It’s rather difficult to introduce the beast that is Vinay Gupta, and so I’ll do it with an overarching narrative instead, which is basically that blockchain needs to take over the world, not just financial markets. This introduction will serve as a brief primer for Vinay’s work, hopefully I will do it some justice, and also set the trajectory for today’s discussion into crypto, morality and existential risk – I’m looking at you Degens and DeFi, who do not understand impermanent risk, so listen up!
Vinay is an experienced meditator and practitioner of the esoteric arts. He helped run the Ethereum launch, so he has been critical for the success of the crypto space. He designed the hexayurt refugee shelter in 2002, which has seen a lot of popularity at Burning Man, as well as temporary shelters for refugees escaping violence and climate change. He has done considerable research and work for three-letter agencies for catastrophic risk assessment, existential risk known as x-risk, which includes pandemics, climate change, wars, asteroid impacts, and generally the storylines straight out of The X-Files.
I don't think that's the future of the blockchain space at all. A bunch of people will make a bunch of money digitizing out of date systems like the New York Stock Exchange. And that will be great. But the end of that, we're not going to be left with a fundamentally better world. We're going to be left with a different set of incumbents, but this is not the goal of the revolution. The goal of the revolution is to fix the damn planet, not just shuffle money around from finance nerds to crypto nerds.
As a humanitarian designer, he launched Hope for the World, which is a seminar on humanitarian design, and explains what we, as first-world designers, can hope to do for the poor; it examines our assets, and how we could find success for everybody on Earth. Vinay has tied these worlds together in a platform he created called Mattereum, which is an asset tracking platform on Ethereum that can help integrate the worlds of smart contracts and Ricardian contracts, which is to say it connects the blockchain to the law. A Ricardian contract is a contract model to record the intentions of a contract, and all actions that relate to that contract, even before the contract itself is executed. Using the hashes that refer to external documents, Ricardian contracts can also easily refer to code. This comes in inside of Mattereum, and for those of you who just blacked out: the end goal of Mattereum, in my view, is a wallet that has automated financial morality.
How is this related to Vinay’s work? The way that our current capitalist system is created is that it actually hides the cost of the goods that you’re purchasing: you don’t know how many slave labour hours went into your phone, you don’t know the carbon impact of your plane flight, or the environmental impact of your hamburger. In a financial world that actually tracks these fundamental costs, the consumer can actually see them in the form of a bill that they choose to pay or not. I’ve been following Vinay’s work on the aforementioned projects for a little while, Mattereum has been live on Ethereum for the past six months, and he’s laid out a roadmap that can allow users, eventually, to track their carbon footprint, and allow the court systems to keep those companies responsible for their emissions.
Vinay, we’re excited to have you here – thank you so much!
Vinay: I'm glad to be here, I think this is going to be a really fun hour.
Nathan: Awesome! I’ve gone through the Mattereum Asset Passport research, and I think your co founder and your company has done a great job at explaining it. The thing I’ve pulled is that by gathering together all the data relating to an object in one place, we can make much more informed decisions about the things we buy, sell and use. Do you want to take that?
Vinay: Sure. Let’s talk a little bit about theories of change. We all want to change the world, that’s why we’re doing this blockchain stuff, in theory, and at different periods in time, we’ve had different stories about how blockchain was going to transform the world. The old story was that we were going to bankrupt the governments: straight out, Bitcoin will take over the world, people will work for Bitcoin, they won’t pay taxes because the transactions will be invisible, the governments will run out of money and they’ll implode. For the early OG Bitcoiners, that was the standard narrative: we finally figured out how we’re going to bring liberty to humanity, we’re going to overthrow the state using this amazing currency thing that we do. Have you heard anybody use that rhetoric in about the last five-six years?
Nathan: Definitely not.
Vinay: It vanished. Because that was the very early stage, when the only people using these technologies were hardcore libertarian, anarcho-capitalists... like, 100% political.
Right now, if you ask most of the people that are out there bouncing money around Uniswap or Sushi how blockchain is going to change the world, the answer is really going to be that blockchain is going to change their world, because they are going to get rich. At that point, particularly given that we’ve got very little underlying any of these so-called assets, these things are essentially just very sophisticated casinos. They’re not exactly Ponzi schemes, but every dollar that’s made in these systems is being lost somewhere else in these self-same systems, because there’s no external flow of money going into these things. You could argue that maybe some people are borrowing money on these systems and then using that money to fund their businesses, and that they’ve got a lower cost of borrowing than if they went to a bank, but that is about the only way that you can imagine that there is any actual wealth generation going on anywhere in these systems. All that we’re really doing is moving money around, and that is not going to save us from climate change, it’s not going to restore human liberty, it’s not going to do anything about the fundamental problems of the world, other than shift a bunch of money from one bunch of risk-seeking maniacs to another bunch of risk seeking maniacs. It’s like “We’ve reinvented the hedge fund!” Whoop-de-doo, guys! Is that really worth all this fuss? You see what I’m saying? There’s a big conceptual problem here.
This is the area where the crypto people are still learning what the real finance people have always known, which is correlation is what really generates wealth. If I can spot the two things are correlated, nobody else knows that I can print money. -33:20
I have kind of a different approach to this, which is what I’m interested in is using computers to control the material base, and by the material base I mean housing, electricity, food. Because those systems are not integrated into any kind of digital representation framework, we cannot optimise the allocation of these resources. 50% of the food which is grown is wasted, we have enormous inefficiencies inside of energy markets, we’ve got tons of unnecessary price volatility, and consumers are buying garbage which doesn’t solve their actual problems all the time. I’ll give you a dumb example here: last night I dropped a spray bottle and it broke on the floor, and I went to Amazon and that spray bottle was no longer available. I’m now buying another spray bottle, and I have no idea whether that spray bottle works or not, because unlike when you buy stuff off Amazon, it’s a crapshoot about whether it actually does the job. Are their views real? Did the goods work? Is it the same thing that arrives the same thing that’s reviewed? This is the same with anything that you do online: there’s always this thing where you open the package, and then you get the surprise about whether it is what you wanted or isn’t what you wanted, and that same thing applies right up to buying 400 sea containers’ worth of rubber boots off Alibaba for Walmart.
There’s an enormous amount of imprecision and room for accident in how we’re managing the material world, and we’re also washing away all of the secondary consequences of our actions. Because we don’t track carbon, we don’t track slavery, we don’t dirty industrial production, the whole thing is just a sort of pre-digital swamp, and we need to use computers to clean up that pre-digital swamp.
Nathan: So you’re refocusing the narrative into changing the world using the actual Internet as it was originally intended, and the actual smart contracts as they were originally set out.
Vinay: Yeah. The ambition here is to get hold of the material world with computers. Think about this: you have a digital part of your life, where everything is exactly where it is the last time you left it, and if somebody sends you a file, you get it and it never really goes wrong. We’re used to one part of our life operating in this kind of precise, sensible, clear, contract-driven sort of way. Compare that to the hassle that you have renting an apartment in New York, where everything about that experience is just analogue filth. When something breaks at your house, a tap stops working, how much slack is there in the process between that tap breaking and that tap getting fixed?
Here's the real estate portfolio. Here's the farmland portfolio. Here's a portfolio made of people's college loans. Here's a portfolio made off a huge collection of art, which is currently stored in 150,000 people's houses. And we've got redemption policies and insurance, so we can actually get the art back and sell if we need it. And we can build all of these systems, which are very tightly attached to physical value in the real world. Present digital representations of that value, assemble anti-correlated portfolios of that value. And those portfolios will be the most stable financial products that have existed in human history. -37:44
Nathan: You’ve written extensively about this, and listeners can find the writing on Mattereum’s website, you guys have published a pretty extensive blog. Would you like to go over, Vinay, the architecture? I don’t want this to be a beginner’s course; I think this would be more useful to just point beginners to a location.
