Why Cardano’s Charles Hoskinson says DeFi is ‘up for grabs’
As Cardano’s Alonzo upgrade goes live, founder Charles Hoskinson of IOHK calls DeFi a ‘bubble.’ How does he think the regulation that is sure to come will reshape DeFi in the future?
Cardano’s much-anticipated Alonzo hard fork finally kicked off a new era of smart contracts on the blockchain. Because of that new capability, the proof-of-stake platform can now host decentralized applications (dApps) in the highly competitive decentralized finance (DeFi) space.
But the unregulated Wild West of DeFi recently received some significant noise complaints from the Securities and Exchange Commission Chairman Gary Gensler, who told the Wall Street Journal that DeFi projects are not exempt from regulations.
“We will see over the next few months to years, some form of a crackdown,” said Charles Hoskinson, the CEO of Cardano developer Input Output Hong Kong, in a video interview with Forkast.News. “[That] means that the next generation of DeFi is up for grabs.”
Hoskinson compares what might be an upcoming surge in DeFi regulations to the initial coin offering (ICO) upheavals of 2017, in which global crackdowns on questionable crypto projects and outright scams shut down waves of companies but also led to the creation of new financing models that gave birth to a new generation of projects like ICP and Solana.
“The winners of the future in the DeFi space are going to have liquidity and interoperability, the ability to move multi-chain,” Hoskinson said. “And finally, cost predictability is such an important thing… It’s so bizarre how we just tolerate massive swings in the price of doing business.”
Cardano did not make it to the first wave of DeFi, which generated superstars such as Uniswap, MakerDAO and many more. Even so, despite calling DeFi’s current state a “bubble,” Hoskinson remains bullish on DeFi in the longer term. Cardano, its founder says, has had its eyes on the so-called “second wave of DeFi” all along.
“We need governance, we need certification, we need insurance, we need regulation on these things, metadata identity… at the same time, you need to decentralize,” Hoskinson said. “The next wave of [DeFi] will do that with a straight face and will be significantly harder to regulate in a traditional sense. The way we constructed Cardano was for that second wave.”
Watch Hoskinson’s full interview with Forkast.News Editor-in-Chief Angie Lau to learn more about Cardano’s plans for its new smart contracts ecosystem, how a regulatory compliant DeFi community might take shape, the promises and pitfalls of non-fungible tokens (NFT), what he sees as the top five uses for smart contracts, and more.
- Is DeFi in a bubble? “I think DeFi is in a bubble and it's always what happens — NFT and DeFi are the latest. It was the ICO revolution in 2017, it was the same situation. But just because it's in a bubble doesn't necessarily mean that's a bad situation. It just means that people recognize there's value, but the market's having a very hard time pricing that value. What are the indications of the bubble? You have new projects that have very small development teams, not a lot of liquidity, and they come out worth a billion dollars. We used to call those unicorns in Silicon Valley. ‘Wow, a unicorn. My God, you did that in five years? That's so incredible.’ It's like, ‘Well, we do it in five weeks now.’ So there's something fundamentally wrong with those valuations. So it's an indication that there's going to be a regression in DeFi.”
- What DeFi needs: “First off, you need to have a dApp store. It just blows my mind that we don't have a canonical dApp store for the industry. I have Google Play and we have the iOS store. I know people have been trying to do this, but you need to have some coherent way of curating dApps so that you know that the code's been checked and certified, you know, the author information is right, the life cycle is great. Because we've already trained a whole generation of people using computing devices that this is the model.”
- The brave new world of NFTs: “What are you actually selling when you sell an NFT? For example, I took some of my tweets and I sold them online as NFTs, and I raised like $30,000 and I donated the money to various people. That was fun. But [for] the life of me, I actually don't know what I sold. I sold an NFT representing a tweet, but can I delete the tweet now? I don't know. It's like this type of stuff. There's no real contracts or intellectual property. And it's going to get litigated to hell.”
- NFTs’ dirty laundry: “There's also money laundering considerations that are occurring. So there's a lot of evidence the Treasury Department's been tracking where people are basically using NFTs as a mechanism to legitimize unlawful funds. So just create an NFT, you buy it from yourself, you say it came from someone else. ‘Oh, look, this picture of a stone sold for $5 million and I just made it out of nowhere. I have no idea who the counterparty is.’ Actually, it was you. This kind of stuff happens. So all that's getting sorted and the way we constructed Cardano is we have a lot of stuff. The same things that make RealFi work really well are going to be really great for NFT curation creation.”
- Why government should be on blockchain: “I'm getting damn tired of the government telling me I need to pay more taxes, and then they say at the same breath, ‘We don't owe you anything. We don't owe you any transparency about how we spend the money, what we do with the money.’ So I say, ‘Let me get this straight. You guys lose $85 billion worth of military hardware in Afghanistan to the Taliban, and then you lose all the receipts and you can't even tell us what you've lost there?’ Conveniently ‘lose’ these things. Like stuff like that. It just makes me sick. There's no accountability. There's no transparency. There's no oversight. There are these bodies like the Government Accountability Office and FOIA and things all that shit should be on a blockchain. All of that should be publicly accessible. It should be immutable. It should be time stamped, auditable so that we can actually get some transparency on how our money is being used.”
Angie Lau: Smart contracts go live on Cardano. Will it shake DeFi for emerging markets? And what novel value will Cardano bring to the crowded world of NFTs? Well, that's just two, but what are the top five smart contract use cases? Stick around for that list.
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It's what we cover right here on Forkast.News. I'm Forkast Editor-in-chief Angie Lau.
