LETS TALK BITCOIN

Episode 98 Johnstons Law

Participants:

Adam B. Levine (AL) - Host
Adam Stradling (AS) Founder of Coin4ce & ProvablySolvent.com

CoinSummit Panel

Vitalik Buterin (VB) Founder of Ethereum
David Johnston (DJ) Founder of Mastercoin Foundation & Managing Director of BitAngels
Brian Snyder (BS) Ambassador of Nxt Project



AL: Today is April 5st 2014 and this is Episode 98. This program is intended for
informational and educational purposes only. Cryptocurrency is a new field of study.
Consult your local futurist, lawyer and investment advisor before making any decisions
whatsoever for yourself.

Welcome to Lets Talk Bitcoin, a twice weekly show about the ideas, people and projects
building the digital economy and the future of money.

My name is Adam B. Levine and today we were in San Francisco for another
instalment from CoinSummit. On the first day of the event, I moderated a panel
featuring Vitalik Butarin of the Ethereum Project, David Johnston of the Mastercoin
Foundation and Brian Snyder, an ambassador from the Nxt Project. We talk funding
and founders, problems and use-cases.
But first, in the wake of Gox, the world is re-organizing how we do, and should do
things. Recently, I spoke with Adam Stradling about ProvablySolvent.com and their
efforts towards improving the voluntary transparency of the people holding your
private keys.

Enjoy the show! [1:05]

____________________________________________


Adam B. Levine interview with Adam Stradling


AL: Were here with Adam Stradling from Coin4ce, which is the largest... [1:14]

AS: Were the largest fixed rate exchange in Chile and we also operate in Mexico and Peru.
Were one of the largest traders of Bitcoin in Latin America. [1:22]

AL: Thanks for joining us today on Lets Talk Bitcoin. Were here at the CoinSummit
conference and I am doing something I very rarely do, which is a stand-up interview all by
my lonesome. Adam, we were talking about proof of solvency. Was that what you called it?
[1:34]

AS: Yes. This is a project or an idea that we had a little while ago and over the last eight to
ten weeks, our team at Coin4ce has started exploring it more in the form of a White paper
that were going to publish in two or three weeks, that essentially allows you to use the
cryptographic functions in the protocol, like Bitcoin and other cryptocurrencies, to prove the
solvency of third party businesses, potentially in real time. [2:02]

AL: In practise for me, what does that mean? [2:06]

AS: Obviously, MtGox was a huge disaster. We also just had Vicurex, which came out and
said that theyre going to be closing down and they lost customer funds. Theres a need, in
general for, what I say called cryptoaudits in this space. We believe that because of the
nature of cryptocurrencies that these audits can be done with a higher degree of
mathematical certainty, ease and automation using some of the core functionalities in the
protocol. [2:37]

AL: One of the things thats interesting about Bitcoin, of course, is that you have the ability
to have pseudonymous transparency, which is to say you can have continuity of identity but
its not necessarily your government issued one. How is this different than what were
doing right now? What is it exactly? You said you were writing a White paper. Can you give
me the sixty second simplification? [2:55]

AS: Yeah sure. Kind of as a reaction to MtGox, there has been discussions of how you might
actually implement this. For example, Greg Maxwell proposed using Merkle trees. Peter
Todd also proposed this too. Theres a few programers, Olivier Lalonde, on GitHub, whos
coding this up right now. This White paper is going to really look at the state of the art, look
at these proposals that theyve made, put them in one spot and then also, put our own
contributions into that. I can tell you more in detail some of our thoughts of how to
improve on this process. [3:33]

AL: Please. I think, again, the transparency thing has been a real problem because you can
do it and yet it hasnt been done. *3:38+

AS: Yeah. Yeah, absolutely. Again, like today you had Kraken publish an audit that was
looked at by Stefan Thomas and that was very interesting and great and I love Kraken, a
huge fan but one of the criticisms that you could potentially make is that they handed their
database over to Stefan Thomas but unless you have a complete history of that database, all
the trades that have ever been made, every single fiat deposit thats ever been made and
every single fiat withdrawal thats ever been made, you really cant reconstruct the entire
history of user balances there. I can hand you the database and I can carve it up however I
want and you can say Oh great, you just gave me the database and now I see you have
that many coins and you have that much cash but how do we know that actually represents
the liabilities that the users had when they last logged into their account. [4:30]

AL: This is transparency throughout the entire process as opposed to only at the audit step?
[4:36]

AS: Well, what youd like to do is youd like to have a complete history of the state changes
of that database over time, so really publishing your database as a Merkle tree, which has
been proposed by Greg Maxwell, although we think that you can use other accumulators
(these are cryptographic tools) that will help you publish that information to get an entire
history of that database. Additionally, you need some type of user incentive for the users to
come in and verify their liabilities, right? Weve actually conceptualized a ways to provide
that user incentive. With the Merkle tree approach, they come in and they can see that
their user balance is included in the tree, which is great and they can feel better about that.
If youre actually an auditor coming in say looking to invest in them and see if their fiat
balances match their total balances, you really need your users to verify every single time
that theyve put money in. *5:31+

AL: Does that happen on a per instance of audit bases? Im trying to figure out is this a
continuous process that happens throughout the entire life cycle of one of these exchanges
that youre talking about or is this a process that only happens through quarterly, or
monthly, or weekly, or whatever reviews, and then there is periodic check points. [5:48]

AS: How weve imagined it, it actually could be something in real time. Thats one of the
concepts that were going to discuss in there because as you know, right now, most audits
are done quarterly. This is an interesting aspect that does come out of the cryptography
that you could be doing audits in real time and at www.ProvablySolvent.com, which is the
domain that I own and we put a website up there now, where you can go and sign up to get
a copy of this paper when its out. I really see www.ProvablySolvent.com being a place
where people can report the results of their audits in real time, so a user could come in and
they could say Hey, is Kraken provably solvent? Is BitStamp provably solvent? They can
see the results of the machinery that is running the audits on that website. [6:33]

