Euvie: Hi crypto world. My name is Euvie Ivanova and today in the thought leader series we have Kenny Rowe. Kenny is the COO of RChain, an adviser to CoinFund and an early team member of MakerDAO, one of the oldest organizations in the Ethereum ecosystem. In this episode, we talk about stable coins, the three different types available now, their benefits and downsides, and potential uses. We also talk about third generation blockchain technologies and how they’re different from previous generations. [00:00:30] This is the first half of our conversation with Kenny.
For all the links and show notes from this episode go to cryptoraido.io/kenny1. You can find the second half of this episode at cryptoradio.io/kenny2 once it goes live. This episode is brought to you by MakerDAO, a decentralized autonomous organization that creates and makes the Dai stable coin on the Ethereum blockchain. Dai is available for purchase on several decentralized exchanges, such as Oasis DEX and [00:01:00] Paradex. For more information about how Dai works, go to cryptoradio.io/maker.
Mike: Welcome to Crypto Radio. We interview the top thinkers and entrepreneurs in the blockchain and crypto currency industry. We also cover topics like trading, investing, and ICOs. We’re your hosts Mike Gilliland, Michael Paul, Chris Sparks, and Euvie Ivanova. We’re entrepreneurs, crypto investors, and cofounders of a new blockchain investment platform called Cosyndicate.io. We created Cosyndicate [00:01:30] and Crypto Radio to make crypto investing a better experience for you.
If you’re new to the show and you’d like a list of our top episodes and resources, go to cryptoradio.io/start. If you like our podcast you can subscribe, share, and follow us on social media and leave us a rating and review on iTunes and elsewhere. It helps others find the show and we really appreciate it. You can find all those links at cryptoradio.io/start. Kenny, welcome to the show. It’s good to have you finally, because we’ve been friends for a while, we’ve been chatting quite a bit [00:02:00] over the last couple years. How we met was pretty interesting actually. I think on Twitter you posted, “Anyone who donates to the Future Thinkers podcast, I’ll match them.”
Mike: I think that was how you were trying to get our attention for something and we were like, “Who the fuck is this guy?” Then we just got chatting after a while and we had a lot of great conversations. Welcome, it’s nice to have you.
Kenny: Thanks guys, it’s really a pleasure to be here.
Mike: Why don’t you give the audience an introduction to what you do, what you’re interested in, that sort of stuff and we can just start from there.
Kenny: I’ve been working in the blockchain space [00:02:30] for a couple of years now. I started and still continue to participate in the MakerDAO, which is a stable coin project. I’ve worked on that project for a few years. I had worked on it full-time from probably mid last year or early last year for maybe about six to nine months, and now I’ve transitioned to another project mostly but I still am involved with Maker on some governance issues and a few other things here and there. That’s a stable coin project. I’ve also done some consulting [00:03:00] for CoinFund, which is a really great outfit out of New York. Right now, I’m working on a generation three blockchain platform called RChain. For that particular project the governance model is fairly interesting because it’s a cooperative.
I’m actually a part of a cooperative, that’s my job. I actually work for a legal incorporated company which, prior to that, there was this idea of the DAO, you could come and go as you please. I think a lot of people are [00:03:30] trying to figure out what legal structures are for the blockchain, as well. That’s a little bit about my background. Mostly I do a lot of stuff in any given project, fitting a need wherever there is one but mainly focusing on operations and some marketing and coordination between different parties and smart contracts, all kinds of stuff. That’s a little bit about me and what I’m up to these days.
Euvie: Cool. What are you guys up to with Maker? For a long time, the Tether was [00:04:00] the only stable coin on the market and now you guys have come in and you’ve actually been doing this for quite a while. As far as I know, you guys were around even before Ethereum?
Kenny: Not quite before Ethereum, but very close to the original launch in 2014. There’s an original post by the founder of Maker, Rohan Christensen, called the E dollar. That was the beginning of the idea. But it had its precursors in bit shares, with the bit USD. There was some precedent for this idea but, yeah, the project has been around [00:04:30] for a very long time and is one of the oldest projects in Ethereum because it was one of the things that you could do with a smart contract. Then why would you want a stable coin and what kind of stable coins in there is also an interesting question. You mentioned Tether.
Tether is a kind of stable coin. Maker, the stable coin there is called Dai, then there’s also another type of stable coin that I think will be interesting to talk about. There are different flavours that you have of stable coins. Something like Tether is [00:05:00] proxy for a Fiat currency, in this case Tether is tethered to the US dollar, this is how it gets its name. The basic idea here is that for every one Tether that exists, there should also be one dollar that’s held in the bank account by some central party. It’s a fairly straightforward way of producing a stable coin. The reason it’s stable is because Fiat currencies tend to be fairly stable.