Cardano's Alonzo hard fork — the smart contract upgrade — is now live and what better time to do so than in the middle of the NFT and DeFi boom?
But Cardano has bigger plans that extend beyond collectibles and farming yield. The project hopes to be the financial bridge to the trillions of dollars of illiquid wealth in emerging markets. Now, earlier this year, Cardano announced a partnership with the Ethiopian Ministry of Education to develop blockchain IDs for its five million students. That's the same blockchain that is now ready to host decentralized finance applications on its ecosystem.
And so our next guest today — returning due to popular demand from our audience — the founder of IOHK and Cardano, a co-founder of Ethereum, none other than Charles Hoskinson himself.
Charles, welcome back to the show.
Charles Hoskinson: Angie, thank you so much for having me on. It's a pleasure.
Lau: The last time we talked, we talked about this application of blockchain and how it really can transcend borders and bring liquidity to the illiquid wealth — that we've been talking about — trapped in so many parts of this world, in Asia, in Africa, in so many continents.
And now, fast forward to today, smart contracts have finally arrived to the Cardano ecosystem. Supporters have been very excited for this upgrade. We've been monitoring this very closely.
So let's just start there. Can you walk us through the Alonzo hard fork of September 12th? Give us a quick behind the scenes description from your team, the community, as you can counted it down to hit zero.
Hoskinson: Well, this was the terminus of a three-hard-fork combinator event. We did one in December of last year where we added metadata support and that we added native multi-asset support with Mary hard fork — I think that was May. Then, we finally got full smart contract support here in September.
Every time we added functionality, the community was very happy to use that functionality. So with metadata, for example, that enabled the possibility of the Minister of Education deal with Ethiopia and the ability to add identity to transactions and all kinds of things. With native multi-asset that made us an NFT contender, over 70,000 have been issued on Cardano already prior to the hard fork that occurred just yesterday. And then obviously, with the hard fork combinator event yesterday, we now have the ability to run Plutus scripts, which is the foundational component upon which dApps will be constructed.
There's a lot more to do. There're more infrastructure to construct. There're dApp stores that will come and all kinds of clever, crazy scalability solutions that will come. But basically, this is like having the Ethereum Virtual Machine. It's having a foundation upon which you can run smart contracts, and we have certainly a lot in queue. We launched one yesterday. One of the first on the network to name my lobster on the microphone. We already had 74 people participate in that one and it'll stop after either a 350 or 500. Little stuff like that is definitely coming.
Throughout the next few months, all those big ecosystem maps that you see people tweet again and again and again, a lot of those logos and the ecosystem maps will be launching products on Cardano, and we'll take a look and see how competitive they are and if they achieve liquidity or not. So it's certainly a major milestone for the project as a whole. But it's just a day.
What's really defined Cardano has been this meticulous, relentless marathon-like pace, where every day we make progress, every day we make progress. There are some days that are slow days and other days like yesterday that are major events, but we're in it for the long haul and it's really exciting to see what's going to happen in 2022 and 2023 as the system is waking up and millions of users come in and what experience they construct with the model.
Lau: I remember when we talked a couple of years ago and I was still grilling you on ‘why are you using Haskell as a coding language?’ It's elegant. It's gorgeous, it's academic, but very few people use it. We were just talking about just the micro aspect of what you're building. And now among the audience are traditional, are institutional people, are professional people. They are not blockchain people, they're not dev people. They probably are just learning what dApps are.
They hear about Cardano as an ‘Ethereum killer.’ They don't even know necessarily what that means. What we all know — and what everybody knows, paying attention to this — is Cardano is the third largest market cap cryptocurrency right now. With Alonzo bringing that smart contract functionality, we are actually closer to that characterization of ‘Ethereum killer.’ If you want to call it that, it's that competitive of a space. But it really is interesting that as you've just kind of put your head down in the community, got to work and the devs got to work, that this space also evolved alongside with you.
And now we meet again. We're not talking about Haskell anymore, we're talking about Plutus. We're not talking about building up to smart contracts, we are here now. You have smart contract functionality. And now as people take a look at your market cap, how Cardano and ADA are functioning in even the market space, how are you bringing the real world along with you? And how does it feel right now to kind of be in this moment that you envisioned all along?
Hoskinson: Six years of effort to get there, and it was not for lack of trying. We wrote over 110 papers, 111 papers — probably 116 on the website now — a million plus lines of code. A lot of a lot of people came and went and it's a really bittersweet moment.
First, we would say, ‘Well, why did it take so long to get here? What could we have done to shave the year off or a month off here and there?’ And you always think, ‘God, I should have built this before I built that, or I should have invested more in this technology instead of that technology.’
If you're really thinking about a product, you're never happy because you're, all you can see are the things you've done wrong in the product, not the things that you've done right even. Even if you've done a lot right, there's always a problem there. But we don't regret certain fundamental things like the choice of Haskell as a programming language. It enabled us the ability to get a much higher level of assurance that the things we were doing were correct. Not completely flawless, but the set of bugs were much smaller. Given that more than a billion dollars of money has been stolen from bad DeFi designs and poor smart contract designs, that really shows you there's a strong need in the industry for certified software, for software that's high assurance, especially given the evaluations that these platforms have.
We're not valuing them at startups, we're valuing them as if they're Fortune 250 companies. So if that's the case, then you have to actually have infrastructure like your Google or Facebook, or at least aspire to do these things. And so we just kind of did it up front. These other guys are trying to figure out how to get there themselves in terms of being an Ethereum killer, the best Ethereum killer in the space is an Ethereum because they're creating an Ethereum 2. When Ethereum 2 is created, Ethereum 1 dies. So everybody acknowledges that that model is not sustainable, and they're trying to now move to a new model. Well, we're first to market with proof of stake in that respect. And ours — in our view — is better than theirs. We don't require bonding or slashing, and we have over 70%. Participation in the system is remarkably stable. We can do seamless upgrades like yesterday, it was just an event. Nothing went down. There was no catastrophic collapse. Half the nodes didn't decohere with each other or something, it just worked. So we think that that's a testimony to doing the work up front and that's a very competitive model.