AL: This doesnt expose sensitive financial data that the exchanges will be not wanting to
expose? [6:38]

AS: Well, that is a great question. This is actually where were going to propose using a
class of cryptographic functions called accumulators and sub-classes of that called
commitments to help increase the level of privacy. This was one of the criticisms that had
been made about the Merkle tree approach is that it does open up everything to everybody.
[6:59]

AL: Lets take a step back here and can we go through that one piece at a time and have
you explain it to me so that the other 90% of my listeners will understand it. (Laughter)
When youre talking about a Merkle tree approach, essentially, what youre saying is that all
the transactions and all their relationships to each other, but not the identity of the
relationships thats whats being used for the audit, is that right? *7:22+

AS: Yeah, that is basically what gets published as a result of their database. Yeah, you will
see that information but those specific users identities wont be revealed. It would be great
if you could keep even that information private and in terms of the liability verification that
happens on the users, it would be great. If that could be potentially private too. Thats
actually where we think the use of commitments would be great because... maybe later I
could get into details of commitments. In the paper youll see that we visualize the use of
commitments as a way to maintain greater privacy but if you have to do an audit, using
commitments, you can actually then unleash or retrieve this information. If an auditor
comes in and says BitStamp, are you solvent like this, then you actually open these
commitments and it will show that information. [8:15]

AL: OK. Real quick, can you explain to me what a commitment is in the context youre using
it? [8:21]

AS: Yeah, its cryptographic function that allows people to exchange information without
that information being known until a later point in time. Its like taking something... [8:35]

AL: Its like a secret? *8:35+

AS: Yeah, its like a secret. Its like putting it in a box and then sending it to the other
person and then, if anybody questions you at some later point in time, they can ask to open
that commitment but youve already deposited your information there, hence, the reason
why they call it commitment. In this case, it could be something like a deposit. A customer
could come in and they could say Heres a deposit of X amount of BTC, or X amount of fiat
and instead of have you broadcasting that to everybody, it could be contained within a
commitment and then later on, if youre doing an audit, you would really use some type of
sampling. This is even how the big four accounting firms do it is actually sample a certain
number of people and in this case, you could open up the boxes and say OK, did this
person and the exchange both agree on the amount of money that was transferred? [9:19]

AL: Lets play it out on the Latin America side because thats where you guys do the
majority of your business. On the one hand, youve got basket case governments and on
the other hand youve got financial institutions, not specifically in Latin America but all over
the world, that could desperately benefit (and I think, certainly their customers could
benefit) from a lot of transparency in that situation. Do any of these solutions have any
implications, repercussions, anything like that on any of these non-cryptocurrency
solutions? [9:46]

AS: Yeah actually, if you look at some of the ideas in the use of accumulators and
authentication of databases, this is a subset of cryptography; there are a lot of financial
applications. Some of these ideas could be directly ported to say, hedge fund management,
where youve had issues with Ponzi schemes and things like that. It would be a way for
investors to authenticate the activities of the fund on the fiat side. On the cryptocurrency
side, you actually have to look at this two-pronged fiat and cryptos on the
cryptocurrency side, you could actually use different techniques. The fiat side is whats
difficult because when you use these functions, youre able to easily sum up the total
liabilities in the database and then, at that point, all you need to do is really look at one
number. Do they have this amount of USD, or Euros, or not? Whereas, a typical audit
company would have to come in and theyd add up every single fiat deposit that ever
occurred, theyd add up every single fiat withdrawal that ever occurred, theyd have to look
at the entire history of the trading database for them to truly know that you have the
money that is supposed to be there. [10:58]

AL: For accounting firms, this actually is a huge cost and time saving if something like this
were... like again, you wouldnt need quite the level of the amorphic infrastructure that you
do in order to understand how the money is routing in the financial system like we do now.
[11:12]

AS: Yeah, this could definitely be applied there on the fiat side for that. Were envisioning it
mostly right now in the cryptocurrency ecosystem but yeah, we just read a paper yesterday
about hedge funds using this to create, basically... because of their databases, sending them
to the investor so that the investors have this information and then, if the hedge fund risk
tolerances or various other thing is put into question, they can unlock this information and
they can say to their investors Were doing what we said wed do while maintaining their
privacy. [11:51]

AL: www.ProvablySolvent.com Im going to go there and by the time this is actually fully
rolled out, what Ill see is a list of exchanges that are following your process and their
current status and then youll be able to look into it a little bit? Tell me what is this website
going to look like when its done? *12:06+

AS: Its www.ProvablySolvent.com and right now, its just a landing page where you can
sign up and get a copy of the White paper. Right now, its really kind of... I envision it as
being a place where people who want to be provably solvent, if theyre an exchange, or a
wallet, or a fund (a cryptocurrency fund) can go there and report the results of their audits.
[12:32]

AL: So its self-reporting? [12:33]

AS: Yeah, I mean, once the idealization of this technology is built, sure it could be self-
reporting because really youre going to have this crowd-based audit system monitoring all
the Bitcoin addresses that a certain business has tagged as their own. Thats a whole
different thing to talk about, in terms of tagging of addresses, which is an interesting idea.
The audit software could be reading and running the solvency equations for a business in
real time and reporting that result right there. Thats kind of how were thinking about it
right now. [13:06]

AL: This is better because what happened, for example with MtGox, is that they might have
been insolvent a year ago, they might have been insolvent at any point in their history and
they might have just carried it forward and it never caught up with them until now. We
dont really know that and lacking good audit options, we dont have a way to. *13:20+

AS: Exactly. If you think about it like this, now that MtGox opened up its database again,
whats happening is people are posting print screens of their account balances on a public
forum so you really have people announcing their liabilities in a public forum so that that
then you can come and sum up those potential liabilities. What were proposing does a
similar thing where youre able to allow users to come in when they make a transaction with
a business, announce that transaction cryptographically in a private manner that then gets
assigned to that business as a liability in this case and then, broadcast that across a network
in a distributed network. Then you have, instead of it just being a forum post, you have all
the history of that is encrypted data in a blockchain, really. If you ever need to call in to
question a transaction that happened two years ago, or something like that, that user says
Heres my commitment, we dont know whats in this commitment but now Ill open it up
and theres my user balance right there. *14:21+