They’re centrally managed, they’re already scaled, they’re used all over the world – in fact, that’s the [00:05:30] primary means of exchange and commerce right now are Fiat currencies. That’s why they’re stable. The trick with things like Tether, or the concerns that a lot of people have, is that it’s somewhat difficult to make sure that there really is one dollar in the bank account. You’ll see things like the amount of Tether’s supply increasing quite dramatically and quickly, sometimes two to three to four hundred million dollars in a week or two. Which is not necessarily an indication [00:06:00] of anything untoward going on, it’s just unusual that that much currency could be flowing through these counter parties that quickly.
Of course, they could be accumulating this over time and then just released all at once or to meet demand. But it is curious that Tether tends to meet the demand that it has fairly easily. They have ways of trying to be and trying to be as transparent as possible, but that’s the risk that you have with a stable coin like that; you’re trusting in that party [00:06:30] to be honest, to not embezzle money, to actually have the reserves that they say they have. Oftentimes in those schemes, you would also want to be able to convert into both currencies. If I held Tether, it would also be really great if I could go to Tether and then get USD, but that’s actually not super easy and straightforward, mostly because they need the Tether to stay in the market to stay in the economy.
Traditionally, what you use right now for stable coins is just trading pairs. A lot of, [00:07:00] let’s say either Bitcoin or Ether, will be traded for these US dollar equivalence and then people can hold them and they tend to stay in value, then you can move them quickly into something else instead of trying to actually go between systems like that. I’m meaning monetary systems like a blockchain system and the legacy financial systems, which tends to have a lot of friction and a lot of fees associated with it. You just lose a lot of value if you’re trying to do that. Stable coins are very useful for traders, because they help them manage their risk.
[00:07:30] Stable coins are also very good for just normal economies, because you don’t want to be using token to exchange for goods and services. That’s going to change a lot in value over time, because if I’m going to pay for a service now and I’m going to pay for it over time, that change in price over time of any given currency, I want to know what my future obligations are going to be. That’s why we have stable coins. Where does that go from there? You have this centralization problem or concern but Tether is also what we would call a collateralized [00:08:00] token. There should be one dollar for every one Tether.
There’s another way you can potentially do this stable coin thing with collateral – that’s what Maker’s approach for doing this is. It’s a fairly straightforward model where we take collateral on the blockchain, like Ether for example which is just another cryptocurrency. You lock it up in a smart contract and then by doing that it creates ne currency, this currency we call Dai. The reason why you have this collateral is so that [00:08:30] Dai is always backed by some other form of value. When you do this with some volatile form asset that goes up and down in price a lot, then you have the additional requirement that it needs to be overcollateralized.
Whereas Tether you can get away with one for one because that’s the idea, right, it’s supposed to represent a dollar, if you want to represent the value of a dollar in Ether, you really have to have about 150 percent at least of Ether in order to create… [00:09:00] You need $1.50 in order to create $1 of Dai. What we’re actually seeing in the system since it’s been live is that it’s actually a bit more common to have somewhere around two to three dollars backed in collateral. We have a dashboard, too. If you go to dai.makerdao.com. You need the meta mass plugin to read the information coming off the blockchain.
It’ll have some statistics about how the entire system is doing and what the collateralization ratios and all that [00:09:30] kind of stuff. It’s just an interesting way to see the metrics. That’s how you would do it. The next version of Dai will have multiple kinds of collateral, because right now there’s just one. All of your risk is in that one type of collateral. Then we’ll have multiple cryptocurrencies. But even still, with multiple cryptocurrencies you do hedge your risk a little bit, but really, it’s not that much. If anyone is familiar with cryptocurrencies, they all kind of go up together and down together. There really does need to be hard assets or real-world assets that are [00:10:00] represented on a blockchain. We’re starting to see some things like that, for example, there are two states in the United States that are fairly progressive in this field, Arizona and Wyoming.
Arizona already has legal precedent for tokenizing real estate, which is a fantastic form of collateral. Another form of collateral, like from [inaudible [0:10:19], which has been a partner with Maker for years, is gold. Then you have hard assets. When we have hard assets that don’t have as much volatility like that, [00:10:30] then we can reduce the amount of collateral needed in which to produce these stable coins. The stable is actually – there’s a bit of a misnomer here that it’s supposed to always be one dollar. It’s actually not supposed to be a dollar, it’s supposed to have low volatility. Which means we do not want the price to change high or low over a short amount of time.
We’re actually not too concerned whether the price tends to creep up over time or even tends to creep down over time, those are just market forces [00:11:00] that the system will monitor. What it’s really looking for when it changes incentives – what I mean by that is how much does it cost in order to create new currency, new Dai, or to redeem it for collateral. You can change those parameters and then that will tend to increase or decrease the money supply, then that would either raise or lower the price based on some external reference. Originally, Maker was looking at some basket of international currency, like the SDR, which is the standard drawing right from the [00:11:30] international monetary fund. Which is, I think, some of the five largest currencies – the USD, the euro, they added the Chinese yuan, those types of currencies.
