- Digital currencies on the blockchain can only go global if transactions can be expedited
- Mass adoption could yield micro-economies, where millions of public businesses could theoretically take off
- Blockchain technologies are in their infancy, but are projected to yield a 17 trillion-dollar economy when combined with AI and the Internet of Things
In this episode of In Conversation With, Angie Lau sits down with Steven Nerayoff, a prolific investor and advisor in blockchain as well as chairman of CasperLabs. Nerayoff compares the blockchain revolution to the boom of the Internet. In its rudimentary form, ARPANET, the predecessor the Internet as we know it, didn’t receive much commercialization until the 90s. The advent of Netscape, however, rendered the Internet a visual experience where it quickly began to spread globally. For Nerayoff, blockchain and digital currencies have this same potential, but have yet to experience its own “Netscape.”
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This Netscape moment would require three key aspects to blockchain: 1) Security; 2) Full decentralization; 3) Scalability in terms of transactions. Though Ethereum and Bitcoin have met the first two criteria, they have yet to replicate the speediness of Visa or MasterCards where they can do up to 2000 transactions per second. In order to make digital currencies go mainstream, a new proof-of-work technology must be implemented to expedite these transactions. Rather than using mining equipment to generate random numbers for consensus, CasperLabs employs proof of stake where the user can buy and stake the tokens, which requires less computing power and permits the movement of many more transactions per second. With the help of CasperLabs, Nerayoff envisions future user cases where blockchain technology will be combined with artificial intelligence and the Internet of Things, which is projected to yield a 17 trillion-dollar economy. To achieve this goal, CasperLabs is first focusing on mass adoption, which first requires the development of a Mainnet, or a functioning blockchain network.
Mass adoption of blockchain and STOs could have a tremendous impact on the global economic structure. Nerayoff provided the example of real estate where there is an estimated 250 trillion dollars’ worth of real estate in the world. With digital tokens, one could specify currencies for restaurants, hotels, housing, or even businesses within businesses. Micro-economies could theoretically be created, where millions of public companies could easily manifest.
Despite these innovations, regulators, particularly in the United States, are taking a “cautioned approach” to decentralized systems, which has, in turn, stifled international expansion. Yet, smaller countries have a far more liberal approach to blockchain innovations, which is giving rise to miniature Silicon Valleys in Estonia, Switzerland, and Malta. For Nerayoff, this trend is creating a “Wallstreet 2.0” and established countries like the US or Japan should be taking notice. Thus, the question is, where can we move forward in building an infrastructure for a decentralized system? Currently, there are no clear answers, but we may begin to see clarification in the next 10 years.
In conversation with Steven Nerayoff, a prolific investor advisor in blockchain. Definitely has had his hands on a lot of projects that you’re familiar with, including Ethereum, and really thinking about the legal way to structure Ethereum that saw an incredible tokenization sale of Ethereum. And now chairman of CasperLabs, and really thinking about how these protocols are evolving. Welcome, Steven.
Thank you. Wonderful to be here.
And it really is an evolution on top of a revolution, isn’t it?
Yeah, so the Satoshi moment was… That was the revolution, that was the paradigm shift, and everything from here, yeah, has been massive. But they feel revolutionary because they’re such big shifts and the ramifications are big. But yeah, they’re evolution in terms of massive iterations of the original technology.
And the original technology, is it good enough?
It’s… Ok, so yes and no. In terms of it’s good enough, as for Bitcoin that most people know about, the Bitcoin protocol has not changed much. They’re pretty adamant that they want to keep the basic protocol unchanged, and any changes would come on top of that. So the way you would think about it is, let’s say, Visa, MasterCard was the basic protocol. Let’s say Visa, MasterCard, whether it’s fine or not, we’re not changing it. If you want to change it, you can add things like Venmo…
In conversation with Steven Nerayoff. He is a prolific investor and advisor in blockchain, and really created the legal structure that still stands today when it comes to tokenization, and that’s certainly how he helped fuel, you could say, Ethereum to where we see it today, and now is chairman of CasperLabs. How are you thinking about the evolution on top of the revolution that we saw in 2008? So welcome, Steve. 2:04
How are we seeing this?