That said, in terms of real world use cases, we tend to think of RealFi, not DeFi. RealFi is DeFi-plus-plus-plus — there's other stuff you add on. You need to have identity, you need to have metadata, you need to have a strategy for how compliance is going to work — as Uniswap is starting to learn. You need to have governance like the claim is not centralized. Well, then who upgrades it? A single company? No, you need a voting system. Well, we pre-built a lot of these things. We have PRISM for identity. We have a metadata standard. We have Catalysts for governance. When you issue a native asset on Cardano, next year, that native asset, you can use that to vote just like you can vote with ADA right now. So you have basically one of the best decentralized organizations as a piece of common shared infrastructure. So a lot of the design choices that we've made, the market's not even aware of those choices yet. And throughout this year and next year, they'll slowly get aware and they'll get aware through progress because there's all kinds of things that are in the commercial pipeline that will come online over the next six months to a year. Those things will bring millions of users into Cardano.
We'll also be EVM backward compatible as well. So if you're an Ethereum developer and getting tired of paying all your fees, you just take your Solidity code and run it on Cardano through a sidechain. All those things are coming and you know that we have direct line of sight to how they're going to come and what we're going to do to get them into the system. It's just better, faster and cheaper on our system. And also, if you care to do things the right way and write software the right way, the program, the platform, it works with you instead of against you and you look at Solidity, it's very hard in that model to actually get high assurance that the application is right. And there's some companies like Runtime Verification, CertiK and others that actually specialize in that. You have to spend a lot of money and time and effort to get to a baseline of assurance where you think what you've written is correct.
Lau: You can either build a streamline ship that stays afloat and is fast in the market or something that stays afloat, it's not necessarily fast because there are some holes that you need to plug as you're trying to move forward. This is why this conversation is so exciting for me at least, and for us at Forkast, because we have been marking these changes. I count myself very privileged to have talked to you early in in your story as well as as blockchain story. And so I absolutely see how even your experience and, you know, in academia and even just thinking about how DARPA really kind of came together as part of your philosophy, as you build the infrastructure of this blockchain of Cardano and how that all comes together and must be a holistic ecosystem versus this protocol that does one specific function and then we'll figure out the rest later.
You kind of took your time and figured out every piece it feels like.
Hoskinson: Yeah. Actually, a DARPA program is the best way of looking at it. So DARPA is famous for doing high-risk, high-return research, and they had the luxury of failure so they can spend a lot of money and have a lot of false starts. And they do these crazy things at DARPA. For example, CALO — Cognitive Assistant that Learns and Organizes — was a program in 2003. They said, ‘We want this intelligent agent that'll just live on your computer and that thing will talk to you and be your secretary.’ It's like the movie Her. It's like, ‘Wow, that's crazy.’ So they spent five years on it and they did all this crazy research and they had dozens of companies and they spent — I don't know — $200, $300 million and they didn't create that intelligent assistant. However, the program manager went on and created Siri, and then that resulted in Cortana, Bixby, Alexa and all these other intelligent assistants there. So they kind of bootstrapped an entire view on how to do an interactive, intelligent assistant that kind of lives in the computing device. And it's part of your computing experience and they create a lot of foundational technology there.
So we looked at Cardano the same way we said, OK, there needs to be a mixture of deep theory and foundational stuff with some applied stuff. If we get it right, we'll get a Siri out of it. We might not achieve and get Her and AGI and huzzah, then falls in love with us, but we get Siri. That's basically what we did. We wrote all these foundational papers like the GKL paper and other things and said, ‘Well, what is a blockchain? Is proof of stake actually possible?’ In the beginning, we didn't know. ‘Can you achieve the same security properties as proof of work? And how will the system evolve over time? How would you govern a system like that? How would you scale a system like that and so forth?’
So a lot of that preliminary research started in 2015, and we created the first wave in 2017. And just now this year, next year, we're finishing the second wave of that. And what you see in Cardano is the manifestation of a lot of those principles and concepts. And what's really nice about it is that the things that are out there, some are conservative, some aren't. We know that that works and that's grounded in very strong foundations and that's built with the entire academic community being aware of it. When you go through the peer review process, it means people who don't work for you outside of your work are completely unaffiliated have had an opportunity to be able to criticize your work through the referee process of paper writing. So we've gotten enormous amounts of wonderful feedback, and it gave us a great collective knowledge of the entire design space. And now it's kind of a mission accomplished — this five years of just being able to get it to a point where there's something real and commercial there.
And just like Siri invited everybody to imagine more, it creates competition and created Cortana and all these other things. Well, this, the existence of Cardano has spawned off a lot of academic competitors like Algorand, for example, an Avalanche, and other professors who say, ‘Oh, we can do better than Charles and his guys, and we're smarter.’ And and so that means we all learn from each other and there's this there's great rigor movement that's occurring, and even Ethereum is starting to realize that some of the things we were talking about like the need for formal methods, the need for writing papers, these they're starting to do that. They finally wrote the Casper paper last year, and they are actually starting to really take seriously formal methods and so forth.
So it's really been a great moment for the industry as a whole, and it's made the industry as a whole lot better, just like a DARPA program usually opens up something like AI or so forth. So we're quite proud of that.