You can bundle them all together. The real idea is that you want low volatility but you want something that is understandable in a day to day context. The example I like to use is if you have a stable coin and it costs $1 to buy a dozen eggs, or one stable coin to buy a dozen eggs, it should generally cost one stable coin in a year or two years. [00:12:00] Not necessarily quite that strictly but it should be fairly understandable over time. That’s generally what we do see from our Fiat currencies now, unless you live in countries like Venezuela or Zimbabwe or some of those places. That’s the overview right now from where maker is. We had a hard cap of 15 million while we’re still in beta, maybe 30 million Dai.
I think we’re at 60 percent of that right now issues. That’s gone through a couple downturns and, so far, the system has been robust enough [00:12:30] to maintain those downturns in price. What happens in these systems locked positions, we call them collateralized debt positions – CDPs for short. Of the value for Ether, which is the collateral, goes below a certain value, then the position is auto closed by the system, or it becomes closable by anyone who would call a certain function. Then the collateral is liquidated into the system. That creates with an incentive to buy it at a discount so that it clears the debt. [00:13:00] All of the debt from the system when prices was going down was all cleared and everything remained collateralized.
In fact, as far as I know, the bit USD, even prior to Makers in the Bitshares days, that has remained fairly stable as well. They haven’t had any death spirals so to speak, where the price swirls down so fast that the system can’t handle it. That is a concern, so we actually do have a back stop in case some collateral type just goes to zero. [00:13:30] In that particular case, what happens is there’s another token called MKR. MKR, it has value because when you close a position just normally you need to pay a fee to do that. That fee is in terms of MKR, then the MKR that is used is then destroyed.
The supply of MKR is always shrinking. It’s a very limited supply to begin with, there was only ever a million coins minted. It’s one of the more rare [00:14:00] currencies out there, so it tends to have a very high price but that’s on purpose. It’s like the [inaudible [0:14:04] Hathaway of cryptocurrencies. That currency is the ultimate back stop. How that happens is if a collateral type goes to zero, then MKR is actually inflated, it’s created out of Fiat so to speak. Then that is used to cover the bad debt. That’s how we address that radical, quick, toxic asset type problem
The benefit here is if you hold MKR, [00:14:30] traditionally when supply goes down, prices goes up. Then the other way around is if something happens where a collateral type fails, then it gets inflated and then the price will go down. The trick here is that MKR holders are the ones responsible for choosing the collateral, what is good collateral, and the other parameters of the system which we call risk parameters. If you were a MKR holder, you’re responsible for having some economic background or delegating your vote to someone that does to make good [00:15:00] decisions so that your MKR isn’t inflated away. If it does happen and it’s inflated away, that’s an opportunity for someone who does know what they’re doing to grab up the cheap MKR and then exert better governance.
That’s kind of the system in a nutshell. Just from the amount of time I’ve been talking about it, you can see it has a couple downsides, right? One is complexity. It’s much more complex than something like Tether. But the trade off here is decentralization. There isn’t any one person or [00:15:30] one entity involved with this entire system at all. In fact, the MakerDAO that we refer to really refers to a system of smart contracts that we’ve just been discussing. It doesn’t actually refer to the people and the organizations that are currently building it, at least in my opinion, because those are structures, those are legal incorporated entities. They have presidents, they have cofounders, all of that stuff, right? It’s not really a decentralized autonomous organization.
But the collection of these smart contracts [00:16:00] kind of is. Hopefully, so to speak, the incentives are aligned correctly and the safeguards are there so that it’s robust enough to survive the ups and downs of asset classes and capital markets to produce something that’s really valuable for the rest of us. So far, Dai is being adopted by several exchanges in the Oasis DEX is the most prominent decentralized exchange that is using Dai as trading pairs. There’s also another really great one called Oasis.direct, which is [00:16:30] like a decentralized shapeshift.
They’ve only got the three tokens at the moment but it’s starting to catch on, it’s really cool. Some interesting things you can with it, just another example, is if you have a ton of Ether – if you were lucky enough to have been in this space for a long time but you’re really bullish on Ether, even still long-term, you don’t really want to sell your asset, your Ether, to do something in the real world but you would really like to be able to do something with your new-found wealth. Well, something you could do, [00:17:00] and we have actually heard of people doing this, you can take your Ether, lock it up, extract that Dai, and then use that Dai to do real world things like refinance your house.
What I mean by that is you take the Dai, you get USD for it, then you pay off your house completely. You don’t have any interest, you own your house, the property, free and clear. You still have debt but the debt is now on a blockchain and there’s no interest for this debt but there are fees involved. Right now, in the early [00:17:30] part of the system we’re in, we’re still testing things out, all the fees are exceptionally low. We’re talking like five basis points, right? For a few thousand dollars essentially, you could refinance your entire house and stop paying interest, which is really interesting to a lot of people, right.