Vinay: Yeah. The main thing here is problem identification. Because most of the people in the crypto space don’t really understand how big the opportunity is in getting hold of the real world. If you think about the sort of house style of the crypto folk, it’s basically Airbnb to Airbnb to Airbnb
with a single backpack, and you’re never sure which country you’re in; as long as you’ve got the Wi-Fi and Uber, you don’t really care where you happen to be. This is part of the reason that Mattereum is hard to grasp, is that Mattereum is fully grounded in the real world, outside of the crypto sphere. So, when I talk about the imprecision in trying to get your landlord fix your tap, that’s happening because nothing in that system is digitally documented. Nobody has any idea what the tap is that’s attached to your pipe, nobody has any idea of how your water system actually works, some plumber is going to turn up, take a look at it, they’re going to make a best guess, and if they don’t have the parts, they’re going to go away, they’re going to buy the parts, they’re going to come back... That sort of grind and inefficiency and imprecision is probably 20-30% of global GDP.
The uncertainty about the status of material things results in a constant grind of people trying stuff and seeing if it works, buying things and seeing if they’re as described, return processes, quality control issues, bad resistors got into the supply chain 15 years ago, and they’re still making computers explode today. All of these kinds of problems come from not having a proper digital representation of the material world. Every time we do get a proper digitization... For example, we got a good digitization of music, and that has completely transformed the human relationship with music. We got a good digital representation of books, and that’s totally transformed how we deal with books. We got a good digital representation of money, and that’s totally transformed how we work with money.
Nathan: Do you want to go into how you are envisioning the scanning of the physical world and digitizing the physical world?
Vinay: Yes, but let’s get clear on what the opportunity is. The opportunity is to do for what you chattel property – the taps in your house, it’s your car, it’s your books, it’s your diamond necklace inherited from your grandma, it’s your collectible whatever it is... All of that material is currently pre-digitisation, and what I’m suggesting is we did it for music, we did it for books, we did it for money, and now we’re going to do it for all the stuff. It’s exactly that same process of deep digitization that has liberated hundreds of billions of dollars everywhere it’s been done.
But that grinder of, political anxiety equals cryptocurrency price spike it, that's why this stuff is useful because we don't trust the damn dollar and we don't trust the damn dollar because the white house is basically run by clowns on meth. So, like if. If we're in a position where we're talking about real world politics, economics, the construction of new classes of financial asset that will provide real protection for people. -41:20
Once we get clear that the idea is we’re going to do for physical things what we did for books, music and money... It’s not that books, music and money stopped being books, music and money; you started delivering this stuff digitally. You’ve used Amazon Prime, right? One-hour delivery of things: you go to Amazon, you tell them what you want, and an hour later it turns up at your doorstep... It’s often faster to buy it from Amazon Prime than to find it in your apartment! You order it, and then after that you kind of wish they would take it away again after you no longer need it.
What I’m basically focusing on is this is a narrative which is much bigger than the blockchain story as it currently stands. Right now, the blockchain story has gotten ratcheted down, until people are looking at ever-narrower digitizations of money and secondary financial products like futures. What we’re doing is we’re just narrowing down and narrowing down, and we’re basically wrestling private equity and financial regulators for digitisation of very, very narrow markets, which are already highly-regulated and filled with really smart people. I don’t think that’s the future of the blockchain space at all. A bunch of people will make a bunch of money digitising out-of-date systems like the New York Stock Exchange, and that will be great, but at the end of that we’re not going to be left with a fundamentally better world. We’re going to be left with a different set of incumbents, but this is not the goal of the revolution; the goal of the revolution is to fix the damn planet, not just shuffle money around from finance nerds to crypto nerds. We have to go deeper than that, if we’re going to get a liveable world.
Once you have that goal in mind, then we can talk about what the Mattereum baby steps are towards that goal. The baby steps towards that goal are the first thing that you need is a digital representation of what it is that gives an object value. We need to be able to answer this first question: what is this thing, and why does it have value? And why does it have value is a very irregular surface. Different classes of objects have radically different reasons for having value. For example, a laptop is valuable for a completely different reason from a vintage baseball card. Does that kind of make sense as a question?
What we're talking about doing is being able to basically slash risk globally for a huge class of asset holders without actually having to transfer any physical property at all. You see what I'm saying? -46:37
Nathan: Of course.
Vinay: So, what are some valuable objects that you think are illiquid and difficult to deal with?
Nathan: But Mattereum goes over this, wine, art, collectibles, right?
Vinay: Wine, art, collectibles – those are the things which are easy to get hold of. Real estate? Real estate is a nightmare, because there’s so much imprecision in the digital descriptions of the real estate, that you wind up having to physically turn up on site and inspect the buildings. Or even worse, you wind up having to buy insurance, because you can’t discover things like whether there’s an old lien on the property, and you wind up buying title insurance, as a way of covering the fact that nobody is 100% sure who actually owns the damn thing. How did we wind up in that position? Well, we wound up in that position because the problems were rare enough in the analogue systems that we just covered them with insurance, but that kind of gives you a sense of how much slack there is in the analogue systems that underpin society.
So, what we have is a set of mechanisms for identifying what it is that makes an object valuable, and representing those underlying claims of value in a digital format, and that’s quite subtle. If you have a piece of music, you digitize the piece of music and that’s fine, you now know exactly what it is, and the value is inherent in the file. If you build a digital representation for a physical object, the value is in the object, not in the representation of the object. So there’s always a level of indirection here that you don’t have in your digitizing music or books or money, because the material world is a different place from the digital world. You have this level of indirection, and in Mattereum we represent that level of indirection using warranties and insurance contracts. What we have is a warranty on an object that says, “This is an authentic Picasso sketch.” I can’t get the authentic Picasso sketch into a digital representation in one step, I need the indirection, so an art expert looks at the Picasso sketch, and says, “This is an authentic Picasso sketch. And if it’s not, I will pay you $15,000,” and now I get hold of that claim in a cleanly digital representation. “Here is the expert, I’ve got an identity for the expert, here is the claim, I’ve got the legal documents of the claim, here is a scan of the object, and now I can match the physical object in my hand with the scan...” What I’ve done is I’ve digitized the attribute of the object that gives it value, in a way that now allows us to transfer that digitally as easily as we do digital currency.
Nathan: Just for the listeners, they’ve been live on Ethereum network for six months, and we’ll add in the show notes some links for the currently-existing asset passports that you could look at: the Captain Kirk figures that have these identifiers, the descriptions, the measurements the identifying photos.
Or our expertise is getting up the physical world, which is what all the stable coin people fundamentally need to make their stable coins actually stable because a stable coin backed by, a half a trillion dollars of hard assets is literally the most stable thing that you're ever going to be able to buy. -48:34
Vinay: The whole point of those asset passports is you go to the website, it loads all of this stuff out of IPFS, including the legal documents, and when you make a payment into those smart contracts, you are now the legally-protected counterparty, on a promise that these assets have value, and I don’t think there’s anything like that in the entire smart contract ecosystem. I don’t know of a single service out there right now that allows you to create a binding legal obligation on a third party using a smart contract, in a way that directly facilitates trade. We have broken really substantial new ground here.
Nathan: I’m looking at the passport contract right now, and there’s a field that says, “The certifier is offering an indemnity with a value of 52 ETH. To accept the contract, you must pay a fee of 2.6 ETH.” Do you want to explain that a bit?