Well, so when Bitcoin kind of exploded onto the scene, that was a paradigm shift, it was a revolutionary new technology. I can interact with you, in that case they were sending value, what we call Bitcoin today, and we didn’t need a third party in the middle. That is a radical concept really for… In human history, we’ve never actually been able to do that. And I can trust you because of the way the technology is operating. And so now we’re seeing many variations of that. So, we’re seeing a whole economy happening in terms of tokenizing and they’re called utility tokens, but it’s a whole new economy and things that we haven’t seen before. And then on the other side, it was kind of seeing like Wall Street 2.0 with security tokens, and it’s the same underlying technology. And I like to say that they have the same grandfather in Satoshi with Bitcoin, but the grandchildren are kind of going their own way, and they both arguably are forming the largest markets that are known to mankind.
Well, you’re almost creating an economy though, some would argue, without actually having the proof case or the utility case. And so there are a lot of teams and a lot of talent in this space right now that are trying to figure out the efficiencies or even enterprise solutions. But that mass adoption, that moment in time when the average person says, “Yeah, I get it. I’m going to use my crypto asset and I’m going to get something of value in return.”
And so what we haven’t seen yet is we haven’t had that… For the internet, it was the Netscape moment. Netscape hit, you looked at it, the internet was always there and had been there, but all of a sudden now you saw pictures, and it was a visual experience, and that kind of changed the whole thing. That was the day the commercial internet was born, and then it went from thousands of people to millions of people to billions of people in pretty quick order. And exactly the same thing’s going to happening here. So in 2009 and ’10, it was a very small number, a very small community. It was starting to grow. And what we haven’t had, and it’s only been 10 years. Remember, the internet started as the ARPANET in the ’60s and then it didn’t actually have the commercialization until 1994. So 30 years with only 10 years into this. I think it’s going to go a lot faster, but what we haven’t had is that killer app, and we haven’t had our Netscape. I think one of the reasons we haven’t had it is because we haven’t had a protocol. So a blockchain, that is what they call the holy grail. So there’s three aspects to a blockchain; one is security, it has to be fully secure. The other one is decentralization, it must be fully decentralized. And the other one is that it should scale quickly, so you do a lot of transactions per second. And the ones that have happened… So you see like Bitcoin and Ethereum, they’re super secure. They are totally decentralized. They just haven’t been able to scale a lot, and weren’t really intended to from the beginning. In Bitcoin’s case, they don’t want it to scale anymore. They’re saying it’s fine.
When you say scale, does this mean transactions?
Sorry. So, scalability is the ability to do a lot of transactions per second. So if you look at, let’s say, the Visa, MasterCard network, that typically does up to a 1,000 to 2,000 transactions per second on average, right? And so if you can’t do that, bottlenecks start clogging. And so you will do is you could charge your Visa card and you could be sitting there paying for your dinner for another week.
Well, I can’t imagine standing there and waiting for that transaction to happen.
And if you had, Visa and MasterCard and credit cards would have never taken off. And so the ability for a transaction to happen fast is absolutely essential for a new technology to be adopted by everyday people. They need to have that convenience and speed, otherwise they just won’t… They won’t work.
Alright. We often talk about proof-of-work as a technology, right? That confirmation that allows that consensus to happen very quickly. Bitcoin is very slow, right? And Ethereum is slightly faster, but there are new protocols that are being birthed every day.
The grandchildren are populating here.
But new protocols. So, what is CasperLabs doing?