AL: It is a global record and a global ledger. (Laughter) [14:24]

AS: Yeah, thats the other aspect of how were thinking of this. We will talk about an
implementation of this which is actually a distributed system too, where both the business
database, which could be in the form of a Merkle tree in terms of how their announcing this,
is actually announced in a distributed fashion through the secure broadcast channel which is
the blockchain. Everybody has a copy of this database going back through time through all
its state changes and so thats again, another way where then the database cant be
manipulated later on. If anybody suspects that, they can say Hey, on this day they can
start opening up the different (??) of the database. Its pretty technical and Ive tried my
best to do it. Our CTO has a PhD in cryptography, Im the CEO and Ive talked a lot about
this and weve discussed a lot but the nitty gritty and the technical details of how this is
implemented... there are business cases where there are two... like, for instance, how do
you get users to report their liabilities to get a full snapshot of the true liability space? Users
dont want to have to go through another step to click and say Hey, heres my information
but weve come up with what we think could be a good incentive model to get people to do
that. Sure, therell be people who will do it just because they want to have a better
ecosystem but then you have users who just wont do that. With a reward system, that
could be facilitated and we talked about that. [15:49]

AL: Do you want to talk about the token side of this? [15:54]

AS: How that might work? [15:56]

AL: Before we get into that, lets just talk about this. Youre publishing this White paper
and from there the next step is...? [16:05]

AS: We dont know. This is so new. Maxwell and (??) theyve only started applying this the
last four to five weeks. People are trying to figure out all these different problems right
now. What we really just hope with this White paper is one place to consolidate a lot of this
information, compare and contrast what people are doing, for instance, the Kraken audit I
think is great. Krakens awesome but I can tell you three of four things, from a process
perspective, that if they didnt do that, that audit is essentially worthless, and then look at
other people who have already implemented this. BitQuick.co has opened their API with a
really cool proof of reserves function and this is a little easier for wallets, like say for
instance Blockchain.info, theres no need to have a proof of solvency there. You know that
they dont have access to your coin but theres another interesting aspect of that. What if
say, as Blockchain.info goes to raise funds and they say We have 1.3 million wallets. How
do you know that thats actually true? Well, heres our database of all our wallets. Again,
now were back at the database authentication issue. We see this not just being a solvency
solution potentially for say, exchanges but a way to do more audits overall in general. We
actually have www.Cryptoaudit.com and these other things. We dont know where this is
going but we just want to help the current people who are looking at this, which is Greg
Maxwell, Peter Todd, Olivier Lalonde and Zach Wilcox, consolidate these ideas and add
some of our own contributions and see if this is something that people can continue to push
forward. [17:38]

AL: If somebody has listened to this and understood it and is really like Man, Id really love
to be involved with that project, whats the process and where do they contact you?
[17:45]

AS: Just go to www.ProvablySolvent.com and they can put in their email and that will sign
them up to get the White paper. What I should do is just open a message box there too, so
if they want to send me a message too but weve just put the site up yesterday, actually.
Or, you could email me at Adam@Coin4ce.com and you can email me there too. [18:14]

AL: Adam Stradling, thank you very much for your time. [18:16]

AS: OK, thanks. [18:17]


_________________________________________


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_________________________________________


CoinSummit Panel

AL: (Applause) Hi everybody. My name is Adam B. Levine and Im the Editor in Chief of the
Lets Talk Bitcoin show, which is a twice weekly show about the ideas, people and projects
building the digital economy and the future of money, as I like to say. Weve heard some
interesting talk about the 2.0 side of things and this panel, really I think, is what its all about
is the 2.0 side of things. We have some great panellists up here representing three
projects that are similar in a lot of ways but very different also. Vitalik Buterin...
(everybodys going to introduce themselves) Vitalik Buterin is the founder of Ethereum and
has been in the space for quite a while. Can you tell us your story of getting in. [20:35]

VB: The first time I joined the Bitcoin community was in 2011, so I know theres this really
cool currency on the internet, how do I get into it? I found a guy on the forums, his name
was kiba and he was trying to set up his Bitcoin blog and he was paying people 5 bitcoins an
article which was $4 back then and thats what I did the first job I ever had, average salary
about $1.50/hr and earned 20 bitcoins, spent half of them on a T-shirt. Eventually, the guys
money ran out and so I managed to salvage the operation for a while by coming up with this
interesting new business model where I would write two articles a week then, I would put
up the first paragraph of each one on a forum with a Bitcoin address. I would say These
articles are held for ransom. If the community dumps 4.5 BTC into this address, then I will
release the rest of the articles. It actually worked. It actually paid me, maybe something
like $6/hr for about two months. From there, I moved on to Bitcoin Magazine and I started
doing development and nine months ago I quit university to go Bitcoin full time, travelled
around the world to the US, Spain, Amsterdam, Israel and then got really interested in this
whole Bitcoin 2.0 space, and thats basically where Ethereum came out of. *21:52+

AL: One of those articles was, actually, the first Bitcoin transaction that I made was actually
trying to get one of those articles... I dont remember what one it was but getting one to try
to release from ransom. You had a huge impact on me choosing to get into Bitcoin media.
David Johnston comes from more of an entrepreneurial background but has really jumped
into this space, and has probably more projects individually than me and certainly, just
about everybody else in this space. Why Bitcoin? Why this technology? [22:17]