Vinay: Sure. What you have there is one of the Shatner contracts. We have some nice video of William Shatner, the original Captain Kirk, signing a Star Trek collectible toy that was issued in the 1990s, and it’s quite valuable. We have that video of Shatner’s signature on the site – the hashes are in the smart contract, you can verify it’s the same file – and then we have a third party that was present and witnessed those signatures being applied to those objects, who is taking legal responsibility for saying, “If you buy this object, and the object turns out not to be genuine, I will pay you up to a limit of 25 ETH,” which at this point is quite a lot of money.
Because these things are valuable to the tune of $10,000 we reckon – maybe a lot more, maybe a lot less, depending on the buyer – so if you were going to purchase that object from the company or from Shatner, then in the event that the thing that turns up isn’t genuine because some kind of fraud has been committed, as soon as you’ve made the payment into that contract, you have a legal claim on actual value. And that legal claim is not an empty legal claim, where you have to go to a court and enforce it and they don’t understand what blockchain is; it’s a legal claim that’s made in a court that we operate and manage, in which the judges are people that we’ve appointed, who really understand smart contracts.
Nathan: Go into this a bit. They’re offering an indemnity with a value of 52 ETH. Are they staking that ETH somewhere?
Vinay: No; they’re making a promise to pay, and we’re making a promise that they have the money. If you use escrow for all of these transactions, what you wind up with is that the system is so economically inefficient that it gridlocks. If you’re going to buy an object from somebody, the escrow is okay, if you’re going to hold that escrow in place for four days while they receive the goods and verify that the goods are as described. But if they find out two years down the line that the goods weren’t genuine, you’re not going to hold that money in escrow for two years, it just doesn’t work. At that point, what you need is things that look like insurance policies,
where we take a group of these claims, bundle them together, and then store enough money that it will cover a representative subset of all of them. If the defect rate in some process is 2%, and you keep 4% back, then as those claims inevitably come in, you just pay them out of the reserve.
Nathan: And are we do is we're kind of getting into token economics of Mattereum. Do you want to get into that?
Vinay: Well, let’s nail down what it does. Because I know right now that half of your listeners are sitting there, scratching their heads and going “Wait, what are these people doing?! Insurance, warranty?! What?!” because this is the typical reaction from crypto people. People that are art dealers are just like “Oh yeah, we totally get that. That’s great, we love that.” But crypto people, because they’re used to operating in a de-physicalized way, all this stuff is super hard to explain.
What we’ve done is we’ve taken the object, we’ve generated a set of legal warranties from different parties, you sign up for those warranties by paying those parties to absorb risk, and those parties make you a promise that if the bad thing happens and the object turns out to be fake, they will pay your damages, up to whatever your economic consequence was for that. The critical thing is this: those parties are now holding the risk of the object not being as it’s described in the digital world. What we’ve done is we’ve taken this impossible challenge of how do we know for sure what a physical thing is in the digital world, and what we’ve said is, “We don’t need to know what the thing is. All we need to know is that the thing is either real, and if it’s not real, if it’s not as described, we will be paid.”
The goal is the digitization of matter. Crypto is as a method inside of that fundamental goal. And so when we've had this conversation with crypto people before crypto people began to understand, Hey, real-world assets, it's where it's art. Like, like yeah. Controls you that 15 years ago, right? -51:03
What we’ve done is we’ve removed the risk implied with dealing with digital representations of physical objects, and we’ve removed that risk by packaging the risk as a financial product, and selling it in parallel with the physical goods. Transaction one is I buy the physical object, transaction two is I sell the risk of the physical object to a third party. And this is the fundamental breakthrough, because what this means is that we can use a financial services architecture to bind together the digital and the physical, in a way that allows us to do trade in physical goods as easily as we do trade in digital goods. What we’re basically doing is providing you with something that looks like a CryptoKitty interface to Picasso sketches,
$20,000 bottles of wine, pieces for your currently-disassembled classic car. Art collectors, wine buyers, high-fashion, art & antiquities, aircraft parts... everything becomes as easy to transact as if we were buying and selling a purely digital asset like a CryptoKitty.
Nathan: How are you managing that insurance risk so someone doesn't post a fake Picasso?
Vinay: This is a staged process. Building up a market for a new class of risk takes time. If we go to Lloyd’s of London, and say, “We’re doing this funny-looking digitization thing, and we want you to pick up five million dollars’ worth of risk on Stradivarius violins’ digital representation,”
their immediate response is going to be “Come back in 20 years.” Although we’ve got markets for risk right now, which are very powerful and efficient and large, getting new classes of risk into those risk markets takes a while. But that’s okay, because we’ve got lots of possible ways of dealing with markets for risk. If you say, “Hey, can I borrow 20 bucks? There isn’t an ATM machine near, and I want to buy some drinks...” what we have there is a market for risk. We’re always in a position where we are creating and moving risk around in systems.
So, we start with somebody says, “Hey, I want to sell some risk on these objects. – That’s great, that’s fantastic. You are a well-known broker, you’ve shown us some paperwork that says you do five million dollars of transactions a year, and you’re looking for one million dollars’ worth to cover on these objects. Do I believe that if I present you with a one million dollar bill, you’re going to pay me a million dollars? Actually yeah, I do. We’ve seen the books, that seems credible.” That’s one way of doing it, is that you just take entities that have some financial stability, and they write warranties backed by their financial stability. And then you have a risk assessment question of “If I’ve got a million dollars in assets, can I write one million dollars of warranties? Can I write 20 million dollars of warranties? Can I write 50 million dollars of warranties?” Well, it depends on the risk.
Suppose we then have a second-order mechanism – again, this sounds very tokenomics for a reason – suppose we have a second-order mechanism, where I write an insurance policy on your warranty. You sell the warranties, and I say, “If this guy becomes insolvent, I will pay whatever is left on the remaining warranties.” Well, now I have a very strong incentive to make sure that that guy is not writing bad paper. The insurers can take a role in insuring that the system is honest, because they’re the people that pick up the tab when things go wrong.
Nathan: So it’s essentially insurance policy writing, just on a host of other real-world assets, the books and music side of things.
Vinay: Warranties are very, very similar structurally to insurance; you just have to make sure that on any given transaction whether what you’re doing is a warranty or an insurance contract. Bundling warranties together and turning them into insurance is definitely a thing that you could do. For example, hedge funds that buy insurance risk are called insurance syndicates.
So, the objective here is to build this architecture, so we start in a slightly rinky-dink way, with bottles of wine and collectibles and a bit Star Trek this and that, but what we build towards is we format those risks in such a way that when you begin to get things like real estate coming in, you can sell on those carefully-structured packets of risk directly into the existing insurance and reinsurance markets. We wind up in a world where the insurance and reinsurance markets come in, and they soak up all the risk between the physical and the digital, in a way that ties the physical and the digital together. And the insurance and reinsurance markets have essentially infinite carrying capacity for those kinds of risks, because there’s very little systemic risk inside of those transactions. If you’ve got one bad actor who’s issuing fake baseball cards, that has no correlation with what the wine guys are doing... Because all of these risks are uncorrelated, you could take very large pools of risk, and sell it into insurance and reinsurance markets down the line.
We start small today, but we have a direct eye to building a financial services machinery which will carry hundreds of billions of dollars in really not that long. Because again, look at how quickly digitization went through music, look at how quickly digitization went through books, look how quickly digitization went through dating. Once the digitization fire catches, it just runs very, very, very quickly, and it generates gigantic amounts of disruption, and transfers gigantic amounts of value.