So CasperLabs is doing something different. Rather than using mining equipment to generate random numbers and they’ll use that as a consensus, what we’re doing is what’s called proof of stake, and you actually buy the tokens and you stake the tokens, and through that process with a lot less computing power and different types of less expensive computers, you can actually do the same amount of consensus. What that allows you to do then is move many more transactions per second and potentially keep the same security. So that’s super important. You have to have a secure network. So this evolution, this is an evolution in the proof of stake, has been super important. The problem has been that everybody who’s implemented this has had some form of centralization. What that means in practical terms is there is… When you have centralization, that means that there could be potential malicious action. That means a third party or a hacker could potentially do something. And let’s say, for example, you did a transaction last week, I sent $1,000 to somebody, somebody else could potentially reverse that transaction and maybe have the money sent to them. So this is obviously a very important thing when we’re talking about…
Because nobody has actually proven proof of stake yet.
No. It hasn’t… Well, nobody has come out with a… They’ve… Proof of stake, they’ve shown it to work, but nobody’s had a fully decentralized proof of stake. They’ve always had some element of centralization in order to make it move fast. So you do these… There’s a lot of transactions per second, so you could serve a lot of people globally. And the exciting thing about CasperLabs and why so many of us came together and a lot of industry folks that have been around for a long time, is because a really prominent Ethereum researcher, probably the most prominent one, is Vlad Zamfir. And what Vlad came up with was, in my opinion, as big of an invention as what happened 10 years ago with Satoshi, and an equally impressive one that happened with Vitalik and Ethereum, and basically adding intelligence more or less to Satoshi’s invention. And Vlad figured out a way to actually scale those inventions. And so you’ve got this beautiful, like at 10 years ago, five years ago now, where you have this invention, and now we actually have the ability to scale. That’s really important, because the companies that are coming onto the blockchains right now, they’re not building for thousands of transactions like Visa or MasterCard, for something that can actually go global, service billions of people like a Facebook or a Google, they’re building something that only can do maybe 10 or 20 or 30 transactions per second, to serve like a very small group. And most of those projects tend to be like concept or trials or small things that companies are doing. They’re actually not thinking in terms of, “Let me service the whole world.”
So, if you imagine Facebook would create a little proof of concept instead of the full Facebook for everybody, they can only service maybe a town, right? It wouldn’t be very interesting. And by definition, you wouldn’t have something like a Netscape or a Facebook that would go to billions of people.
And so what are the adoption cases that you can envision with really primary use cases for what’s coming out of CasperLabs?
Well, the great thing about this is with decentralization, it’s a new way of thinking. So it’s not just saying we’re going to take e-commerce and put it on the blockchain, right? I mean, that’s… Yes, there will be some of that, right, but it’s a lot more than saying a decentralized Facebook or a decentralized eBay. There’s new models that we would have never even thought about.
Well, I mean, if you think about it by way of analogy, you can think about the internet plus GPS gave birth to Uber. We would have never thought about an Uber or an Airbnb. Would have never thought about these things before, those technologies coming together. I think what you’re going to see here is also similar. We’re going to see blockchain combined with things like artificial intelligence, or blockchain compared with things with like Internet of Things. Internet of Things, for example, is projected to be a $17 trillion economy.
That’s about the size of the US economy, and similar to the US and China. So that’s how massive it is.
How does the average user, the average person, factor into this economy, this new economy?
To the average user is going to have the wonderful benefit that they had with the internet, but much, much greater because they’re going… Their lives are going to be absolutely improved by this.
But if… Well, the fact that you and I can interact with each other without intermediaries, that opens up a whole new world, right? So now the early use cases that you’ve seen is like remittance. I have somebody in a third world country and I want to send money back to my third world country. I left. I went to a first-world country. Now, it was very difficult for me to do that. The remittance was, it was a barrier to the banking industry.
There was a lot of friction, and a third party, and of course a lot of financial fees that are attached.
And you see actually, life and death in some cases.