Now, of course, there’s risk involved with that, too, because if Ether drops in price you could potentially get covered – forced covered, meaning your position could be auto-closed. If that’s the case, then the fee for that is something more like [00:18:00] 13 percent, which is, yeah, that’s a lot more than your standard interest rates in most places. But do your homework, be educated, but it’s still really interesting. If you’re really high-risk, if you really are bullish on Ether, you can do the same thing where you lock up a big chunk of Ether and then use the Dai to buy even more Ether. This is what we would call a leveraged position.
Now, when Ether goes up, your value is going up much quicker. The same is also true, it’s going down much faster, as well. So, that particular [00:18:30] use case for me is particularly scary because of leverage like that. Leverage trading can be very unpredictable and I wouldn’t really recommend anybody do that that doesn’t really know what they’re doing, and never do anything like that with funds you can’t afford to lose for sure. Using debt or an instrument like this to produce additional value in the real world – financing a new business, paying off your house, buying a car, all of those things provided that you can still make payments on them but you can make payments at [00:19:00] your own discretion, that seems pretty interesting to me as well as just using it as a trading pair.
You don’t have to open a CDP, you can just buy Dai with your Ether or, hopefully soon, Bitcoin or something else like that, and then just use that to trade with other people on the blockchain, which would be fantastic. That’s Maker. Then I’ll briefly touch on one other type that hasn’t launched yet, which is still fairly interesting. There’s another kind of stable coin that doesn’t use collateral, okay, so there’s nothing [00:19:30] backing it and the general idea here – this was an idea called a seniorage shares – here you have a monetary base and then a smart contract that is monitoring the price of this token. Then if it increases in value, then it decreases the monetary supply and vice versa.
This is essentially what a central bank does, right, they monitor the core consumer price index and a bunch of other indices, and then they try to manage the money supply to cover that. You can’t just do that [00:20:00] because the federal reserve of the United States has ways of which they can actually remove money from a system or increase money. They create it and then give it to banks and the banks distribute it or, at least, they’re supposed to. That’s the way they increase it. Then if they want to remove money, they buy bonds and then destroy them, which is US treasury debt. That’s the basic way that the federal reserve does that. Any implementation of this idea on a blockchain would have to have some similar mechanism for [00:20:30] taking money in and pushing money back out into the system.
More likely than not, it would be bonds or rights to the issuance of seniorage, which would be this increase in value or an increase in currency. With this one, it still has the complexity issues that Maker has, so they’re both similar trade offs in that sense. It’s more economically efficient, because there’s not this overcollateralization requirement. But then you also have the other problem [00:21:00] of it’s sort of a pansy scheme, because it only works when it keeps growing. In order to sell a bond for the rights for the next issuance, you need to have enough next issuance. It could be argued that governments in general are pansy schemes and I think that’s a bit of a harsh criticism.
I think the description of what a pansy scheme is is it’s a bit of a spectrum, meaning if you design an economic game that is intentionally trying [00:21:30] to extract money from people in order to give it to yourself and early investors, i.e. what the man pansy did that tends to be very destructive, and that’s what we call pansy scheme. Something like a government, even though it does have the same general pattern, isn’t destructive. Another example would be social security in the United States. You always need younger people paying in in order for the older people to get their benefits. That’s not bad but it falls to the same pattern. You have to be careful because these patterns aren’t [00:22:00] sustainable, they always tend to crash at some point.
They just become unsustainable. For example, I had no plans of drawing any social security myself just because I don’t think the program will be solvent, I just don’t. I think a lot of people in my generation don’t. My parents, they’re great, and I’m really happy that they’re going to get social security because it’s a great benefit. That’s the criticism that you would see from an uncollateralized automated system that would manage money supplies like a central bank. It’d probably be really great for… [00:22:30] and potentially for a long time until it wasn’t. That was a long [inaudible [0:22:32]. That’s the landscape of stable coins currently as I see it anyway.
Euvie: I’m interested in how all those different types of stable coins react to black swan events.
Kenny: Yeah. So, in Tether your black swan would be isolated to any – let’s use a more controversial term for USD – Petra dollar, okay. Where I’m going with that is let’s say there had been some experiments in Venezuela, one might say desperate [00:23:00] experiments to create commodity-based tokens or cryptocurrencies backed by something like oil, right. When Venezuela did it, it wasn’t really seen as any sort of legitimate or even trustworthy program. Let’s say if China and Russia and a few other south-east Asian countries all did the same thing where you actually had faith that you could redeem this Petra token for Petrol at a port, let’s say in China, because there are [00:23:30] massive infrastructure connections between Russia and China. Whereas, you might not trust Russia but you do trust Russia to continue to produce, that’s just within their best interest.