Nathan: So given that blockchain is public and a history is available for everyone to see, do you actually need an extra carrot for insurers to jump on board?
Vinay: Generally speaking, the question is how much risk can the blockchain space absorb. What we’re seeing right now inside of things like Uniswap and Sushi and the rest of this game, what we’re seeing is that there is a lot of appetite for risk in the blockchain space, but it’s risk that is just directly tied to currency volatility. If Ether begins to go back down, a lot of these things are going to unwind in a really unfortunate way. What we have is a limited amount of liquidity in the blockchain space relative to the real world.
The blockchain people are very tied to the idea that the blockchain is the real world, like “Oh blockchain, that’s the real space!” But, the numbers in the real world get really big. Counterfeit consumer goods is 1.8 trillion dollars per year, and the current market cap of everything that even touches blockchain is probably half a billion dollars. You think of “Fake Nikes, that’s not a very interesting problem,” but fake Nikes is four times the size of Bitcoin. And that sort of scaling thing... Like, we need the technology of the blockchain space, but we need the technology of the blockchain space in the fake Nike ecosystem. “Well, I bought real Nikes because I bought them on the blockchain. – Absolutely. And how do you feel wearing real Nikes rather than fake ones? – Good. That is what I wanted to pay for my shoes, I wanted the real thing – You got the real thing, and we proved that with the blockchain.” That architecture is the same architecture that tells you about the carbon footprint, it’s the same architecture that tells you about the slavery footprint. Authenticity, slavery-free, carbon emissions, not coming from the jurisdiction that we’ve currently got a trade embargo on... all of that stuff is all risk in the attributes that give the goods value.
Once you build an architecture for mapping, managing and selling the risk on the attributes that gives the goods value, we get out of this ghetto where we’re basically constrained by Bitcoin to figure out what everything else in the blockchain space is worth, and we start running real-world value over blockchain technology. And when that takes, it’s literally going to dwarf Bitcoin.
Nathan: Would you like to talk about emerging, competitors and, the MakerDao real-world asset challenge?
Vinay: Let’s talk a little bit about what Maker are doing. Maker are in a position where you promise that you will sell assets, if the price of a crypto coin, token or whatever it happens to be drops below a given threshold, that’s the Maker offer in a bundle. “If this thing goes down, you will sell your assets, and then we will buy our tokens with those assets and that will bring the price back up,” and that’s the Maker contract.
Nathan: It’s a stablecoin, and the float is owned by more or less the equity holders.
Vinay: Yeah. The critical thing is that Maker is asset-backed, so in the event that the coin comes down outside of their stablecoin boundaries, they sell your assets to buy the coin, and that’s what you’re being paid for. You’re being paid to basically lose your assets, if Maker moves outside of its price bound. And that’s a routine thing: lots of people have put their money on Maker, and lost their money when there was volatility in the coin.
So, in these kinds of situations, what Maker wants is to be able to use real-world assets to produce stability in the coin. If Maker was a portfolio of 25 billion dollars’ worth of real estate in 130 countries, in all probability the price peg would be extremely firm, because it’s very unlikely that all of those assets will move in some kind of correlated way. Maker’s weak point is correlation inside of the assets which they’re using as collateral. Price correlation in the assets inside of a collateral portfolio is what bites you in the face when you’re doing this kind of stuff. Because all of those are crypto assets, if the crypto market as a whole catches a cold, and suddenly the people that have put their money into the Maker contracts are screwed. And this is not theory; this has already happened.
So, Maker’s desperate need is to diversify outside of crypto, so that the Dai stablecoin is stable relative to the assets in the real world, rather than only being stable to the assets in the crypto world where there’s so much correlated risk. And I can’t overstress how key the concept of correlated risk is to everything that underpins Mattereum. If we can get very large asset portfolios with financial identities, then it becomes possible to bind those asset portfolios into uncorrelated or anti-correlated asset pools. If I’ve got a maximally diverse pool of underlying assets, all of which have strong legal identities, that pool’s value will not change over time. It will be rock solid, it will be literally the most solid security that you could buy in the world, because it will be more rigid than even government bonds are.
Nathan: Well, this is also really important as it relates to a balanced portfolio in general as an investor, having uncorrelated assets.
Nathan: Do people grab this very well? Because this is not really talked about, in any sense of the word.
Vinay: This is the area where the crypto people are still learning what the real finance people have always known, which is that correlation is what really generates wealth. If I can spot that two things are correlated and nobody else knows that, I can print money; if I can spot the two things are anti-correlated and nobody else knows that, I can print money. The understanding of cause and effect is the high-level asset inside of finance. That’s why hedge funds employ so many people who’ve got physics backgrounds, because their job is to basically identify from mathematical data where there is correlation in complex systems – it’s like weather modeling.
So, if we give digital identities to a huge slab of assets, and by huge I’m talking trillions of dollars of assets... In a world where I’ve got a digital API that will connect me to trillions of dollars of assets as easily as buying and selling Bitcoin... And remember, I don’t mean that we own the assets; I just mean that we take an existing asset and we give it a digital identity. You have a farm in Kentucky, we give that farm a digital identity, now you can do things like sell 20% of the equity in the farm in exchange for the cash you need to buy a new tractor. That sort of very simple digitization and equity release model, if you’ve got trillions of dollars of real
estate and cars and boats and trucks and factories and portfolios of IP and all the rest of this malarkey, then from that you can construct a variety of synthetic derivatives which will be vastly harder currency than any nation-state-issued currency, and, by the way, vastly harder currency than Bitcoin.
Nathan: Go into this. Because what we’re seeing right now in terms of synthetic derivatives, on the Synthetix exchange, they’re wrapping Bitcoin and Ether, they’re wrapping Ripple, they’re wrapping Tezos and Ether, and they’re also wrapping their inverses. Can you go into that a bit?
Vinay: Well, all of these assets are to some degree correlated because they’re all inside of the crypto ecosystem. You can hedge risk inside of the crypto ecosystem by doing things like buying essentially shorts on Tezos or Bitcoin or whatever it happens to be. The problem is that if a lot of people buy those shorts, and then everything goes badly wrong, you get counterparty risk because people simply won’t deliver the money that you think they owe you. This is the problem with shorting, is that in a sufficiently large price movement, all the people who have the other end of the shorts go bankrupt and you never get paid, because it’s not like that stuff is escrowed anywhere.
Although shorting looks like a good idea, shorting only works within a stable system. The time when you really need the shorting to work is when the system goes out of safe flight parameters, and that’s exactly the time that shorting fails you because of counterparty risk, and counterparty risk is the absolute heart of all of the financial systems that are out there. At the end of the day, when you say you owe me this money, do we get paid? When you say, “You need to deliver me the gold bar, I sent you the money three weeks ago,” does the gold bar turn up the next day or not? That counterparty risk stuff, the crypto people never really see counterparty risk because all the settlement is done directly on chain, but that also means that things like synthetics... They’re not, I don’t think, escrowing all of the money which is behind those shorts. So if one of those shorts happens, presumably you’re in a position where there’s somebody who’s going to pay? And they’re going to have to sell assets to pay, and if those assets are no longer worth anything, they’re not going to be able to pay.
Nathan: And if they're all chained together and you can't get out from a high Ethereum gas fees, you're screwed.
Vinay: So you just wind up in a position where on paper it looks like you’ve successfully gotten rid of a lot of risk and you’ve anti-correlated your portfolio and all the rest of that. But in practice, if the shit hits the fan, you’re going down in the same boat that everybody else is on, because it doesn’t matter what decks you’re standing on if the iceberg hits. This is the core.