The ROI in terms of what was spent to build this versus what has been created, the entire cost of the program was seventy two million. We're a little over budget — came out of my pocket. But all things considered, a multi-million person ecosystem, over 100 scientific papers, you know, a million lines of code, working product and market with smart contracts, international footprint, 120 exchanges it's listed on, it's bewildering to see the level of progress and insight.
Lau: It's a bargain based on your output, right?
Hoskinson: EOS spent four billion. You got to always have comparability of, did you get a good return on intention with what happened there? So we're real happy about all of that and we're real proud about it. But there's a long future ahead. There's still Basho to do, there's still Voltaire to do. We have a lot of great things that we've been working on for about three years now on scalability that we can turn on next year for Basho, and it's the same for governance. What we've learned with the whole Catalyst program over a billion dollars of value sitting in the Catalyst program and every six to eight weeks, there's another round that comes out and people vote on it, and we're probably going to have over one hundred ventures funded this round and it just keeps growing — $4 million this round probably be eight the next round. So that's really impressive to see that that the living organism that Cardano has become and it's really greater than the sum of its parts at this point, and it just is hard to know where it begins and ends.
There's probably 15 development companies that are doing infrastructural development on Cardano. There is a lot of competition now. A lot of cases, we're not first to market in something. Like a lot of these concurrency scalability blog posts are being written by the DEXs that are deploying on Cardano. We were expecting to write, you know, this big concurrency block and we're kind of like, when do we have time for this? We're doing the launch and then Minswap release something, SundaeSwap release something, and all these other guys. It's just so encouraging to see that people we haven't met, we don't have a commercial relationship with are now building, deploying and creating a commercial ecosystem around it, and they'll bring customers in. It means I can focus more on science and also I can focus more on the commercialization of Africa and actually building out relationships there which has always been my passion. Meanwhile, other people can focus on other areas like, ‘How do we win in Silicon Valley and how do we win here and so forth?’ That'll happen.
Lau: It's really a great symbiotic relationship — for lack of a better description. You're focusing on enterprise commercial space in Africa, but arguably that could also give birth to a lot of enterprise ideas that we could see in the rest of the world.
I want to talk about DeFi here because last time we talked, we talked about DeFi in emerging markets. How you believe that the true value of DeFi and blockchain's promise to bank the unbanked will be seen there rather than New York — seen in emerging markets like Ethiopia, like Africa versus New York or United States.
Since then, the DeFi ecosystem in competition has soared. The rise of Polygon, Binance Smart Chain, Solana, Ethereum no longer the only option for builders. How would you break down your current observations on the growth of the DeFi space and how Cardano all fits into this ecosystem?
Hoskinson: Yeah, I think DeFi is in a bubble and it's always what happens — NFT and DeFi are the latest. It was the ICO revolution in 2017, it was the same situation. But just because it's in a bubble doesn't necessarily mean that's a bad situation. It just means that people recognize there's value, but the market's having a very hard time pricing that value. What are the indications of the bubble? You have new projects that have very small development teams, not a lot of liquidity, and they come out worth a billion dollars. We used to call those unicorns in Silicon Valley. ‘Wow, a unicorn. My God, you did that in five years? That's so incredible.’ It's like, ‘Well, we do it in five weeks now.’ So there's something fundamentally wrong with those valuations. So it's an indication that there's going to be a regression in DeFi.
Also, there's a regulatory surge that's just about to happen with the Securities Exchange Commission in particular. Gensler has made his feelings abundantly clear that he's not happy and he's beginning the process of turning the wheels of bureaucracy. We will see over the next few months to years some form of a crackdown. Well, those two things mean that the next generation of DeFi is up for grabs, so people are going to migrate from where they're at to change that provide more predictability and cost. Better support for whatever regulation comes, as well as basically a better home for their customers to live, and then new DeFi protocols will be constructed to compete with them. Just like the ICO (initial coin offering), revolutions collapse led to different financing models that inevitably led to the creation of ICP and all of these other things, like Solana and so forth, that when we now see in market that are quite competitive.
I'm overall bullish in the three to five year time horizon, but I think batteries aren't included. We need to get to that stage. So we need governance, we need certification, we need insurance, we need regulation on these things, metadata, identity, these types of things. But then at the same time, you need to decentralize. So how do you do all that stuff and be decentralized? None of these protocols have done that stuff and maintained some semblance of decentralization yet. The next wave of them will do that with a straight face will be significantly harder to regulate traditional sense. And the way we constructed Cardano was for that second wave to come. These incumbents, these standards don't last very long. No one seems to believe me of this. Guys, I've been in technology a while. If you don't believe me that network effects are valuable, what you need to do is pull out your BlackBerry phone and go to Yahoo and search for your email.
Lau: Wait, where are you talking about? Search for your Hotmail?
Hoskinson: Yeah, search for your Hotmail, and then go ahead and restore your MySpace account, and then you can post about how I'm wrong on your MySpace account. Come on, guys. Stuff changes so quickly in technology. Microsoft was on top. Now they're on bottom, Android and iOS are on top, Microsoft is surging again — who knows? Facebook is a metaverse company — what the fuck does that mean? I don't know.
There's so much crazy stuff that you see so quickly and every two to three years, the clock resets. And just what we've already achieved with Cardano is unthinkable if you talk to people even a year ago in Silicon Valley and other places. Meanwhile, they don't really realize that the game we've been playing is not for today, it's for the future. We're in the right market to build the right technology.