There’s enough in the pipeline that you could probably get your Petra token out from China or some other port. In that sense, if you had trust in being able to redeem the token and you could actually see that it’s working, that has massive, massive implications of the currant state of current state of affairs for the [00:24:00] US Petra dollar. All Petra right now is traded in US dollars – or, the vast majority of that. If that ever changes or even looks like it might change, I don’t know if you could ever quite consider that a black swan event, or maybe you tie that with a very contentious election in the United States all happening at the same and potentially other civil unrest like maybe a succession movement or one or more states.
You could see how some of these things could pile onto each other, [00:24:30] because a succession movement would then obviously require that a succeeding state to create its own currency. Let’s say this is really black swan, right, but if California decides that they’ve had enough and they want to split off and they would be, roughly speaking, the ninth largest economy in the world unto themselves – or Texas for that matter, because Texas is the only state in the union that has the legal right to succeed. That was part of the requirements when they joined the union.
They could actually do that legally and Texas is a massive state, they have a huge economy. Let’s say you have a very contentious [00:25:00] election. We actually kind of expect the next one to be contentious, so that’s not out of the realm of possibility. Then you have some crazy experiment by the Chinese and the Russians to create some new currency, blockchain or not, that’s represented by oil. If all of that happened at once, that could seriously destabilize the US dollar. Would that change what Tether is doing? It wouldn’t change Tether so much because Tether would still be Tether to the dollar, right, it would just be an issue of weird prices. Tether itself would always remain [00:25:30] one dollar.
It would just be completely tied to the fate of whatever is happening to with the USD, or Euros or whatever you tether them to. That’s the collateralized Fiat way of doing it. Then Maker, the black swan events, is more likely than not, a complete collapse of crypto in general. Which is not out of the realm of possibility. In fact, some people that I talk to think that that’s much more likely than what some people might think just because we haven’t really seen, besides some financial innovation [00:26:00] in a few other interesting proof of concepts, we haven’t seen world changing type applications quite yet.
I would say that’s potentially true but I don’t think that a complete collapse of crypto is likely, but a very large collapse is. We see 50, 40 percent price decline usually every 3 to 4 months. So far, that hasn’t seemed to dampen any kind of excitement or forward momentum so it’s hard to imagine what level of price decrease really would do that. [00:26:30] If, let’s say the world trade organization or something like that, or some transnational organization, convinced most jurisdictions to ban or make illegal all of this stuff, which I think would be very unlikely. That potentially could do the kind of damage where you would see all crypto going to very low values.
In that case, Maker, if it didn’t have real world assets would probably not survive that, depending on how quickly it happened because if it happens slowly enough the system would [00:27:00] gracefully unwind down to very low levels of usefulness. What if there were real world assets like real estate which seems to be fairly straightforward and gold and potentially a few other classes, it could potentially weather something like that. Another thing that would potentially kill something like Maker is a fundamental flaw in the blockchain in which it was deployed on.
Let’s say that the cryptography behind the Ethereum that was suddenly cracked, that would just totally invalidate everything, right, there would [00:27:30] double spends everywhere and you really couldn’t recover from that. But Maker is aware of that and they never had any intentions on staying on Ethereum, it was just the first platform for which you could build. Projects like I’m working on, RChain, I’m porting the Dai stable coin onto RChain. Eventually, we would like to have the same business logic on both chains that wrap up to a one token that’s fungible between them.
There’s no reason why you couldn’t take the business logic of [00:28:00] Maker and port that onto other chains, as well, if there was some sort of fundamental flaw. Then the last one is fairly straightforward, that’s just what would happen in the pattern that requires growth. Any pattern that requires growth in order for the system to remain stable, as soon as growth falls enough for a long enough period of time, the system collapses.
It’s just how that would work. In fact, I would say that last one, the seniorage share idea, inevitably would collapse. I wouldn’t even consider that [00:28:30] a black swan, that would be an obvious one. The issue would be would it collapse within a reasonable time period. In that, I don’t know. Those are the kind of risks I would see for all three types.
Euvie: You mentioned third generation blockchain technology. Let’s talk about that a bit, because I think Ethereum has been around for a couple of years and it’s becoming pretty obvious that it has very serious limitations.
Kenny: Yes. Third generation blockchain technologies, there’s a few companies out there. The one that’s winning, [00:29:00] at least in the sense of price right now, is something like Eos. Cardona was also very interesting. Some things like Iota are interesting. Then you have things like the project I’m working on called RChain. The basic idea here from generation three is to build a chain that can scale for the entire planet. We’re talking about billions of people, right. Potentially looking at a full global scale, if you had this sort of data structure that’s going to be really running everything, [00:29:30] you’re talking about billions and billions of transactions a second, right. Not just a lot, meaning visa scale or whatever, but billions. Right now, that’s just not even possible, that’s not even feasible, we don’t really have a roadmap for something like that.