Let me return to the basic goal. The basic goal was to produce a better currency than the currencies produced by the nation state, that was the theory of blockchain. We can create a currency – and I don’t mean we Mattereum; I mean we the industry, of which Mattereum is a leading part in this kind of thinking – we, the industry, can create a currency, which is to say many currencies, that are more stable than nation state money, because they’re asset backed. “Here’s the real estate portfolio, here’s the farmland portfolio, here’s a portfolio made of people’s college loans, here’s a portfolio made of a huge collection of art which is currently stored in 150,000 people’s houses, and we’ve got redemption policies and insurance so we can actually get the art back and sell it if we need it.” We can build all of these systems, which are very tightly attached to physical value in the real world, present digital representations of that value, assemble anti-correlated portfolios of that value, and those portfolios will be the most stable financial products that have ever existed in human history.
Nathan: I’ll repeat that last sentence: assemble the anti-correlated portfolios of that value, and those portfolios will be the most stable portfolio assets in human history.
Vinay: Yes. Because right now we don’t have the ability to just arbitrarily buy and sell physical assets into portfolios. If you think about the amount of work that it takes to set up something like a real estate investment trust, it’s a freaking nightmare. And at the end of that, you buy and sell equity in a real estate portfolio, but the underlying real estate assets are, generally speaking, not going to be sold, and the whole thing is weirdly illiquid.
Nathan: As someone who’s been a Mattereum fan for a long time, and I’ve read a huge amount of the work that you’ve written and a lot of the YouTube videos that you’ve delivered, this is new to me, the correlation thesis. If this was presented to DeFi and Degens in some sort of way, I’m sure they would be all over this.
Vinay: Well, this is the kind of stuff where if we talked about this two years ago, you would have thought we were insane, because nobody had even the fundamental building blocks of this language. I am typically 10-15 years ahead of the fields that I’m operating in. The groundbreaking work that I did on digital identity, and modeling digital identity as a series of risks that could be taken out to markets, I did that work in 2006. My first year of being paid 100% in digital currency was 1999. I’m easily 10-15 years ahead of the field on almost all of this stuff. Just like Ian Grigg or any of the other guys that were part of the 1990s crypto revolution, we started thinking about this stuff while most of the people that are currently making millions trading crypto derivatives were in primary school. We’re a generation older, so we’ve got huge knowledge bases, because we didn’t stop thinking about crypto in that 20-year period when not much was happening. We spent that time sharpening our knives and polishing our claws, and then when we suddenly got some action, we’ve all waded in to figure out how to get stuff going in this space.
The problem is that the younger people in this field are not thinking very clearly, because the money is making them blind, and I cannot overstress this. What we’ve got is a bunch of rich kids who’ve made their money very fast, and largely by luck. Most of that money came out of being in the right place, at the right time, with the right set of ears, and we’ve confused luck with judgement. So, what we’ve got is a very large asset bubble. Do you know what the fundamental backing is for Bitcoin?
Nathan: 19 mining pools in China.
Vinay: 19 mining pools in China. Or, if you want to look at it from another angle, the fear that the dollar is going to be worth 20 cents one morning, and Bitcoin will then be worth a million dollars a coin. Bitcoin is basically held in place as a hedge against the US government totally screwing the pooch. We get all of this anxiety about the upcoming US elections, and suddenly Bitcoin is back at whatever it is, $11,000 right now.
Nathan: It’s at $10,000, and it had dropped significantly.
Vinay: Well, there you go. That grinder of political anxiety equals cryptocurrency price spike, that’s why this stuff is useful, because we don’t trust the damn dollar, and we don’t trust the damn dollar because the White House is basically run by clowns on meth.
So, if we’re in a position where we’re talking about real-world politics, economics, the construction of new classes of financial assets that will provide real protection for people, what’s the hardest asset that you can buy? The hardest asset you can buy is a pool of everything in the world which is valuable: some patents, some music, some real estate in a bunch of different countries, some bonds taken out against the future revenue generated by college graduates, a bunch of classic cars that are warehoused in Dubai, and if you own a bunch of those classic car tokens, you could go there and visit your cars once in a while.
We can put together very massively-diversified financial products, and then you take your artificial intelligence, and you use that to basically build portfolios which are extremely secure against different kinds of risk, and then this is what you basically offer to the pension funds. What you offer to the pension funds is “How would you like the world’s most secure financial products? These things make the US Government Treasury Bills look like toilet paper.” This is what we’re building towards with Mattereum. Sure, we start by doing a bunch of stuff with Star Trek toys because you have to start somewhere, but the same architecture that digitizes the value in a Star Trek toy is capable of digitising the value in a medieval castle. The paperwork is a bit worse, but once you know how a digitize value, you know how to digitize value.
Nathan: So what you're, so what you're seeing is, is MakerDao combined with the DeFi incentives combined with an insurance provider of allocation risk.
Vinay: And you just pile physical assets into those systems. Once this thing starts, physical asset holders just throw assets into these systems. Because as soon as your asset has a digital identity, the world is filled with people that want to buy bits of equity in the asset, because this is the thing. Sorry, I’m ranting now – this is kind of a religious point!
Nathan: Here we go!
Vinay: The equity in my house is worth more in your portfolio than it’s worth to me in my house, and let me explain that; because once you understand this, the whole thing becomes transparent. Imagine that you and I both have a house, you’re in New York and I’m in London. Right now we’ve got 100% exposure to our own risk, in our own real estate market. If I give you half of my house and you give me half of your house, both of us have the same amount of value, but now that value is at fundamentally lower risk. If there’s a price spike in your market or my market, we will make less money but we still get some upside; but if there’s a price collapse, we’re still holding half of our money.
Stabilisation against risk in asset pools, which are extremely large and extremely diversified right now, is very expensive, because there is so much work involved in just getting the equity into your portfolio in a way that is actually liquid and realisable and saleable in the event that you need it, that we just don’t have this kind of massive anti-correlation, outside of things like BlackRock.
Nathan: This question I’m about to ask is mostly about onboarding people into Mattereum. And you and I have spoken about this offline about it, about how to onboard more people and incentivize them. What we’re seeing, at least in DeFi and in MakerDAO, is that unless we get the greed quotient to these humans who hardly understand this, we won’t move the needle.
Vinay: Let’s think about what produces value in these kinds of transactions. This idea that if you and I exchange equity, we’re both in a better position than we were when we started, because we’ve got the same amount of value at lower risk, this is generic to all property. If I have a capital asset, that capital asset is probably worth more to me if I sell 1% of it to a hundred
different people than if I retain 100% ownership in that capital asset. The world is filled with people that have a huge amount of correlated risk inside of capital assets that they’re holding.
So, if we just run a machine which takes all of the million-dollar capital assets that are in the hands of people whose net worth is only four million dollars, and those people can basically shuffle around the risk around them until all of them have risk-managed portfolios, because they sold 80% of the farm and they bought a whole bunch of other stuff instead, and they still live on the same farm, but now if there’s a price spike, they don’t lose their retirement plan... What we’re talking about doing is being able to basically slash risk globally for a huge class of asset holders, without actually having to transfer any physical property at all. What I’m saying here is what we’ve got is a machine which takes an asset that you already have, and makes that asset immediately more valuable by providing a digital interface to it.
Nathan: Right, but how are we going to incentivize these asset holders inside of the greed mechanism?
