be the most transformative.
Great.
Thanks so much for coming.
[APPLAUSE]