Lau: This is it. For everyone who recognizes that right and sees that Defi, as it exists today, whether the regulators come in in this phase of growth for DeFi — to your point — all the hacks that are happening, all the cybersecurity issues that that's experiencing, there is a next phase of DeFi. If you're an enterprise person and you're sitting here, you're on the institutional side, you're in finance and you are interested in DeFi, you are interested in adapting some of these functionalities into your commercial business. What is the next phase? Describe that. Describe that for all our friends in finance.
Hoskinson: First off, you need to have a dApp store. It just blows my mind that we don't have a canonical dApp store for the industry. I have Google Play and we have the iOS store. I know people have been trying to do this, but you need to have some coherent way of curating dApps so that you know that the code's been checked and certified, you know, the author information is right, the life cycle is great. Because we've already trained a whole generation of people using computing devices that this is the model.
Lau: Should a bank do this, should one of the world's leading banks do this? Or how does this work?
Hoskinson: No. I think it's completely up for grabs. Actually, the telcos have the best chance of doing it because they can deploy alternative app stores on their phones, and Google can't stop them and Apple can't stop them. So somebody's going to do a dApp store. We have some ideas of what that needs to look like and other people have as well. So that's a foundational user experience if you're talking about B2C. You've got to get it into the browser, you've got to get it on in the phone, you've got to get it where the eyeballs are, the money is the action is and you have to make discoverability of dApps [and the] curation of dApps really, really, really easy. Then, you can get mass market. You can get millions, the billions of users very quickly in the developed world.
The developing world is a whole different banana and we specialize in that. You have connectivity issues there. You have capital control issues there. You have a lack of monetary stability. There's a ton of education that's needed. There's so many unique challenges there and that's a long conversation — and we have those conversations like the Africa special and other things. You measure progress in years. On average, a deal takes three to seven years to do. But if you're focused just in America, Europe, the developing the developed world dApp store is the way to go.
The other thing is we need to start thinking about cross-chain in DeFi. It is so crazy where we're like, we're open source and we believe in this open movement and decentralization.
But the first thing I want to do is lock you into my model and my token. What the hell are you doing? It's like Microsoft with Active X and Internet Explorer all over again. IE 6 was all, ‘Well, you can't even do properly coded cascading style sheets.’ You actually had to put a bug in your software to get your sheets to render correctly. But they didn't follow a standard. They didn't care because they're Microsoft — they had 90% of the market share. It makes no sense to have vendor lock-in in these things.
The winners of the future in the DeFi space are going to have liquidity and interoperability, the ability to move multi-chain. We already see this happening with things like Chainlink and others. They see that and they're trying to move in that particular direction and not put all their eggs in one basket like Ethereum and so forth, which is why I think it's so crazy when people talk about Ethereum's network effect. It's so ephemeral. It's more about where do you do your B2C and how do you get a good UI/UX and then how do you create liquidity for developers where they build once, deploy everywhere? We see that with Cordova. We see that with so many construction to like, react and so forth, where you have the ability to go multiplatform.
And finally, cost predictability is such an important thing. It's so bizarre how we just tolerate massive swings in the price of doing business. It's like nobody runs a 7-Eleven where you go to the 7-Eleven and you're like, ‘Well, I want to buy a Twinkie.’
‘Well, that'll be $74 dollars.’ And then tomorrow, ‘That'll be 50 cents.’ It's madness. You can't, you can't have price volatility. As a merchant, you can't have margins where some days you're windfall profits in Sunday's year and exponential losses. It's crazy. You need to have constant pricing of computation. And that's really where the good layer-2 interplay comes in — the state channels, the ZK Rollups. A lot of the work that we're doing with isomorphic state channels in Hydra, we think is industry leading, but everybody's pursuing that because the really smart people recognize that. And that is where most of the action of dApps and DeFi are going to live in the next three to five years in that zone, and they use the layer 1 as kind of a proof checker and a settlement of last resort. They use the layer 2 for all the interactions and things between the people. And then you'll have all these ‘Oh, but I have Hashgraph. I have this and I have this. And DAG this and DAG that and somehow the base layer can do 10 bazillion transactions per second.’ And you say, ‘Okay, well, you can't do basic math then because you can't be decentralized with that.’ If you're doing a million transactions per second that are kilobyte each, you have a gigabyte per second for your system and somehow people, grandma is going to keep up with that on her cell phone? ‘Oh, no, but she doesn't, because we have this light pro.’
‘Oh, so your whole system is centralized around 12 custodial servers that run everything.’ How is that any different than Amazon or Rackspace or these other guys? They can't think it through? If you're really serious about having a layer-1 solution that's sustainable and stable, you have to really say, ‘Well, what's really going to be happening there?’ And that's going to be batching and proof checking. That's going to be an aggregation of a lot of events. And then you're going to have these dynamic, ephemeral networks that live and layer two and their multi chain and they're coordinating tons of activity. But all that cryptography and all that other stuff, it gets checked and validated on chain. So you have an equivalent trust model, but you're not using this very scarce resource that is your layer 1.
Lau: And so you have this kind of elegant balance between something that we humans have a basic need of stability. You can't run a business without having awareness of your fixed costs. You mentioned dApps. So the lead up to the Alonzo hard fork — I got to ask you about this — was kind of met with some drama. We saw it in this form of a decentralized exchange. It went live right on Cardano's public testnet. The test was met with some concurrency errors, which led to a few of your critics having a field day regarding Cardano UTXO — that is unspent transaction output model.
Some said that the dApps would be limited to just one transaction per block. What actually happened there that led to IOHK releasing a statement on Twitter calling out the ‘FUD’ and ‘misinformation.’ Let's just clear it up right now. Can you educate us on what happened there and what you're building out?