Vinay: For the physical asset holders, the incentivization is that you digitize the asset, and people immediately start buying bits of it off you. And they’re buying bits of it off you because your asset is worth more to them as a stabilization mechanism inside of their hedge than it is to you, because you have massive correlated risk on the asset, and they want to use the asset to anti-correlate risk they’ve already got. That’s the big economic driver when we start talking about hundreds of billions of dollars – which is where this is going, by god – that economic driver is that 20% of five farms is worth a lot more than 100% of one farm. That’s where people get paid: you put your asset into the Mattereum system, and people come and buy bits of it off you, because that’s how they stabilize their portfolios.
Nathan: Are you imagining it as a dual system, like a MakerDAO Dai system, or a utility security? How are you imagining this?
Vinay: Initially, I think we’d be very happy just pumping assets into things like MakerDAO. If we basically go out there and asset-passport a whole bunch of valuable stuff, then we build the interface to MakerDAO, and MakerDAO then goes out and uses that to build stablecoins... I would be very happy sitting there, outputting correctly-passported assets into the stablecoin industry, until we’ve maxed out the stablecoin industry. Our expertise is getting at the physical world, which is what all the stablecoin people fundamentally need to make their stablecoins actually stable. Because a stablecoin backed by half a trillion dollars of hard assets is literally the most stable thing that you’re ever going to be able to buy; it’s more stable than government currencies are.
What I’m suggesting is that there will be, over time, a flight to quality, as asset-backed stablecoins become the most stable assets in the world. But that mechanism is only as good as the individual identification and management of the value in those assets, and the locking of that value in secure forms. Because the last thing you want as a stablecoin where people are leeching value out of it by selling the assets that you thought you owned out of your stablecoin.
So, having figured out how to lock the value in the real world to a digital thing, at that point... Okay, we’re starting with these kind of rinky-dink things to get us started, because you have to start somewhere. But once you can lock value inside of physical assets, it’s stablecoins for a while, and then after that it’s hedge funds, and derivatives. Because this is the fundamental bridgework... It’s not that the crypto ecosystem has lagged; the global financial system has lagged. I never looked at this as being an enterprise that we were starting inside of the crypto ecosystem; I thought of this as being an enterprise that we were starting inside of the global economy that happened to use crypto for getting the paperwork done. But this is why there has always been this weird vibe around Mattereum, is that Mattereum acts like a financial services company in the crypto world, rather than acting like a crypto company selling financial services. We’ve always been much more conservative legally, we’ve always tended to just turn up with a very different attitude and a very different energy and a very different vibe...
Nathan: Well, that’s because it comes from you!
Vinay: It comes from me, but it comes from me because I’m very interested in the global economy, and I’m not that interested in the crypto economy, because the crypto economy is very small! I can’t save the world with the crypto economy, I’m never going to make enough money in the crypto economy to go out there and terraform... The objective here has always been to get right into the fundamental gap between the physical and the digital, close the gap up, get us the carbon stuff, get us the anti-slavery stuff, get us incredibly stable meta-currencies where everything is bound to everything else in these anti-correlated packets, and use AI to manage those... The goal is the digitisation of matter; crypto is a method inside of that fundamental goal.
So, when we’ve had this conversation with the crypto people, before crypto people began to understand “Hey, real-world assets is where it’s at...” like, I could have told you that 15 years ago. Real-world assets is where it’s at, because crypto is tiny and the real world is large. But, if you can figure out how to basically put a two-molecule thick layer of crypto over the real world, suddenly the real world comes to life, because all of the magical attributes that you’ve got on things like CryptoKitties suddenly apply to actual cars, and this is exactly what we need. Because once we have that resource liquidity layer because we’ve got accurate indexing, then you can start talking about designing things like a sharing economy, where we double people’s access to goods and halve their carbon footprint.
Nathan: Would you like to go over how this relates to things like Avalanche, and other companies working in this space besides Mattereum?
Vinay: Yeah. There are a whole bunch of companies that are doing sort of certificates of authenticity for art, and they’re lending money against these certificates of authenticity under some circumstances. All of this stuff is good first steps, and in that domain we probably have 20 companies around us that are doing bits and pieces of this stuff, without having the fundamental understanding; they’re mining out little, kind of local ecological niches, but they don’t really have this kind of full-scale agenda. Similarly, we’ve got MakerDAO and a whole bunch of other folks who are doing various kinds of stablecoins, and there’s this discussion of “Hey, let’s move real-world assets into stablecoin,” and then you get this kind of thing of “Huh. Hey, getting hold of real-world assets is really hard. – Yeah, we know. We have a way to handle that.” We had a bunch of conversations with Maker about a year ago, but basically
they weren’t ready to roll and we weren’t quite ready to roll. And I would say that after we’ve gotten another, I don’t know, half a million or a million dollars into Mattereum, we should be able to build out the fully-automated interface, so you can roll up to an object in the Mattereum system, get that thing passported and documented, and then immediately turn it into Dai. At that point, we just continue to run that machine, until we’re at the carrying capacity for Dai, and now we need to start thinking about hedge fund licenses.
Nathan: There's also a double bottom line investing strategy for people who are interested in social impact, no?
Vinay: Absolutely. Because the anti-slavery stuff and the carbon management stuff... We were talking a lot about this in terms of the financial engineering side; let’s drop back to the consumer level. You want to buy a new car, you tell your software “I want a new car, and I want the car that has the lowest-possible carbon footprint,” and they give you an electric car,
and it’s an electric car that’s also bought 20 acres of trees to offset the emissions for making the car, and you are happy. What you don’t want to have to do is six months of diligence on your car-buying deal, to figure out whether or not that car really is the greenest car. What you want to be able to say is “Look, we’ve got really accurate information about what this car is,” and I just make a request of “Get me the greenest car in category,” and then I get told what that is. And it’s based on fact, end of discussion.
For consumers, most consumers, you could get them to click a box that says, “Never show me anything again that was produced by slave labour.” I can’t get them to do due diligence every time they buy something; I couldn’t even due diligence every object which is currently sitting on my desk. “Here’s a box that my fountain pen lives in. It’s made of wood, it looks rather nice. Could have that been produced in a sweatshop in Asia? Certainly could. Or maybe it was produced by a very happy middle-class guy in Thailand who owns the machine shop. I’ve got no way of knowing.” That kind of feeling that we might be silently predating on other human beings, because they’re being forced to work for nickels, in labour conditions where they can’t do something like unionize without getting shot... Anybody that’s a person of conscience, anybody that cares about the way that they live in the world has a fundamental anxiety about “All of my stuff might be made in bad conditions, by people who are enslaved,
and I’m supporting that every time I go shopping.” I think we could lift that anxiety off people very nicely, and get them higher-quality goods at very, very stable prices, without them having that anxiety that they’re making the world a worse place just by shopping. I think that comes down to you hit the checkbox on Amazon that says, “No more slave stuff, please,” and if it doesn’t have the right certifications, Amazon just doesn’t show it to you anymore.
And that could be Amazon, it could be Alibaba, it could be Etsy, or it could be some new, global trade portal that is basically like “Hey, carbon offset and slavery-free only. So if you bought it from us, you’re not making the world a worse place by shopping here.” If you had a choice between shopping on Amazon and Amazon Green, which one of those are you going to take? You’re going to take Amazon Green. And if it’s not on Amazon Green, you’ll basically bite your tongue and buy it on Amazon Black. But, why don’t we have Amazon Green? It’s not because the goods aren’t there, it’s not because the market isn’t there to buy those goods. It’s because the infrastructure in between the goods and the market has no way of managing the green credentials in a way that has any integrity at all, so we wind up not being able to bring the goods to market in a systemic way.
Nathan: Would like to go into emerging competitors to ETH?