Projects like Ethereum, they have a track record of actually working, which is very important. There is a roadmap for scaling and there’s a lot of smart people working on this. The fundamental problem with that is that the virtual [00:30:00] machine that was chosen for Ethereum is a sequential machine. Transactions have to come in order. That is not going to change. The reason it’s not going to change, because if it did change, all of the smart contracts that have been built wouldn’t work anymore. There’s this code debt is what we would call it. If you don’t want to break things, it limits your options quite severely.
What’s happening right now is the Ethereum team is trying to figure out how to get as much scale [00:30:30] out of the system they have as possible, but they aren’t going to end up with a system that’s sort of shaped like this where, at the bottom of that, is the least efficient part of the whole thing. Yeah, you can potentially do things that are not on the chain itself, you can do things like splitting up the sharding is what it’s called, splitting up like the address space and only having certain validators or people checking on certain transactions that began with certain digits of whatever. That all has got to [00:31:00] wrap up to something and that wrapping process is going to take time. There’s just no way around that, right.
You’re going to get trade offs like, “Okay, yeah, you can do off chain transactions but you might have to be required to put down deposits in order to create the channels. Bitcoin is experimenting with these same things, they call it lightning network. It’s great once you have a channel open, but the process of getting a channel open is still an on-chain transaction, which got relatively high fees sometimes and it’s still [00:31:30] not a great user experience. Once you’re there, it’s great. That is true. It’s just, for me, it doesn’t look like it’s going to work. It’s just not going to work because the computational model isn’t scalable.
I don’t want to run the world on a pocket calculator. Yeah, you could try strap stuff into it to make it do other things like push computation around, but why don’t we just build something better and then learn from what we’ve done, okay. I’ll just talk about the computational [00:32:00] model and the things that I think are the most likely to really transform society and just happens to be the project I’m working on, of course, right? In RChain Greg Meredith, who’s the founder, he’s a mathematician, he’s a computer scientist and he discovered a process calculus called Rowe Calculus. If anybody’s familiar with the process calculi, Pi Calculus was the predecessor then the Rowe Calculus has a bit more features that are much better for creating virtual machines.
Some of the features that you get are things like concurrency. [00:32:30] In concurrency, for example, a really great example of concurrency – or a real-world example of that – is when you guys bought your coffee this morning there’s very little chance that that transaction had anything to do with the transaction of me creating my own coffee in my house a thousand, two thousand miles away. That’s just an intuitional thing. There actually might have been some weird connection but, more likely than not, there really was no connection. In that sense, it doesn’t [00:33:00] matter whether my coffee was produced before yours or vice versa.
If we don’t care in which order those things come in, that’s what we would call concurrent, as opposed to a serialized transaction. That becomes really important when you’re having a virtual machine because if it can do concurrent processes, that is much more robust in a network sense, when you don’t necessarily know when the messages are going to arrive and, when they do arrive, you don’t necessarily care what order they’re in. Because in a block, right now, [00:33:30] in almost all blockchains, they’re in a very specific order. That’s what the miner does, they serialize everything – this came before that. If you don’t care, then it doesn’t matter.
That’s one interesting property of Rowe Calculus as a process calculus. All of that means it’s just a way of computing, that’s what the calculus does. Specifically, it’s a way of building like a virtual machine. You can actually implement Rowe Calculus in hardware. In fact, we’re actually doing some of this right now, which is really fascinating. We’re actually [00:34:00] going to be able to build application specific hardware to run smart contracts, not just like mine things faster but actual hardware that’s going to speed up computation, which is really exciting.
More toward the point, we have this core calculus, which is a mathematical description of computation, which builds the virtual machine that derived from the other. On the other side, you have the programming language, which is called Rowe Lang, the language. Now, they’re both connected to the same thing, [00:34:30] so they are correct by construction. That’s what the word correct by construction means, that they have a same mathematical derivative that they’re from. Whereas in solidity, in smart [inaudible [0:34:40], you don’t have that, you have a programming language that tries to create bite code that the virtual machine can understand in Ethereum.
So, there’s somewhat of a proof obligation in the sense of, “Hey, is solidity really compiling what you think it is?” Most of the time, it looks like it. You also get a lot more [00:35:00] bite code. If you have a small chunk of code, you get a lot of bite code back out. In fact, if you really want to be super-efficient you have to write your smart contract in bite code, which is a pain but also works really well because then you can also reason about it much better. We don’t have those problems, or like we said, we don’t have the same proof obligations in RChain, because they’re derived from the same process calculus.
Euvie: Can I ask a quick dumb question.
Kenny: Yeah, sure.
Euvie: What’s bite code? Is that the code that validates [00:35:30] that the other code did what it was supposed to do?