DJ: When I think about new trends, I really look at the fundamentals and in 2012, when I
first found out about Bitcoin, it really captured me from an economic perspective. I like the
idea of a currency that cant artificially be debased. That struck a chord with me really early
on but quickly you go through that Bitcoin newbie learning curve, where you realize its not
just a currency, its this vast payment network that lets me send transactions across the
network. Then you realize its also the technology underneath, the blockchain technology is
really where the exciting stuff is and then, you realize we can use this technology and apply
it to other areas. That was, sort of, the light bulb moment for me. I got heavily involved in
Bitcoin in 2012, started the BitAngels with Sam Yilmaz, Michael Terpin, and others at the
San Jose conference last year in 2013. Now, Ive got about 400 members for the BitAngels
and weve tried to invest in all sorts of different applications but whats really captured me
the last six or nine months has been these decentralized applications. I ended up writing
the White paper and now Ive got to focus entirely on decentralized applications. I ended
up investing early on in Mastercoin and was asked to be one of the volunteer board of
directors for the Mastercoin Foundation. Thats how Ive gotten really heavily into it.
[23:39]

AL: How long did it take you to go from being interested primarily for the appreciation of
the price of the unit and being more interested in the ecosystem? Was there a gap there?
[23:48]

DJ: It was a pretty quick transition. Probably two or three weeks of... [23:52]

AL: You just got it. [23:54]

DJ: Yeah. [23:54]

AL: Interesting. [23:55]

DJ: Youve got to read the White paper, you go up the learning curve and after talking with
a lot of smart people you wrap your head around it. [24:01]

AL: Thank you. Brian Snyder is here representing Nxt and Nxt is kind of an interesting beast
that Ive been watching for the last two or three months. I like to call it the beast that has
no head but has a thousand arms. Its really difficult to organize but if you ever could get it
organized, then it probably has a lot of ability in there. Youve described yourself to me as
an ambassador, whos actually relatively new to Bitcoin. Can you describe your journey?
[24:26]

BS: My journey is a long journey to get here. I graduated from Washington State University
in 2004 and in between that time and now Ive seen credit card accounts get hacked, Ive
seen actual identities get hacked and its come to the realization that the central networks
are not being secured adequately to protect peoples interest, whether its money, or their
identification, or even their ability to transact money. Its an honor to be here and be an
ambassador for Nxt, or Next and I was asked a couple of times last night if I was the creator
of. (Laughter) No, I am not BCNxt or Satoshi Nakamoto but, we all are. [25:22]

AL: All these questions are basically for everyone, one after the other. Weve heard prior
panellists flatly say that now is not really the time for 2.0 development and that we should
be more focused on applications that seem to interface cryptocurrency to legacy currencies
like the dollar, or the yen, or things like that. On the other hand, I think that the
applications that you are working with are more focused around applications that are
cryptography to cryptography and dont necessarily interface so much with the space. Is
that fair to say and what do you think about the idea that we should be waiting to develop
these 2.0 applications until Bitcoin is ready. [26:00]

VB: I personally think 2.0 stuff is really by far the most interesting part of the
cryptocurrency scene in general. I mean, OK, you can send money instantly from A to B,
congrats. Theres a whole bunch of services that let you do that in China. Sure, Bitcoin is an
improvement in a lot of ways but that by itself isnt really enough of an improvement to get
the entire world excited and get the entire world to switch over onto a cryptographic
ecosystem. I think the reason why people want cryptocurrencies and people want crypto
protocols is precisely because of some of these 2.0 smart contracts, decentralized
incentivized protocol ideas. Thats the sort of thing that you absolutely cannot do with
traditional finance, no matter how hard you try. [26:51]

DJ: I think a good analogy is the early days of the internet. Early days of the internet, email
was the killer app, all of a sudden I could instantly send a message to anybody on Earth, it
hardly cost anything, which is a great analogy to Bitcoin and now being able to send money.
Only focusing on email doesnt make sense for mass adoption. What got people excited
about the internet was now there were all these different uses and websites that popped up
that were relevant to them. I think as we see more and more projects using the underlying
Bitcoin technology, that are doing things other than payment and other than currency, now
I care. As an end user, Im maybe not a merchant and I dont see all the advantages or I
dont buy a lot of stuff online but if I use DropBox today and you told me that there was an
alternative version that was ten times less in cost, all of a sudden, I have a reason to adopt
this new technology and use it. I may not even understand that Im using that technology
but Ill be leveraging those same protocols in order to accomplish that. I keep saying and I
really believe this... in five or six years, I think youll have a billion people using Bitcoin and
most of them wont realize theyre using it. Anymore than most people consciously think of
the fact that they are using HTTP when they go onto their social media, or go onto a search
engine. [28:19]

BS: The reason centralized exchange failures highlight the need for cryptocurrency 2.0
systems i.e. decentralized exchanges to allow the cryptographic community to trade in a
trustless fashion to where the transactions are signed locally and then sent through a set of
automated transactions that represent a gateway. These gateways can exist on top of the
Nxt Asset Exchange and can provide a totally decentralized method for trading
cryptographic pairs. [29:06]

AL: Founders and fundraising. Again, everybody here is kind of on different places within
the timeframe and everybody has a different story. Lets start with Brian about Nxt. Can
you tell us about what you think about founders... you know, are founders an advantage or
they a disadvantage? Is fundraising an advantage or is it a disadvantage? [29:28]

BS: BCNxt collected 21 bitcoins to generate the genesis block for Nxt and that genesis block
created one billion Nxt, which is a fixed amount. There will be no more than that. Its
similar to the 21 million number for Bitcoin. (Long pause) As far as funding and founders
go... [29:58]

AL: I guess what I mean is... [30:01]

BS: Its said by the creator of Nxt that a world with money can never be perfect and so
some people will always have misgivings about any system. There will always be
inequalities in any system and in the initial bootstrapping phases of a cryptocurrencys
ecosystem, there must be people who have stake, who have an incentive to continue the
network success and to continue the security of the network. [30:36]

AL: Do you view that 21 bitcoin that was raised as a fundraising, or was it something else?
[30:42]

BS: I suppose you could call it a fundraiser. [30:47]