Hoskinson: Ok, so first off, no one in the industry seemed to have any issue at all with UTXO which is the core accounting model of Bitcoin for the longest time. And there's all these people that do UTXO like Monero, Bitcoin, Litecoin and so forth. We're adding smart contracts to Bitcoin but apparently there, that's not a concurrency issue. We'll never complain to Blockstream or any of these other guys.
So what happened was, Minswap, they released a very early alpha on our testnet and they designed it in a rather straightforward way, but they didn't actually take advantage of the concurrency design patterns for UTXO. So basically, you can only consume one UTXO per block. The way you get around this is you have more UTXOs so you load balance with that. They didn't do that. So what happened is that you have one transaction per block in that design. It's not a design failing of extended UTXO — you need to have different design patterns for extended UTXO. The account model takes care of some of this for you. Extended UTXO is batteries not included with that. You need to put a system on the load balance. So this is early days software, so obviously they don't have that concurrency thing and those patterns have yet to be fully explored yet. That's the point of it taking a few months. But then, critics said, ‘Well, because they didn't do that, that must mean that everybody can't do that, and Cardano is incapable of that feature.’ And we're just like, ‘What? What the hell are you guys saying?’
There's an easy analogy for the everyday consumer to understand. So there's multi-core and single-core. When Intel and AMD came out with their multi-core processors, you have suddenly two processors instead of one. But a lot of your software didn't run any faster. And if people say, ‘I don't get it. I have now twice as much raw horsepower. What's going on?’ The software wasn't written to take advantage of multiple cores. And so we had to kind of wait for people to learn how to do that and introduce parallelism. It's the same situation here. You can use UTXO like a single core processor [and] you can use UTXO like a multicore processor. It's up to the software architect to decide that. And you can't blame the chip in the computer for the fact that the software developer didn't do something.
Lau: Even the poor artist, you can't blame your materials.
Hoskinson: Yes, it's like blaming the violin for your ability to play. It's like, ‘Come on, guys. The instrument's fine.’
So even Minswap the creator of the of the DEX (decentralized exchange), they they released a blog post today actually explaining how they're going to achieve concurrency within the model. And they outline all the challenges and what they're thinking about. SundaeSwap did the same. We wrote some concurrency blog posts. Everybody in the space is kind of showing that the point is it takes a little bit of time for people to learn how to write software that way. And once they do, you gain a huge advantage, which is determinism and consistency and predictability.
With Ethereum, you have no idea how much things you're going to cost, and there are all kinds of hacks and sometimes your transactions succeed, and sometimes they fail with the UTXO model, you always know locally because you don't have a global state of how things are going to work. And as a consequence, you know up front what you're paying and you can get determinism with your execution. It's so powerful from a formal method.
Lau: It also speaks to the tribalism that really is interesting in this space, I have to say.
Hoskinson: Oh God yeah. Like the Bitcoin people were hitting us. And we're like, ‘Guys, you are on the same accounting model. Ours is just more expressive than yours. If we can't do it, you sure as hell can't do it. What are you doing?’
Lau: Everybody's great. You're all special in your own way. Everybody play nicely on the playground.
But essentially the playground is getting more crowded. This is the exciting part. There're smarter kids on the playground. There're kids joining all the time with new ideas, building it out. We talked about emerging markets, we talked about DeFi. Let's talk about NFTs.
NFTs, the the boom has been incredible. How does Cardano smart contract capabilities — you think — shape the booming NFT market? Especially since you hinted that some of the stuff that we are building out to, you're not going to see for the next six to 12 months, but we see it very clearly. You're going to see it in the next couple of months. We kind of saw that in the NFT space. There are still some people talking about the art space and the sports space. Let's talk about the real estate. Let's talk about financing. Let's talk about all of this other media. All of this other application of the NFT space that you see as well as you build out the Cardano vision.
Hoskinson: So first off, I think we're probably one of the best platforms for NFTs because of the native assets that we have. The native multi-asset means that it's cheaper and easier to issue assets on Cardano than ERC-20 assets or any other assets that you see in a smart contract-based system. What's beautiful about this is that those assets have the same properties that ADA has. So anything we do for ADA can be reused for those assets for free. So if you can vote with ADA, eventually you'll be able to vote with those assets. Already, as I've mentioned, 70,000 plus NFTs have been issued on Cardano and that's just pre-smart contract. What's nice about the smart contract side is that you can now add in spending policies, dynamic NFTs where things actually change and evolve as the NFT is used. Like, for example, a lot of the value of something as a collectible is about who owned it [and] what did they do with that?
So you say, ‘Well, here's a rifle.’
‘Well, this was George Washington's rifle, and he used it in New York.’
‘Wow, that's so valuable.’
So that history of an NFT and the dynamism of it is a humongous component to collectability. Also, the ability to layer NFTs with other techniques like securitization and revenue streams, and these things, like you can represent a chunk of intellectual property as an NFT. You could securitize that chunk of intellectual property. And as it gets licensed, you can generate a royalty to all those shareholders. So you have a base thing and it's connected to a fungible thing. So all of those things are easy to do with Cardano because of that native multi-asset standard.
That said, we actually need as an industry to really think carefully about a lot of edge cases of what are you actually selling when you sell an NFT? For example, I took some of my tweets and I sold them online as NFTs, and I raised like $30,000 and I donated the money to various people. That was fun. But to the life of me, I actually don't know what I sold. I sold an NFT representing a tweet, but can I delete the tweet now? I don't know. It's like this type of stuff. There's no real contracts or intellectual property. And it's going to get litigated to hell because the musicians right now have all these contracts with record labels and there's a very strong, draconian, royalty sharing thing. But then they can go and create some NFTs that are derivatives of that and then sell them and say, ‘Well, we don't owe you any royalties on that.’