Kenny: You know like an address in Ethereum? 0XAB120, that stuff? Those are bites. It’s encoded in hexadecimal characters. It’s just ones and zeros. Bite code is just taking ones and zeros and then translating them into bites, which is just hexadecimal characters. Then each pair of characters is a set of instructions to the virtual machine. When you send over 60, that’s the code [00:36:00] for push. Then another code for move… The different instructions, that’s what it is. You guys know Alan Turing, right, we’re all very thankful for that man and what he ended up doing.
In his machine, his Turing machine, that he used was like an infinite tape and it had data on the tape and then that data would then, based on what the reader could see on the tape, it could then either move to another part of the tape, record – which is like read or write. [00:36:30] Those are the fundamental things of computation. If you can do those things, then you are Turing complete, right. You’ve probably heard that word quite a lot. That’s what that means. If you follow all of the properties of a Turing machine, then you’re Turing complete. Which is just, essentially, can you read information from some medium, can you write to it, and can you skip to some other parts? Can some set of instructions tell you to go someplace else and do something?
Turing completeness also means if I have a jump from here to here, [00:37:00] then this jump says jump back, it’s an infinite loop. But Turing machines, a nice handy little property is that they can simulate Turing machines in and of themselves. You can build a Turing machine inside on the infinite tape. You get this crazy… Then they can go all the way down as long as there’s resources, which is crazy and super useful because that’s essentially what a blockchain is. Your hardware, this laptop that I’m using is a Turing machine and, therefore, it can create and simulate [00:37:30] other machines that do the same thing. But of course, we all know that if you have a blockchain that allows infinite loops, you need some mechanism to prevent that, otherwise the entire network literally stops.
Mike: What do you think that that mechanism is?
Euvie: Is that what the gas limit is for?
Kenny: That’s right. We have the same thing, this is called the halting problem. We still have to have some way of terminating a loop. We have the same thing, we have gas. If you run out of gas, your program stops. [00:38:00] Same idea. A few other interesting things about RChain, we’re learning from what other people have done before us. File Coin, [inaudible [0:38:07] coin, some of these other things that are incentivising storage, those are really useful. Or Swarm, even those kinds of things. We’re implementing that into a thing that we’re calling RSpace. Its massive storage incentivized by the base level token, which is Rev. You can incentivize storage with Rev. Now, your smart contracts can have as much storage as you want.
[00:38:30] The original design specification for RChain was to be able to run a social network, which is all of the video, all of the likes and down likes, all of the images, all on chain. That’s one criteria. We can also do things like incentivising or doing proofs of bandwidth, something like this. If you’ve got a large data centre with high powered machines, we can tell how much you’re able to put through the system at any given time and reward that. [00:39:00] We’re also using proof of stake to do our validation, which is much more ecological for the planet and it’s faster, as well, than a proof of work system.
We’re implementing the Casper algorithms developed my Vlad Zamfir and Greg Meredith, both of which are on the board for RChain. The difference between Ethereum, who’s planning to do proof of stake, and the way RChain is going to do it, so in Ethereum the validation is going to happen [00:39:30] on the block level. The validators will validate blocks. In RChain, the validate logical propositions. A great example of that is just does A come before B? That’s just yes or no. If it doesn’t then, because we still do need to know when transactions need to be ordered, because if my coffee that I made here in Seattle has anything to do with what you guys are doing, we need to know about it.
Then the obvious question from there is how do you know about it? How do you reason [00:40:00] about whether or not two transactions interact? We do this with something we call name spaces, or just names in general. Names aren’t anything new, we’re just abstracting them much more than any previous system. You’re already very familiar with names and Ethereum and all the other blockchains, they’re just called addresses, right? These are their names, the pointers towards specific computational resources on a virtual machine or address space.
[00:40:30] But in Rowe Lang, we don’t have restrictions on the name space, meaning the name space of Ethereum, the set of all valid addresses is a subset of the RChain name spaces possible. That also means Bitcoin is a subset. Any other structured name is a subset of the greater whole, meaning any possible name. All possible names can be created within RChain. This is fairly interesting because [00:41:00] you have a couple interesting properties where, if you have a name space, a very defined set of things, then you can have specific rules for that name space. Specific validation. You could have your own validators doing very specific kinds of validation, either high throughput or highly economically secured things like Bitcoin that are hard to change.
You can also have interoperability, because if you have the names of Ethereum sitting next to the [00:41:30] names of Bitcoin. You can do some smart contract stuff here and then push that code over, you can do some atomic swaps. The virtual machine has been organized in such a way that it is also compatible with existing network technologies, which is just HTTP. We can, in RChain, talk to and listen from other blockchains, whereas right now you need things like oracles, which is people pushing data into these other smart contracting platforms [00:42:00] for them to do anything with them. Now, there’s a big caveat here.