AL: OK. [30:49]

DJ: I think what were seeing is different best practices emerge here. People have certain
expectations based on how Bitcoin has been built that whatever system you choose, its
going to be transparent, people are going to be able to participate on the process on an
equal basis and that it will be based on open source. You have these best practice
expectations and I think, if you go along those and you make a best effort with your protocol
and the way that you issue your tokens for these applications, then the community will get
onboard. If you do things like try to keep things proprietary, or youre not transparent
about the process, or people arent able to participate on an equal and fair basis, then
theres a lot more scepticism. I think those best practices are really starting to emerge.
[31:41]

VB: Definitely fairness and this whole issue of does the protocol privilege certain people
as something that people talk about quite a lot. I think one of the problems here is that
there definitely are a lot of people in some of the earlier Bitcoin community, whether its
the more market libertarian, or open source culture, or a combination of both is that theres
a lot of emphasis in those kinds of schools on systems that are sort of technically fair, that
dont sort of explicitly privilege people with specific institutions. More from an
entrepreneurial standpoint, the thing that you need to understand is that really Bitcoin itself
is not really all that egalitarian. Sure, theres nothing in the Bitcoin code that says Satoshi
Nakamoto and Hal Finney are entitled to a pre-mine of 30,000 BTC. The reality is... I for
example never had a chance to even do anything with Bitcoin in 2009 or 2010. Id never
even heard of it, so its not really a matter of whether the system is technically fair, its more
a matter of whether its actually fair, whether the process is widely distributed, whether its
designed end-to-end in such a way that anyone can participate and what the distribution of
the currency supply is. Obviously, if one particular entity has 40% of it, thats a bad thing.
Also, once again, is there transparency? A lot of these different fundraising methods, David
actually made this point to me a few months ago, are even more fair than just something
thats purely mining-based. If you have something like Bitcoin and its a purely mining-
based currency, in order to mine it now you still need money. You need money to buy an
ASIC or you need $5 million of capital to make an ASIC company, I mean, thats where the
real money is, whereas if you have something like a fundraiser then anyone who has any
money can participate. Its a matter of coming up with a mechanism where lots of different
diverse constituencies can participate in different ways. [33:53]

DJ: I think thats the other best practice emerging is if youre not doing something that
requires hashing power, then why only reward miners? Were now having applications that
dont necessarily need hashing power that maybe are built on Ethereum or on top of
Bitcoin. What they need to do is incentivize other user groups. I and Vitalik talked about
this early on is you have developers that you need to incentivize to add to the open source
code. You have people you want to participate in the crowd sale when you initially
distribute the tokens that want to support this financially. I think ought to be the largest
pool is whatever user behavior you need in order for this as a system to work, that ought to
be what you reward in the biggest way. Lets take a particular example, Storage won the
recent hackathon in Austin; we put up $1m from BitAngels for the hackathon there; they
took first place. Its a system that rewards people for adding computer storage to a cloud.
Thats the majority of how their tokens will be distributed for everybody setting up these
nodes that compensate people. People are competing to provide this storage to the
network but you also have a pool for developers that contribute to the open source and you
also have a pool for the initial crowd sale. Thats the different constituents that you were
talking about. Thats what we will really see emerging. *35:19+

AL: Lets talk about use-cases. These 2.0 technologies are sort of... (laughter) its a bit of an
ethereal concept (no pun intended). What are some early use-cases that you see coming
out on your platform? [35:33]

VB: One thing that people are very excited about is this decentralized dropbox idea. We
have these systems where, if you have 100GB file you can upload and they store it for you
but why cant that be a cloud, as in an actual decentralized cloud? You upload a file, anyone
can download it and then theres a contract which automatically pays out money (or
whatever kind of tokens) to whoever manages to submit a cryptographic proof that they still
have the file. The reason why its exciting is, as we said at the last Texas conference,
Dropbox has a mark-up of something like 100X, so if you can drop that down even 10X,
potentially weve got a massive improvement there. On the server side, you can earn
money by renting out your hard drive. Thats a powerful message. *36:21+

DJ: The cool thing is that people have been working on this for a while. One of my favorite
projects in that space is MaidSafe, is doing the backend for what Storage is doing on the
front end and theyve thought through a lot of those hard problems around how do you
fully decentralize storage encrypted end-to-end; make it so theres no central point of
failure. I think projects like that are going to be a really easy to understand use-case for
most people because people are starting to get used to the idea of the share economy.
Theyre used to Airbnb and being able to earn extra income by renting out their house or
now there are all these car sharing apps that let people earn extra income doing that. Why
not rent out extra storage space sitting on a 3TB hard drive sitting on your desk. Its sort of
a natural extension of that that people will understand and really be able to use every day.
[37:10]

BS: One of the interesting use-cases of Nxt is fraud prevention with regular... the example
being used here is the exchange DGEX, which is run by Graviton of the Nxt community. In a
situation where a fraudulent request was made from an account, the administrator Graviton
was able to contact the initial funding owner, the real owner of the account and seek the
authentication token from inside the Nxt account. Given that the request was made from
some other account completely, the request to provide the token was not able to be
completed and so the withdrawal was not processed. [38:02]

AL: What is it about Nxt that allowed that to happen where it wouldnt in Bitcoin? *38:05]

BS: Within the Nxt client a token authentication feature, where you can plug in a website
and your Nxt account number and it feeds out a cryptographic hash that can only be
unlocked by the other person. [38:26]


________________________________________

ADVERT:

This is Kris Joseph bringing you news on Nxt, the first true second generation cryptocurrency
for April 5
th
2014. It had to happen eventually. Nxt features a coin supply of one billion
indivisible coins and at the time of its creation, nobody was concerned about this
indivisibility because the supply was so large but with the development of the decentralized
asset exchange, questions have arisen. How can we trade other divisible assets against Nxt
if Nxt is indivisible? This week marks the debut of what were calling the quad, the Nxt
equivalent of the Bitcoin satoshi. A new version of the Nxt software running only on the
testnet adds divisibility for Nxt up to 8 decimal places which matches most other cryptos.
The goal is to make it easy to trade Nxt against other currencies on the asset exchange.
Once this new coin divisibility feature has been fully tested, it will be deployed on the
production Nxt network. For more general information on Nxt, head to www.NxtCrypto.org
or www.MyNxt.org and stay tuned for more news on Nxt in the next Lets Talk Bitcoin
broadcast. [39:34]