You see Venezuela during this crisis that they’re having, Bitcoin usage is a sword through the roof, because for the first time, I can walk out across the border with all of my assets and I have nothing in my hands, all of my assets, and there’s nobody that can touch those. So I can keep them in Bitcoin, and when I move, I just have to have my information to be able to access that, which nobody else has, and then I can access it after I’m over the border. This is like… This is revolutionary, right? This has never happened before.
Do you have a Testnet?
Mainnet will be up this year.
Up this year?
And a lot of people are wondering about a roadmap. What does that strategy look like?
So the roadmap will be focusing on mass adoption, right? So we’ve spent a lot of years here building out this technology, thinking about the different things it could do. And now our goal is to get this out to the world. We want to serve billions of people, not millions and not hundreds of millions, like literally the whole world. And eventually, if you know like the Internet TCP/IP is the protocol that everybody agreed upon, it’s servicing seven or eight billion people, however many are actually on it, but everybody can go on it. Right now, we don’t have that. So we’re hoping to give that gift to the world, and it’s important to note it’s an open-source project. Once we’ve developed the Mainnet and we launch it, basically send that out into the wild. It’s humanity’s gift at this point. We will be contributing to it at that point, but we don’t own it.
Alright. Well, we’ve talked to a lot of protocols, and some are talking about the open-source and the need for public blockchain. What we’re also seeing are people like Hedera Hashgraph for Hashgraph, right, and thinking that to be open source truly is to also potentially open up for a dilution of talent, or even undermining the very ethos which sounds almost ironic, right? But to at least place some sense of control so that it moves forward, rather than forking and diluting and teams are separating. What’s your sense of that?
This is why people… Blockchain is so amazing is because open source… It’s a great, great, I think the best example ever of an open-source, you could look like a company like Microsoft. So Microsoft was the epitome of proprietary closed source license, we control the market, we’re monopolistic, and they bring a new CEO, and then in a couple of years he’s completely changed the culture. And now he’s saying we’re shipping things out, it’s open-sourcing everything, and we’re just going to be a contributor that has… We realize by doing this human nature, I don’t know if it’s human nature, the way we’ve been trained is probably a better way of putting it, has been that if I own it, I’m gonna make a lot more money ’cause of percentage-wise, but what we’re realizing is actually if we send it out and humanity owns it, but I have a piece of that, I’m going to have a thousand time bigger pot. So I may only need 2% of that to get a way bigger percentage than I would’ve had. So I’m sure you’ve seen for-profit public companies doing this as a smart strategy for their shareholders, and it’s also a smart strategy for development because you’re getting developers that are passionate. You can’t possibly hire all of these people from all around the world, so you’re going to get the best minds, ’cause they’ll be attracted to it, and there’s an easy way for them to just come into it. So it’s really the gift of open source blockchain has just grabbed onto, because Satoshi used it as an open-source project themselves, and it is bringing about a lot of these amazing changes
As a lawyer, you think about structure, you think about the structure of economies, the structure of deals. How about the structure of where we are today with blockchain? We went from ICO, now we’re talking about STO.
Yeah, so the ICO was a huge important development. So what that showed was that capital flow to where it was desired to go, with a community that maybe is only 40 or 50 million people globally, it was actually very small percentage-wise, you could see a rush of tens of millions of dollars that are going into a project and people chose to. Now, to be fair, a lot of these projects did abuse the process. So I’m not condoning that, what I’m trying to get is, let’s go underneath that for a second. What it showed was that collectively, independent people all around the world could look at a project, open-source project, and just say, “I want to support that project and send resources to that project.” So not just computing resources, but physical monetary resources to that project in the form of cryptocurrency, and there’s a whole economy being built around that. Similarly, that technology has given birth to something called security tokens. And one project that I worked on was called tZero, and they were kind of like the first ones to start building this out. So Patrick Byrne from Overstock was really visionary in this space. And what that is, that’s really Wall Street 2.0. These are showing that we take a token, and by changing digital, which is just digits on a screen, we have something that’s actually programmable. It means, it’s kind of a weird concept to understand, where your stock or your bonds are programmable. Well, this is actually really a big deal because, let’s say a government’s issuing bonds. Well, there’s schedules, there’s payment schedules, and early fees, and all kinds of different things that they have to do in structuring them. That all could be taken care with a smart contract. So, it’s lowering the barriers, lowering the cost, and it’s making the capital move flow quickly. So now, what you’ll see is low-cost markets with capital flow that’s going globally. So a transaction can happen in China, and in US, and South America, and amongst each others, and it’s super important, it’s peer to peer. So, it’s not going through some settlement layer. So, I’m dealing directly and it’s settling… If you’re selling me something, we’re directly settling with each other through the use of the blockchain. Well, the blockchain could’ve done that, but again, ’cause you don’t need an intermediary, you will… So, there is absolutely a place for banks and everything in here. In fact, their role is going get even bigger in terms… Because one of the other things this is bringing is the tokenization of real assets.