If you open a port to some service and that service pushes something back to you that’s completely wrong, well, that’s not great. So, be careful about what you’re listening to or that sort of thing. It comes with trade offs for sure, but we’ll be able to do interoperability, we’ll be able to do consensus quicker with proof of stake. We’ll be able to have scaled, global level storage. We’ll have a concurrency, which will make things so much faster. We’ll have [00:42:30] guarantees about code that we don’t have now with strong type systems and correct by construction. All of these things bubble up together to be something that looks to be orders of magnitude better than anything else we’ve had or have at the moment.
That’s super exciting for me and I think it’s great to see it coming together. In fact, we’ve actually seen on our community hangouts a live working implementation of Casper. That’s amazing, right? All of this stuff is working, which is fantastic. [00:43:00] The kicker is all of this fantastic technology is built around a different kind of governance model. The model here is something that we’re fairly used to in the world which is a cooperative model. Co-ops are very well known around the world. Food co-ops, there’s probably one within driving distance from both of us. In the co-op there’s one member, one vote. It’s not how much stake do you have or how many tokens do you have. [00:43:30] It’s one member one vote. There’s also still a structure of which people can get stuff done.
Any time we see organizations or groups of people specializing in any one thing, they tend to get separated and pushed off into their own organization. Now, we have our co-op in the United States. We’re looking into the process of what it would look like to start a co-op in Berlin. We have venture capital firms that are split off, that are used to create [00:44:00] investments and new start ups that are going to build on the platform. We’re trying to get started a marketing organization to do sales and marketing for multiple organizations at once.
Research and development, which is super important in something like this. We did a huge tour of some of the top tier universities in Europe not too long ago. Out of that, we were able to spin up a research group that’s independent and continually pushing in new innovation pipelines for the roadmap. As new things become specific, they become [00:44:30] wholly separate and autonomous. I think the idea of many, many organizations tightly coupled through economic incentives through an underlying token that are pointed in the same direction, that are managed on their own but still have the same culture – or different cultures but have the same vision for the future – seems to be working out fairly well as an organizational structure, as well. That’s RChain and blockchain [00:45:00] generation three as I see it in general.
Euvie: Is this a general-purpose platform or do you see it having very specific applications?
Kenny: Yeah, very much general-purpose. It will be the defacto platform for smart contracts, for anything that requires scale of any kind.
Mike: Where are you guys at right now with the project, what stage are you at?
Kenny: The project has actually been around for quite some time but it was under a different project previously. There was a bit of a messy split with another project called Scenario about [00:45:30] a year and a half ago. There was a lot of development that happened up until then. Greg has actually been working on stuff like this for 25 years. He did a version of something close to this for Microsoft called Biztok. It does work very well in commercial settings but it’s a very centralized system, it’s not really meant for blockchains. The Rowe Calculus has been around for, I don’t know, 15 or 20 years or something like that.
The math is very well known. [00:46:00] We’ve actually had a long-time to work on this. Like I mentioned, we have a working version or implementation of Casper. Right now, on our Get Hub page you can download the node, which is called RNode. You can spin it up and it will connect, bootstrap to the existing network and talk to other peers. I think at this point, too, it’s actually sending blocks around, which is just random bits of data that it’s going to validate on, it’s not doing anything interesting. Rowe Lang is completely done, the semantics are there. [00:46:30] It still has a ways to go to make it a little bit cleaner and more understandable, because it is a very different language than most people are used to.
Right now, I don’t want to give too many forward-looking projections, but it’s not unreasonable that we’ll have a test net within several months. Then after the testing phase, let’s say perhaps six months to eight months after that, what we’re calling Mercury launch is very likely to occur. The next version after that will be Venus, then Terran, Mars, [00:47:00] we’ll see how far we go from there. Right now, we’re working on the specifications for Venus and Terran as well. Fairly soon, fingers crossed. It’s always two weeks out it seems like with software development, but you can actually spin something up now on your computer and see what it does, which is a fairly good sign I think.
Kenny Rowe talks about stable coins, their benefits and downsides and potential uses. He also discusses the third generation of blockchain technology, and its differences from previous iterations. This is the first part of our interview with Kenny.
Kenny Rowe is currently the COO of the RChain, a third generation blockchain platform, an advisor to CoinFund, and an early team member of MakerDAO. Maker is one of the oldest decentralized autonomous organizations in the Ethereum ecosystem, and is the issuer and backer of the Dai stable coin.
What we cover in this episode:
- What is a stable coin?
- More than just Tether: the three types of stable coins available today, and their differences
- Why are stable coins useful for traders, and what is their function in everyday economies?
- Collateralized tokens as an answer to the centralization concern in cryptocurrencies
- Maker’s model of collateral approach to the stable coin
- Use cases of Dai stable coin in real estate, how it produces additional value in the real world
- Cryptocurrencies in different economies of the world
- How is the third generation blockchain technology different from other generations?
This episode is hosted by:
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