Vinay: So, the bottom line is that we need a global smart contract clearing system which is faster than hell, free to use, 100% reliable, open source, and resistant to quantum computing, that’s what we need. Different products on different platforms have different parts of that vision, but until we’ve got all of those attributes in a single place at a single time, none of these platforms is the all-singing, all-dancing eternal platform.
I look at all this stuff as like we’re scrambling up a hill, over the boulders and all the rest of that stuff, trying to get to the thing that works as well as HTTP. Avalanche is a huge step forward, I think the Avalanche algorithm is a thing of beauty, I’m very happy that those guys have sat down and taken a fundamentally new approach to consensus, and if that turns out to be a working system, I hope everybody else adopts it and that becomes the new norm. That’s what learning looks like for a society, is some smart guys sits down and says, “Hey, we do it like this,” and then everybody else copies it. So yeah, I’m very enthusiastic that Avalanche has happened. Because frankly, if Avalanche had not had the breakthrough on underlying algorithms, I would have been extremely unhappy to have all the world’s eggs sitting in the Eth2 basket. Like, way back in the day I was a real computer scientist, I was reading papers on neural networks and distributed systems engineering in the 1980s – I was a teenage nerd with a university library card, and I used it.
So, in this kind of situation, without a fundamental breakthrough at the algorithm level, all you’re really doing is optimizing on top of a basic framework, which is very problematic. Classical consensus, you wind up with kind of n^2 communication between the nodes – or n!, whatever it is – as the number of nodes rises, the amount of communication swamps the network, and it stops working. Nobody had an answer to that, until Gün comes along and says, “Look, they only need to talk to a random assortment of neighbors, and as long as they’re really random when they’re picked, the summation of all of these small, random pools of neighbors is equivalent to global consensus, with extremely strictly-defined statistical margins of risk. If you’re happy with it being a one-in-four-trillion risk, you do five rounds. If you need a one-in-twelve-trillion risk, you do eight rounds.” That ability to exactly quantify the risk profile of the consensus mechanism, in a way in which it gives you a clear mapping between what do you have to do to local in order to get secure global, that just opens up...we’ve got 20 years of work to do before we’ve fully explored those ideas. Until that happened, we were basically just squeezing the lemon on classical consensus for the last few drops of speed. But now what Gün has done is he’s basically just said, “Hey, it turns out that you can row a boat as well as paddling it. And, by the way, would you like to hit the open ocean now?”
I think that when we start talking about the digitisation of trillions of dollars of assets, which is inevitable – if it’s not Mattereum, it will be somebody else; there’s no way that asset digitisation is not the future, it’s as inevitable as music digitisation and money digitisation, it’s obviously what the future looks like – we are going to need not just Avalanche but we’re going to need the third-generation thing that’s only possible because Avalanche has this algorithm breakthrough, because what we’re talking about is building systems that have to run 10 times as fast as Visa. If you think of the back-end of Amazon, we’re talking about systems that have to move 100 times more data on each product purchase than Amazon moves right now, in the context of smart contracts. That technology does not exist, that technology is nowhere near existent!
So, we will get as much as we can get done with each platform as we go forward, we’ll push Ether as far as Ether is going to go, we’ll push Avalanche as far as Avalanche will go, we’ll push Hippopotamus as far as Hippopotamus will go... There’s no fundamental reason why we are chained to any specific platform. At the end of the day, we’re going to use whatever it is that works. Obviously my home base is Ethereum, Mattereum runs on Ethereum, we haven’t
done anything on Avalanche yet, although we expect to... But all the way through this, if people trust Ethereum more than they trust Avalanche, then the big assets will be on Ethereum, and we just have a frontage where we work with whatever it is that’s appropriate to what we’re doing.
Nathan: Do you think that crypto teams are working on the wrong computer science problems, even as Amazon needed to build a cloud computing empire to serve them?
Vinay: Here, let me be completely honest. Way back in the day, I looked at what was happening inside of Ethereum on the scaling project, and I said, “I’m going to give them five years. If they haven’t cracked this in five years, I’m going to raise a bunch of money, I’m going to go back and hire my professors from university, and I’m going to sit down with the Edinburgh University Parallel Computing Centre team, with the guys from the Laboratory for Foundations of Computer Science, and we are going to fix this.” Because... I’m not sure if I should even say this...
Nathan: Well, I can say it for you: sharding doesn’t work.
Vinay: Well, sharding kind of sort of works...
Nathan: Not in the format of Nakamoto consensus it doesn't.
Vinay: Well, each shard is its own individual... [mumbling around] “You know, you can do this...”
Nathan: [laughs] Come on!
Vinay: It gets very complicated, because at the end of the day, sharding is hard. Sharding is hard for video games, it’s hard for databases... How would it not be hard for blockchain? Sharding is pain, sharding is “It doesn’t go fast enough, so let’s make five of them and try and keep them synchronized.” Synchronization is pain. Why is synchronization pain? Well, synchronization in a position where you can’t trust any of the other nodes... Oh, that’s really going to hurt.
Nathan: Who have nothing at stake, and there’s no mechanism to achieve consensus between nodes.
Vinay: There will be much suffering from this approach, gnashing of teeth. Which is not to say you can’t make it work, but it’s going to be hard. And then Gün walks in and says, “Look, if we could do, I don’t know, 2,000 nodes doing the consensus, and we can crack through, I don’t know, maybe 5,000 transactions a second, would that be enough to get you started? – Yeah, we could do that!” But if that works, and the transaction costs are low, as soon as somebody ports World of Warcraft to Avalanche or whatever, his network will get maxed out too. Whatever you build, if it works, it will immediately fill. It’s like building highways: we build a six lane highway, it’s full; we build an eight-lane highway, now that’s full too.
Nathan: Right. They’re fixing some of that problem by creating subnetworks.
Vinay: Subnetworks... That sounds a lot like sharding! It’s a bunch easier than sharding...
Nathan: What I’m saying is that you won’t... World of Warcraft people won’t be in the same network as real-world financial assets, don’t you think?
Vinay: Well, we say that. But at the end of the day, do you want an Internet, or do you want 12 intranets that are connected by some kind of weird protocol? Everything that we know about computers says that the ideal world is that everything connects to everything else in a completely fluid, liquid way. So, much as it is said, “Well, these things will all run in their own subnets...” I bet that if people could possibly run it on mainnet, they will.
Nathan: Right, but under what context would securities interact with utilities?
Vinay: What’s the difference?
Nathan: I mean, come on. You know that people running security nodes, like nodes where securities are traded, they can’t be people like normal people; they have to be accredited or whatever.
Vinay: Oh, sure, in theory. But in practice, the street finds its own use for this. If Avalanche works really, really well, I guarantee you the Nigerians will be running ghetto stock markets for other people’s numbers pools, that are being financed by people going around their bicycles and collecting packets of money from people... If it works, you will not be able to maintain control. The network will simply saturate, because everybody will be doing everything all the time, and then you’ll want a faster one. It’s like asking this question of how much storage is enough for the cloud? Well, if the cloud works great, we’re just going to store everything; and if the cloud is crappy, we’re going to store nothing.
Nathan: So it's an all or nothing at all problem.
Vinay: However well it works, it will saturate.
Nathan: And do you think that Avalanche, which has solved the consensus problem... What about storage and indexing?
Vinay: What I'm going to pointing out here is that every time you build a technology and the technology works, people will saturate the technology. And then the only thing that stops them, throwing more stuff onto it is cost or unreliability or other kinds of flakiness. So the cloud has to massively grew every year because the cloud works.
And we haven't run out of data. So if cloud storage was completely free and it lasted forever, people would be like continually streaming their doorbells directly into the cloud. And they'd go back like 18 months to go and see the video of that time where next door. the dog caught the Frisbee in inline with your camera.