________________________________________


AL: Were kind of going through this in a little bit of a backwards way. Id like each of you to
take just a minute or two to explain your project. Brian, lets start with you again. *39:43+

BS: Nxt is 100% proof of stake cryptocurrency that operates on its own blockchain and one
of the features that is being developed right now is called the Nxt Asset Exchange. The Nxt
Asset Exchange, once released on the main net and once its all tested and fully debugged
will allow gateways to build on top of the Asset Exchange to allow... at this point, theres
been a proof of use-case of a fully automated, multi-signature, cryptocurrency gateway that
has transferred Dogecoin into the Nxt Asset Exchange, running on testnet and transferred it
back out of the Nxt Asset Exchange and back into the real world Doge wallet. That type of
application... [40:36]

AL: Just to follow up on that. What youre saying is that somebody transferred Doge into
Nxt where it was represented by an Nxt asset... [40:45]

BS: Yes. [40:45]

AL: For Doge. [40:46]

BS: Yes. [40:46]

AL: ...then somebody traded it back out. In that way, people are able to trade Doge on an
entirely decentralized peer to peer exchange? [40:53]

BS: Yes. [40:53]

AL: OK. Thats different. *40:55+

BS: As just a proof of use-case, that has been demonstrated so far. [41:01]

DJ: The case with Mastercoin and the Master protocol is a similar use-case but on top of the
Bitcoin cryptographic ledger. With Master protocol, and Master is just an acronym for
metadata, archived by standard transaction embedding records, and thats exactly what it
does. Its embedding records in the Bitcoin ledger using the standard transaction types.
Youre interpreting that metadata to say Oh, thats not a regular Bitcoin transaction, thats
a Dogecoin token, or a Peercoin token, or one of the user currencies that people have
created using Master protocol that could represent any different type of project. For
instance, MaidSafe or Storage, if they issue their user currencies on top of the Master
protocol, all the Master protocol wallets will be able to recognize that transaction as a
particular token and somebody is sending that from one place to another. Thats really at
the heart... is the decentralized exchange thats recently been launched and the next thing is
user currencies and its all on top of Bitcoin. The interesting thing that that creates is if
Bitcoin is successful as a general cryptographic ledger, well see more and more assets,
more and more tokens built on top of the ledger, really adding an enormous amount of
value to Bitcoin itself, expanding Bitcoin from today a currency and a payment network to a
secure cryptographic ledger. That really makes it a lot more like the internet than like email.
It will be interesting to see how that evolves. [42:36]

VB: Its a good thing that the analogy between the internet and email got brought up
because one of the ways that I like explaining Ethereum is actually talking about, specifically,
the internet. If you look at the internet back in the 1990s, we had this language called
HTML. It started off by lets have text web pages and then HTML came out with specific
features, things like paragraphs, underlining, bold. At some point, we decided static content
isnt good enough; people want to be able to do forms, so HTML came up with a specific
feature that allowed you to do forms inside of HTML. You could fill out forms, you could
submit them and they would go straight to the server, and so forth. With Ethereum, then
however in 2000, what we... or around 2000, Brendan Eich came up with this programing
language called JavaScript and the idea is that was that, instead of having this internet
protocol suite with dozens and dozens of features on top of it, lets just have an internet, or
the web with the programing language built in, so you can build whatever features you want
on top. Since then, weve seen people whove built Gmail on top of JavaScript; people
whove built Facebook on top of JavaScript, people have built Bitcoin wallets on top of
JavaScript. All these applications that Brendan Eich never even have thought of are possible
just because he created this protocol that contained this universal programing language that
allows you to do everything. Ethereum, basically, takes that exact same idea and brings it to
the world of cryptocurrency. Its a sort of generalized contract network where you can
encode any kind of arbitrary rules, any arbitrary transaction types you want, any financial
contracts, decentralized storage, make your own currency, just by defining exactly what
they are in a programing language and putting it on the blockchain. [44:21]

AL: Why not use Bitcoin? To David, why use Bitcoin? What are the advantages, what are
the disadvantages and Vitalik, lets start with you. *44:31+

VB: Theres three different ways we could have used Bitcoin. One way is, lets take Bitcoin
as it stands today and lets try and make slight modifications to it. The thing is what Bitcoin
does have is a built in scripting language, but its very limited. One of the big limitations, for
example, is that transactions they dont really have state. A transaction could be spent or it
could be unspent. Theres no way to use that to make some kind of complicated five step
contract, or a five step financial contract, or even a sub-currency that has as much state as
you want. The other approach is to do something like ColoredCoins, or Counterparty, or any
of these other ones, and Mastercoin and say Lets use the Bitcoin blockchain as a data
layer. Its a good approach; in fact, the one fun facts that the original Ethereum White
paper, back around November 27
th
, actually we had the Ethereum protocol running on top
of PrimeCoin. I think the biggest reason to do it independently is just a matter of scalability.
With some of these protocols, if you do it on the Bitcoin blockchain, in order to figure out
what the current state of the system is, you have to process every single transaction,
whereas, if you do it on your own network then you could actually use mechanisms like
Merkle trees and allow various different kinds of caching and optimization to happen, so
you can have secure (??) clients that know exactly just a particular part of the state that
they care about. [46:00]

DJ: You want to reinvent the wheel? [46:02]

VB: Yes, we want to reinvent the wheel and make it better. [46:06]