And now we’re taking things like… Let’s just take this building that we’re in right now. There is about $250 billion, no trillion, excuse me, $250 trillion worth of physical real estate in the world that is illiquid. That right now, this is the first technology that allows us to now cause that to be liquid, and people can invest in those assets, we could create a token for an individual building, and you can create a token for a restaurant inside of the hotel. You can get really specific, you’d have micro economies. I can have a token, not necessarily from Apple the enterprise, but let’s say I just want to invest in the red new iPhone X, that particular model. I think that model is going to do well. Apple could actually very easily spin off a token that directly tracks the revenue stream off of that one phone model.
And this is super important, because now investors can get very particular in terms of what they want, and they can define their choices. It also opens up investment to billions of people that don’t have it right now. So I can invest, let’s say I have a local coffee shop, and I don’t have enough money to really invest in a large public company, and I want to put $50 in the local coffee shop. That coffee shop can now go public, because the barriers, and what we even think of as a public company is actually changing. So, I envision a world in the not too distant future where instead of having a couple tens of thousands of public companies, we could have a couple million public companies. But your definition of a public company changes.
But then who takes care of investor relations? Who takes care of the fiduciary responsibility that that one business or entity has to the millions of online or virtual investors that are probably anonymous?
Yeah, well, not necessarily anonymous, right?
So you can absolutely have the exchange of information, but it changes the role of the company on the investor, because now with… So you have the utility tokens, so what we were seeing is security tokens. These two can come together. So, you can have a token that says, “I want to have part of your revenue stream.” What we normally think of like a stock. But at the same time, that token could say, “Well, if I have 1,000 of these tokens, then I get a certain discount on your product.” Or, “I’m getting a certain type of benefit that’s not available to anybody else if I have 10,000 of these.” Alright, so I just walk up showing my wallet, and now all of a sudden your Customer Relations Department and your Investor Relations Department kind of start colliding with each other. And you’re thinking about how you’re interacting, and instead of seeing shareholder customer, maybe you start thinking of stakeholder. And they’re all kind of in the same pool, they start melding with each other. So now as a business you can start looking at your supply chain. Let’s say maybe I want my suppliers to become investors in my business, and I’m going to give a benefit in my relationship with them, when they buy from me the more they’re investing in the business. Now, there’s great synergies here, so companies can get super creative and make their ecosystem more cohesive and connect to other ecosystems.
What’s the appetite from the regulatory space in the US when it comes to STS?
So, I think that the regulators are taking a very cautioned approach. They are seeing this, I think they are starting to understand the ramifications here, and to be fair, it’s not a simple task for them. In the US we have these couple of acts the SEC is under. And they are now… It’s really a round peg/square hole issue. They never envisioned, they were in 1933, 1934, nobody back then, they probably just got used to electricity, more or less. But now they’re thinking about tokens, and this new economy, and something that can change, and it does one thing for one person, like I said before, and a different thing in a different content. How do you regulate those? So, it’s a difficult situation. I think what they need to do is they need come up with new rules, and at the same time they’re trying to walk a very fine line by protecting investors, ’cause that’s their main job, is to protect investors, second to allow innovation to occur.