And then the record labels would, ‘Well, screw you, man. You owe us money.’
There's already going to be a lot of court stuff that happens and the shenanigans that happens.
Lau: Have you designed towards those things?
Hoskinson: Yeah. Some of that is industry wide standards, and some of that is also ‘Can you embed contractual relationships into the transaction itself?’ So when somebody buys an NFT, they're actually signing a contract and there's a clear end user license agreement and all these kinds of things. So those standards need to be constructed and they're intrinsically cross-chain because you want to enforce scarcity. Like, for example, I can right now issue an NFT on Ethereum. I can then issue the exact same type of NFT on Cardano. Is that okay to do that? I guess I can.
Lau: It would be disingenuous, obviously.
Hoskinson: But there's also money laundering considerations that are occurring. So there's a lot of evidence the Treasury Department's been tracking where people are basically using NFTs as a mechanism to legitimize unlawful funds. So just create an NFT, you buy it from yourself, you say it came from someone else.
‘Oh, look, this picture of a stone sold for $5 million and I just made it out of nowhere. I have no idea who the counterparty is.’
Actually, it was you. This kind of stuff happens. So all that's getting sorted and the way we constructed Cardano is we have a lot of stuff. The same things that make RealFi work really well are going to be really great for NFT curation creation. And then really that question of how to go from static to dynamic NFTs. How do you make the history of component of the NFTs value? And then also how to get NFTs into gaming — video games? We have some great ideas. We're going to roll out at the conference, like with Crypto Bison and other things that we think will really showcase a case study and how that's going to be done well. Then it's up to people's imagination. A lot of this is going to be driven by marketplaces. A lot of this is going to be kind of like, remember Beanie Babies or the Pet Rock, they go way up, they go down.
Lau: You're aging us, Charles. You're aging us.
Hoskinson: I'm only 33! Everybody says I tend to be older, but I remember these things. I remember being a kid and people selling Beanie Babies on the side of the damn road. It was crazy here in Colorado.
Lau: It was supposed to be somebody's college fund.
That's absolutely true in terms of where we potentially could be going in this space. But the regulators, as you've said, are noting with great trepidation and not necessarily just the U.S. side. We know that they're taking a look at the art world already. You know, for the banking, new Banking Act amendments. And so of course, this kind of flows into the NFT space.
But now we're also hearing from the China side that China is looking at the NFT space, which has been going great guns because they have kind of been foot off the pedal or at least foot off the brake there for a little bit and now starting to apply some pressure as to questioning what is this NFT bubble activity that we're starting to see domestically in China?
So you have regulators kind of starting to hone in on the NFT space. How is this all going to shake up in the end, in your view?
Hoskinson: Well, generally speaking, regulators get very concerned when there's a case of a lack of visibility over the movement of large amounts of value. So NFTs are problematic because basically creates this way of of creating value out of thin air and then somehow legitimizing money that's dark money. So that's going to get closed up pretty quickly. And there's going to be an application of standard AML and KYC and the transaction flows of NFTs very quickly. The same for all the anonymity coins, the same for a lot of these DeFi applications.
But overall, what's exciting about NFTs is it legitimately is a new economy. And like any new economy, you have difficulty valuing and pricing it, but people know there's some value there. And what's so cool about it is that the platforms are becoming so easy to use their turnkey. A lot of people are entering this space like Tom Brady and Giselle Bundchen and all these others. And they're just having so much fun, basically doing things that they would have already done, but they did it through specialized agencies who take 90% of the value and they just get a license deal or something like that. It's old and young, like William Shatner is doing these things. He's almost 90 years old. And then you got kids who are 15 years old, 14 years old, participating, making fortunes. So it's just another tool in the toolbox — just like social media is a tool in the tool box or Twitter is a tool in the toolbox — for how to run a modern business in the gig economy. There'll be overconsumption of it. Eventually, people get tired of it and then it'll scale back a bit.
But the NFTs, in my view, that are always going to preserve value are the NFTs that actually require something to create. That's why I'm so incredibly excited about the emergence of gaming and NFTs together. Because if you look at video games — Diablo 2 is a great example of this. It's an older game from about 20 years back. Blizzard Entertainment created it. There were items in that game that you could only acquire after literally spending hundreds, if not thousands of hours of effort grinding and grinding and grinding. So as a consequence, those actually had real life value. People would sell them on eBay and other things like that, which is just extraordinary. If you think about it, it's like you're buying a made up thing. It doesn't exist, it's digital.
Well, what if the next generation of, these Jordan stones are these things you'd be able to represent as a token that's transferable and you actually can sell it and the game developer can make profit, perpetual royalty on. So then suddenly a full time job could be on playing Eve Online or World of Warcraft or something like that. There's going to be that whole economy emerges as a consequence of this. Those have value because they can only be created through a human process where it's like proof of human. There's hundreds of hours of grinding and effort that goes into the construction of that. And then other things like that are connected to certain events where they're minted by very specialized organizations like commemorating something like a presidential election or something. There's only a hundred of them or something. That kind of collectible scarcity is always going to have value. Being able to, at any time, create a tweet or this or that, I just don't see that sustaining itself once regulation comes in and figure out the money laundering.
Lau: Yeah. I love that that phrase and that concept, it is proof of human. We are an embodiment of our own experiences and the productivity that we invest our own time in to output something of value. Hopefully, the society appreciates it and therefore we have value.