DJ: OK. I think that analogy of programing languages is a really good one and one I often
use. People ask me Arent you competitors with this or this project, and I try to remind
people that these are all open source projects and that whatever best practices emerge,
everyone else will copy. Thats how open source works; its how it should work. I think of
these more as programing languages that have different strengths and have different
weaknesses. For the particular features of the Master protocol, we wanted to build on top
of the largest, most secure cryptographic ledger and today, thats Bitcoin. Master protocol
doesnt have to forever stay only on Bitcoin; theres already been discussion around the
devs about partnering with Ethereum to build on top of their platform, partnering with
MaidSafe to build on top of their platform. I think this will exist. Its sort of like asking Are
you only going to do this app for iPhone? No, Ill do it for Android too. Maybe Ill do it for
other platforms. There is no reason we cant leverage all those capabilities based on the
different platforms that get built. Again, for the particular features of the Master protocol,
they were straight forward enough decentralized exchange of tokens, defining assets, that
the fastest and clearest path to success was to do this on top of the Bitcoin ledger in a way
that fits into their existing architecture. Hey, if Ethereum gives us awesome advanced
features, wonderful. Thats great! We will make sure our wallet and everything integrates
with them and can take advantage of those features as those roll out. There is sort of this
race to do the decentralized exchange and one of the ways we got there very quickly was by
using an existing ledger and an existing blockchain. [47:51]

AL: Let me follow up with that real quickly. Youre doing a decentralized exchange and Ive
been playing around with some of the Bitcoin-based decentralized exchanges and I noticed
while a 10 minute blockchain... 10 minute block time is really, really fast when you compare
it to a wire transfer, when you compare it to trying to trade on a trading platform, its
incredibly slow. [48:09]

DJ: Sure. [48:10]

AL: I mean, do you think thats a problem for Bitcoin in the medium term? [48:13]

DJ: Not necessarily. Bitcoin is never... or, not in the near term, going to be a high frequency
trading platform. Its not designed that way. Its meant as a cryptographic ledger. I think a
gentleman mentioned earlier the best way I would do that today, is I would do it off chain
and every periodic amount of time 10 minutes, 20 minutes, whatever, I would merge
those records into the blockchain. Now, even if my high frequency trading fails, Ive got the
records as of 10 minutes ago, that I know are stored in the secure cryptographic ledger. I
think it makes sense more to use something like Open Transactions, or another thing thats
meant to act at a very fast pace and do that off chain and then merge those records.
[48:59]

AL: Do they require us to trust you? [49:06]

DJ: The best that you can offer off chain today is a federated model. If you look at OT as an
example, you create a pool of servers and it would be very, very difficult to take over all of
those servers in order to fake a transaction. They have a high level of security but I would
still want to merge into the ledger to get an even better level of security. What Id really like
to see is somebody take these federated systems for OT, and other systems and figure out a
way to fully decentralize them. I think thats going to come. I think its going to require
identification protocols; its going to require reputation protocols; its going to need other
elements before you can fully do that process. [49:52]

BS: I think its interesting that the Java technology being referenced as the enabler of the
internet applies directly to the coding of the Nxt ecosystem because Nxt core is coded in
Java, as opposed to Bitcoin which is coded in C. In addition, Bitcoin has (Im sure as
everyone knows) a 10 minute blockchain generation time, whereas Nxt has a one minute
blockchain generation time. In addition, the average cost of a Bitcoin transaction right now
is $32.00 approximately and that can be found on Blockchain.info and is a result of the
competitive securing of the Bitcoin network via all of these ASICs and via proof of work. Nxt
provides a significant energy saving advantage over the long term as well as a faster block
generation time. [50:57]

AL: How does it accomplish that? [51:01]

BS: Every single node on the network has to agree, every single minute which node will
process the next block. [51:11]

AL: Its another way to find consensus? *51:14+

BS: Correct. [51:14]

AL: OK. [51:15]

DJ: Proof of stake. [51:16]

BS: Yeah, proof of stake. [51:17]

AL: How long has Nxt actually been working in practice? [51:20]

BS: Nxt has been in existence for about four months now and proof of stake was just
thought of probably six months ago. [51:29]

AL: Interesting. The legal landscape is interesting. These are all global projects and again,
there are differing approaches to dealing with this. Lets start with you, Brian. Change the
paradigm, conform to the paradigm or completely avoid the paradigm, and how? [51:46]

BS: Nxt is a completely decentralized network. There are no leaders and at the core, it
cannot be stopped just like Bitcoin cannot be stopped. The blockchain will continue to roll
on, will continue to generate new blocks as long as there is incentive to the members of the
network. [52:06]

AL: Do you have any plans to interface with regulators, or has that even been discussed
within it, or is this just outside? [52:12]

BS: Well, the core provides extensibility to other programers, so other programers can build
gateways (as I described) onto the Nxt Asset Exchange. Those gateway providers would
fully integrate with the regulations, know your customer, anti-money laundering laws, etc.
At the core, the system will run no matter what and is not beholden to regulation. The
providers that build on top of the core can choose to come into compliance where they
need to come into compliance, or choose not to. [52:57]

DJ: I think thats the right answer. Bitcoin has given us a really good example of how to
operate these type of projects. Bitcoin is an open source tool, its global and its not trying
to do compliance on a global level with the open source. Its just an open source toolset
and any operator can take that Bitcoin protocol and use it in their particular jurisdiction to
run an exchange, run a business and its up to the operator in that jurisdiction to comply
with their local regulations. Thats part of why Bitcoin has been so successful. You can see
people have taken the Bitcoin protocol and you build an exchange in China, different than
you build an exchange in the United States, different than you build an exchange in Europe.
Its given people that flexibility to do compliance in their local jurisdiction but have access to
this open source platform that gives them all the tools they need. I think thats really
important. I talk a lot about that idea of not... instead of trying to do global compliance,
which is really tough as a start-up and as a new project, but doing local compliance and just
leaving the top level as an open source protocol. When it comes to people issuing the
tokens, the frame I like to think about is, imagine I wanted to develop a new video game and
I went onto a website and said Hey, everybody that wants to support this new video game
can send me $10 and I will give you the first password to this new video game. All the
people that support it will get this new password. I collect the money, I do the work, and six
months later I release the video game and all the people that participated in my initial
crowd sale of the video game get access. Thats a really good frame to think about this
because when people offer tokens, they are literally giving them, all their participants, their
private key which is the same as a password. Theyre getting a password that accesses this
particular application and people associate a value with that password because now
anybody with that password can access this new application. I think from a framework on
the regulatory side, thats how I think about this is - it is a crowd sale. Its very much sort of
a crowd activity thats participating in accessing these applications because there is such a
broad array of things that people will use this for. [55:28]