It’s incumbent upon them though to move with speed, because what’s happening is, you’re seeing that the US is being a road block to international expansion. And a lot of people are… When ICOs were happening, the US came down hard, and I think in many cases it was certainly warranted, so I’m not… But it did show there’s a negative aspect to it, what it showed is that it stopped it globally. And maybe you would have wanted that particular issue itself, that’s not really… The issue is that it’s also stopping development of the technology for Wall Street 2.0, for example, and in other areas, because you want to stop it here but then you want to fix it in a way that allows the technology to proliferate while still protecting people. And they haven’t taken that second step yet. But to be fair, we’re still in the middle of this process. So, I think they’re moving. Other countries are moving much faster.
And you’re seeing countries like Malta, and other countries in Asia, and even some South American countries moving much more rapidly with their… Zug in Switzerland is another great example, Estonia… These countries are popping out, some are established countries like Switzerland, some are less established, and what you seeing is, innovation is flowing there. You’re seeing in the US, we’re seeing it, entrepreneurs leaving to go to those countries and start, set up operations over there. And you see those economies starting to flourish and innovation is starting to happen. So I think they’re certainly on the forefront, if they continue to stay at the forefront, they will birth entire new economies. If you go to Zug in Switzerland, you’ll see it’s called Crypto Valley, and there’s a ridiculous number of blockchain companies there. Some are billion plus companies that didn’t even exist. And in many ways Switzerland is hundreds and thousands, and whatever it is years old in terms of the banking industry, and that was their mainstay. And now they’re like, there’s this whole new technology plan, they really weren’t involved in technology before. And this technology play is really super important to them ’cause it brings not only technology but it’s also Wall Street 2.0 to them.
And so, I think countries like the United States and other established countries, certainly China, Japan, need to take notice of that.
You are a structure guy at the end of the day. How do you apply that structural thinking, thinking about building foundations, thinking about building infrastructure for something that is completely decentralized?
Yeah so your thinking needs to change in terms of how you are applying it. What you need to start thinking about is how does this serve an ecosystem? So, it’s not well, this party or that party. How do these rules apply to an ecosystem? And it’s a different way of thinking. You know, it’s certainly if we’re talking of blockchain governance. How do you just manage disputes in a blockchain? If I have a smart contract, and we have a dispute in our smart contract, and it executes, and I disagree with the way it executes, how do you solve that?
How do you solve that?
There’s no simple answer. What you need to do, there’s a big debate right now, and part of the debate is to just let it autonomously go and say, “This is the way it’s going to be, and that’s it.” Or do you allow participants to make changes to the blockchain over time and how it governs each other? In fact, in our case, our chief architect, Vlad Zamfir who came up with Casper, CDC Casper, he’s also been a big proponent on the legal side for this way of thinking about blockchain governance. There’s two camps there; there is some validity… There’s one camp in terms of not changing things, and that’s more the Bitcoin, and that’s just value transfer, but that argument breaks down a lot when you’re talking about people interacting with each other, and then having to deal with it in the physical world, because we don’t actually live on the blockchain. You know, at the end day we’re living on soil.
And so it has to be brought back here because we have real courts here, we have real buildings here, there’s real people here, and sometimes that gets lost. And so it can be, say, we trust the code all we want, but at the same time the judge with his gavel doesn’t have to say that either, and if he makes it illegal, that’s a problem. So we have to think these things through, and this is… As much as the technology is starting to take hold, you have to remember, this is affecting all other aspects of society. The legal system is one area that it’s affecting, and they haven’t even started getting their hands around it. There’s cases haven’t made it to the trial, let alone appellate. My guess is it’s probably another 10 years before we start seeing real clarification in that area.
Well, 10 years is like centuries in blockchain, but it has been such a pleasure. This has gone by in a flash.
I’ve learned a lot. Thank you so much.