You see what I'm saying? Like if the storage is free and, and it just works completely frictionlessly, people will use an infinite amount of it.
Nathan: Of course.
[01:06:00] Vinay: What I’m kind of pointing at here is that every time you build a technology, and the technology works, people will saturate the technology, and then the only thing that stops them from throwing more stuff onto it is cost or unreliability or other kinds of flakiness. The cloud has to massively grow every year, because the cloud works, and we haven’t run out of data. If cloud storage was completely free and it lasted forever, people would be continually streaming their doorbells directly into the cloud, and they’d go back like 18 months to go and see the video of time where the next door’s dog caught the Frisbee in line with your camera. If the storage is free, and it just works completely frictionlessly, people will use an infinite amount of it. Same with the blockchain: the more perfect the blockchain, the more transactions will flow on to the blockchain, the more clogged the blockchain will become, and the only thing that stops people using more of it is that the thing becomes too expensive or too unreliable.
So, I think that what’s going to happen is that if Avalanche just works exactly the way they think it’s going to work, then we’ll be having the same conversations about Avalanche scaling now that we’re having about Ethereum scaling. “Avalanche is full and it’s beginning to get slow and get unreliable, and all of this subnetting thing doesn’t work and our cross-chain protocol is flaky... I wish there was some better solution to consensus!” It will just go round and round and round, because success looks like going round and round and round. It’s not that you fix it and it stays fixed; it’s that you fix it, and it’s so popular that you immediately have to fix it again!
One of the guys I’ve met on my various travels was the scaling engineer who did Farmville. All the people that were doing Facebook games were provisioning their own servers, so when their game got popular and they got a spike, they would just bring in a bunch of servers, and it
would take them two weeks for the servers to get provisions set up, installed and online, and by then the game had become flaky and unreliable, and people had stopped playing it and they went off to do something else. Whereas those guys were on... I want to say AWS, but it might have been Google, one or the other. I think it was AWS. So, what happened was when they got a spike, they had more capacity within minutes. As a result, when they got social spikes because the game was going viral again, they just kept throwing servers at it, and so they never lost that viral spike to things like shutdowns. He was saying that that was how Farmville managed to become so successful, is that when it was popular it kept working, whereas everything else when it was popular it fell over.
Nathan: Ability to withstand the volume of success.
Vinay: The prize for winning anything that is on the open Internet is that you are continually encountering scaling problems. Because all of these solutions only work in an interim sense. If Avalanche is doing 5,000 transactions a second, and people love it to death, then 5,000 transactions a second will become a new bottleneck faster than you can imagine!
Nathan: We’re coming up on about an hour and a half here, and I want to respect your time... I also suspect that since you’ve already given us a crazy amount of extremely good content, I think it would be valuable to have a follow-up to this.
Vinay: That would be great. And the next time we talk... One of the other things I’m up to right now is trying to put together a proposal for an independent foundation, to calculate the odds of the goods containing slave labour, and how much slave labour they might contain, as an input that would be structured like a blockchain...
Nathan: And where can people go to learn more about that?
Vinay: Right now, nowhere. I’m talking to a bunch of academics, we’re putting together a funding proposal, I’m going to take it out to the people that I know in the family office world, but this is one of these things where... We’re very serious about the anti-slavery stuff, really very serious about that, and what I’m building here is a confluence of different influences. If we can build a system which is used to provide the underlying risk-management architecture for ultra-stable stablecoins... If this is the thing that tells you that the assets are really there for your stablecoins, if this is the thing that enables you to buy on Amazon, and never get a shirt that doesn’t fit and never get a pair of shoes that are of the wrong colour ever again... By the way, everything in that system is also managed for carbon and checked for slavery, what we’re beginning to talk about is the rebirth of the global economy, in a form which is fit for the 21st century. But if we leave even one part of that story out, like we leave the anti-slavery work behind because we’re busy doing other things, and these systems begin to roll, then it becomes like “Hey, why are you imposing all of this anti-slavery stuff on us? We liked the system the way it was before!” So, it has to be there at the beginning, baked into the foundations, so that this new economy that we are building is clean and green from the start. Because if we don’t do that, it will be impossible to clean later. You have to start with it in pristine condition, with all the checks and balances in place. And it’s hard. Nobody wants to take on that complexity, because most people are not crazy. But, you know, if you want to get things done in this world...
Nathan: Well, also it's hard to look into the abyss.
Vinay: Yeah. I mean, we talked about that: my first professional certification was in abyss-staring!
Nathan: [laughs] I greatly appreciate your time, I hope that this will educate the listeners, in a way to drive the production of this envisioned platform, and the narrative of blockchain taking over the world, not just financial markets.
Vinay: I hope so too. We’ve got the asset passport issuing stuff. Right now, only we can issue asset passports. We need capital to build the tooling to let other people issue asset passports, we need capital to begin to build a whole bunch of XML-based or JSON-based standards for doing object finding and search and all the rest of that... We’re capital-hungry, because this is big, expensive project that we’ve run on the cheap. But, the markets are back up, we finally got some mates in the UK that have a multilateral trading facility license, which means that we can do securities issuance in the UK for things like tokenized equity...
Nathan: It's crazy news that happened last week, right?
Vinay: Yeah, like two weeks ago. So, there’s a very substantial chance that we will put all the pieces together and go back to the markets, in a way that is both fully tokenized and fully regulated. In that way, we don’t blow out our ability to get long-term traction with things like hedge funds, by having a bunch of shitty, illegal capital-raising at the beginning of our life.
Vinay: For all the times that I’ve had people, like even our investors, just be like “Vinay, where’s the token? Come on, man! The market is moving! Where’s the token?” and I keep having to basically say to people, “Look, in the long run, if we raise money in a way which is not strictly inside of the wire, we’re going to have a hell of a time dealing with regulative financial entities later on. If you want to talk about how we’re going to move billions and billions and billions of dollars of hard assets...”
Nathan: Also, that’s your x-risk that’s inherently part of this model.
Vinay: Yeah, absolutely. I’m not that interested in solving one problem. We have a fundamental problem, which is that the global economy makes us blind to the consequences of our actions. We use technology to make it possible for us to know the consequences of our actions, and then we use more technology to basically fix our problems automatically. This is the whole automated morality thing: I tell Amazon “No more slavery stuff for me. I don’t want any of that,
I’m not doing that anymore,” I click the button that says, “No more slave goods...” Suddenly, everything is more expensive, and there’s a lot less of it, but I shop with a clean conscience.
I don’t see any reason that people will not just fully embrace that, kind of in the same way that a lot of people embrace veganism, and a lot of people wear health-monitoring watches and they’re now getting a bunch more exercise. Computers make it easier for us to do the right thing, if we’ve got the data that we need to make the decisions, and that is fundamentally the problem that we want to crack with Mattereum. But to get there, we have to basically transform a huge slab of the global economy. Because if you do that kind of stuff small, it winds up in a little ghetto like Fairtrade. “Oh, Fairtrade coffee! Great! Well, what about Fairtrade everything else? – Well, it’s kind of hard and expensive and difficult, and we never really got it to scale, and we’re sort of stuck.”
We don’t want to build a little system that just does ethical; we want to build a big system that produces huge benefits to the financial system, and then we make sure that the ethical is built into that system from day one, so that everything that we touch becomes ethical in the process.
Nathan: Thank you so much for your time! What we should do is schedule a follow-up, or possibly even a regular check-in, because these are great – I really appreciate your time and your insights!
Vinay: It was really fun talking to you.
Nathan: Thanks, Vinay.