Gosh, we have talked about a lot of things, but as we wrap this up — because we could go on forever and we will do this again — in your view, what are the top five use cases for smart contracts that excite you? I want to hear it. I think our audience wants to hear it. We all want to hear it. What in your view, the top five use cases for smart contracts?
Hoskinson: Well, I think the number one use case that's universal for the entire DeFi space is the ability to establish a decentralized identity and build reputation with that identity and use that in a global marketplace. That's like the skeleton key for a lot of derivative things that you enable. So for example, if you talk about credit, credit only works if you know who you're lending to. They have to have some notion of reputation, and normally we have a third party credit scores and Equifax and all these other and doesn't work very well. That's one — it's how do you construct identity, build reputation, grow reputation and so forth.
Then when you move beyond that, I think smart contracts are the only real way to create a trustless stablecoin — so an algorithmic stablecoin. We've written a beautiful paper called Djed and we're implementing that paper and we'll talk about it at the conference here in just a few weeks. But basically, the idea is that you take something it's volatile, like a cryptocurrency, a basket of those things one or more, and there's some magic — turn the crank — and it creates another asset, and that asset is stable or semi-stable. That's essential for building an economy. Price predictability with your unit of account in order for it to be an effective means of exchange and a store of value. That is enabled by smart contracts. There's already been enormous progress — prototypically — with things like MakerDAO and so forth. We're just refining and iterating that. But we're doing it at the speed of entrepreneurship, not the speed of central banks. That's great. So that second use case is so powerful.
Third, when you start looking at new economies, new ways of doing business, fractionalized ownership of everything, liquidity with everything, the ability to shrink down any entity. So we normally think of the IPO. A $500 million entity, a billion dollar entity, you do an IPO for a $10 million entity. Just today, I saw that George Church announced a new company called Colossal, and they're trying to bring back the woolly mammoth, and they're raising $15 million. Normally, go to venture capitalists and do this whole thing. Or now today you can just sell like wooly mammoth NFTs because it's a really fucking cool idea. Then some of you wake up, you have $15 million of money ready to go. Wow. So all new kinds of ways to do project financing that are distinctly different and pay royalties and guarantees that are distinctly different and fundamentally change the relationship of the funder and fundee.
Even sovereigns — when you talk about sovereign bonds. Let's say you're an African country. You have a lot of diaspora and you want to raise some money to build infrastructure. Well, right now you have go to Wall Street and you have bad credit ratings and all these other things. What if you do a primary issuance direct to the citizens of your country who live abroad and have them by 20, 30 dollars of debt each? If there's several, like the Philippines, tens of millions that live abroad, you could be every year with these types of instruments raising hundreds of millions of dollars and paying the coupons steadily now.
Lau: Just don't call them taxes.
Hoskinson: Yeah, right. Well, there you go. But it's sovereign debt. At least there's a hope you can pay back for these stuff. So these types of things — the enablement of liquidity at the small, even the sovereign scale with completely new ways of raising money. I think that's the third thing that's extremely exciting to me.
Then you look into derivative things of organizational transformation. So we keep saying we're going to run blockchains without a company. Ok, well, that's kind of a collection of protocols and human processes, and it's a product and all these other things. Well, if you can do that, why can't you do a company that way and get rid of the CEO, get rid of the C-suite and get rid of the board of directors and actually have a bottom up company. Almost like what a co-op is trying to do but now we can do that on a blockchain. In my view, three to five years. Already in Wyoming, they passed the DAO law. There's already legislative progress in this direction, but an evaporation of centralized control of institutions and centralized curation of routing of institutions.
The fifth thing is transparency. I'm getting damn tired of the government telling me I need to pay more taxes, and then they say at the same breath, ‘We don't owe you anything. We don't owe you any transparency about how we spend the money, what we do with the money.’ So I say, ‘Let me get this straight. You guys lose $85 billion worth of military hardware in Afghanistan to the Taliban, and then you lose all the receipts and you can't even tell us what you've lost there?’ Conveniently ‘lose’ these things. Like stuff like that. It just makes me sick. There's no accountability. There's no transparency. There's no oversight. There are these bodies like the Government Accountability Office and FOIA and things all that shit should be on a blockchain. All of that should be publicly accessible. It should be immutable. It should be time stamped, auditable so that we can actually get some transparency on how our money is being used.
Lau: True governance. Real governance.
Hoskinson: Yes. I think charities are going to be the first use case for that — 501(c)(3) types of things. But then you can gradually grow that to the organization. You can gradually grow that to the government. So I think those are the five use cases that I'm most excited for in the next three to five years and we're there.
Lau: Three to five years is a very short timeline — incredible but politically a minefield.
Hoskinson: But Bitcoin was worthless and running on a laptop 12 years ago and look at it now. It's a trillion dollar ecosystem that has hundreds of millions of people that run it around. A lot can happen in five years.
Lau: Well, Charles, I think one thing that no one can deny is that. You have seen it, and now you're verbalizing it, Cardano is putting thoughts and vision to paper. We're seeing it now, and it's always interesting to talk to you because none of the ideas that I hear escaping your lips, I've heard anywhere else.
This is really what's exciting. Charles, let's do this again soon. I'm really excited for your event. We're going to hang out and observe what's happening over there and report it back to our audience. But I'm just going to continuously invite you to hang out with us as you express really what the future of not only Cardano, but really blockchain application can really mean for enterprise and sovereigns. So Charles, always a pleasure to hang out with.
Hoskinson: Always a pleasure. Thank you so much for having me on, Angie.
Lau: Thanks, Charles, and hey, thank you, everyone, for joining us on this latest episode of Word on the Block, I'm Editor-in-Chief of Forkast.News Angie Lau. Until the next time.