VB: One of the problems I think is that even though we might think that all were doing is
just pre-selling tokens. You do have to keep in mind that the regulators might think in a
different way, especially if you go around and promote it as a massive investment
opportunity. There definitely is room for compliance of some kind and its not as much of a
problem with Bitcoin because its a completely anonymous project. On the other hand, if
you go with some kind of fundraising approach, it is something that you do have to think
about. That is one of the costs that come with the benefits. Unless its possible to gain the
benefits of that (??) while still keeping the whole thing completely decentralized, with no
central parties whatsoever, but thats I think a challenge thats still... *56:28+

DJ: Anybody interested in this area, Id encourage you to check out CODA, the Consortium
of Decentralized Applications. This includes Mastercoin, ColoredCoins, BitShares, Ethereum,
Open Transactions. Were all getting together people in these Bitcoin 2.0 areas and saying
Lets pool our resources to do legal work, do regulatory work and figure out what are the
gos and what are the no-gos in this area, so we can all be smart. We want to do this in an
intelligent way that complies with all the jurisdictions. [56:59]

AL: Sure. We have five minutes left. We didnt get through all my questions. Im sorry
were not going to have time to take questions from the audience. I wanted to get broad
and visionary here for a second and talk about what this ecosystem looks like five years out,
or two years out, if you succeed with what youre attempting to do. What does the world
look like? Lets start with you Vitalik. *57:15+

VB: With Ethereum, I think in the long term, we dont even need to necessarily know all
that much about us. People dont go around talking all that much about something like
TCP/IP. People talk about the applications on top of it. In the long term, people arent
necessarily going to be writing contracts, even in our Python code, which to be fair is much
easier to use than the Forth scripting language that comes with Bitcoin. In the long term,
people are going to be using apps and the job is to create a way that allows you to sort of
take all this smart contract functionality, package it up into tools which are simultaneously
user-friendly, easy to use but also in the background, have all of the security assurances that
decentralized consensus technology provides. It will basically look just like your iPhone
except you have the reassurance that its actually secure on the backend. *58:18+

DJ: Ill take this opportunity to coin Johnstons Law. Johnstons Law is as follows:
Everything that can be decentralized will be decentralized. Thats the vision here. I look at
this as the entire text stack and were still at the early days where were decentralizing data
and storage and bandwidth but once we have those elements in the next few months, we
can build more and more advanced protocols and decentralized systems on top of those
basic elements. I think we can take all the existing hierarchy or centralized systems and, one
by one, decentralize them using this type of technology. Im not saying its a model that
applies to everything, but those things that can be decentralized, that it makes economic
sense, they will be, I think, over the coming years. [59:07]

AL: OK. You still have sixty seconds on your answer, so I actually want to press you with a
further question. What do you think the single most exciting project is that you are looking
at that is on the 2.0 use-case side? You know, real... fifty seconds. [59:19]

DJ: Number one: MaidSafe. Number two: Ethereum. Number three: Open Garden. That is
my computes, MaidSafe is my storage and Open Garden is my mesh network that gives me
decentralized bandwidth. [59:34]

AL: And the thing that ties these together is tokens? [59:36]

DJ: Tokens tie it together because it lets us monetize the use of these applications. Without
an arbitrary fee or profit margin built in. Were working with Open Garden to create a
White paper that brings together how you tokenize their system and incentivize people to
share the internet. Ethereum is doing a great job with how do we incentivize scripting and
consensus around that. The MaidSafe guys I think have done an incredible job. Ill put it
this way I got on a plane and I went to Scotland to meet all their developers and I was
really, really impressed, though I think theyll talk more publicly about what theyre doing in
April at the New York conference, but yeah.... those are the three things that Im really
excited about. [1:00:15]

AL: Thank you David. OK. Nxt has the last ninety. [1:00:17]

BS: The Nxt network in the future will have a fully operational asset exchange and on that
asset exchange will be the gateways I described previously. These gateways could operate
in any country, they could be fully regulated or they could be running anonymity protocol
like the Zero Cash protocol from John Hopkins University. These are applications that are
being worked on right now and additional uses of the Nxt decentralized cryptocurrency
ecosystem is the reanimation of dead capital that is not able to be titled or sold because
people dont have access to the financial services and its largely due to the excessive costs
of old analog style banking. [1:01:15]

AL: Can you expand on that a little bit in 27 seconds? [1:01:18]

BS: I can try. Most of the world has not experienced the internet yet, at this point, even
though the internet is 25 years old, it still needs to be secured and most of the world still
has not experienced the benefits of it. As we go forward, decentralized applications will
provide the avenue to be able to deliver safe and secure solutions to the rest of the world.
[1:01:42]

AL: Gentlemen, thank you for your time. [1:01:44]

BS: Thank you. (Applause) [1:01:47]


__________________________________________


CREDITS:

Thanks for listening to Episode 98 of Lets Talk Bitcoin. This episode was produced by Adam
B. Levine and Krystal Levine.

Content was provided by Adam Stradling, Vitalik Buterin, David Johnston, Brian
Snyder and Adam B. Levine
Music for this episode was provided by Jared Rubens and General Fuzz

Any questions or comments? Email adam@letstalkbitcoin.com

Have a good one! [1:02:13]