LETS TALK BITCOIN

Episode 84 Ethereum

Participants:

Adam B. Levine (AL) - Host
Jonathan Mohan (JM) LTB correspondent
Charles Hoskinson (CH) Founder of Ethereum project & entrepreneur
Vitalik Buterin (VB) Founder of Ethereum project & programer
Brian Fabian Crain (BFC) Host of Epicenter Bitcoin podcast
Sebastien Couture (SC) Host of Epicenter Bitcoin podcast


The following program is for informational purposes only. Cryptocurrency is a new science
so do your homework before putting money on the line.

Today is February 15
th
2014. Welcome to Episode 84 of Lets Talk Bitcoin, a twice weekly
show about the ideas, people and projects building the digital economy and the future of
money.

My name is Adam B. Levine and Im the editor-in-chief at the LTB network and today the
topic at hand is Ethereum.

Bitcoin started something unstoppable - a new type of digital money that didnt have a
company or individual responsible for it. With Bitcoin, this innovation begins with money
but many new protocols are vying to become the Bitcoin 2.0, able to apply the same
blameless disruptive innovation to... well, everything.

Late last month, LTB correspondent Jonathan Mohan sat down at the Ethereum
House in Miami, Florida with two of the project leads, Charles Hoskinson and Vitalik
Buterin for a wide ranging exploration of the upcoming Ethereum project. It should
be noted that Jonathan is currently, or will become, formally affiliated with the
Ethereum project in the near future, in a community management capacity, and so
make up your own decisions here. But wait, theres more!

We wrap todays show with an update from this weeks Inside Bitcoins Berlin
conference, from Sebastien and Brian at the Epicenter Bitcoin show. Stay tuned to
hear their impressions of the European conference scene.

Enjoy the show! [1:32]


___________________________________________


Jonathan Mohan interview with Charles Hoskinson & Vitalik Buterin

JM: Im here at the Ethereum House in the wee hours of the last day of the Bitcoin
conference of Miami. Joining me is Charles Hoskinson and Vitalik Buterin, two of the five
core developers for the Ethereum project. Guys, thanks for inviting me in, your hospitality
and talking today. [1:54]

CH: Its a pleasure to be with you. Its been a long day. *1:57+

JM: There was a pretty big presentation for Ethereum at the conference. Can you talk a
little more about that? [2:01]

CH: It was a very large conference and incredibly exciting. I think it was over 1,000 people
who attended. [2:07]

JM: Easily. [2:08]

CH: Yeah, many wonderful companies. It really surprised me to see how much the
conference scene has grown from 2013 to 2014. Yeah, Vitalik had a really wonderful
presentation. Vitalik, do you want to talk about that? [2:19]

VB: Yeah, sure. I had a thirty minute presentation and I basically talked about what
Ethereum is, what some of the applications are, why we need it and I think the reception
was really amazing. I saw in the presentation just before mine, 40% of the seats were filled,
during mine it went up to 80% and after mine, it went back down to 50%. I think that
means something. [2:40]

CH: It was amazing. In fact, he said any questions and every hand went up and then one...
the moderator said you have to go, you have to go, so he went outside and everybody left
the room. They just mobbed him like a Van Halen concert. It was crazy. [2:52]

JM: It was like four or five people deep. It was pretty intense. [2:54]

CH: It was and I said Oh god, Im sorry Vitalik. I have to come save you. *2:57+

JM: Im pretty tall so I can see people and I couldnt even see his head in the sea of people.
[3:02]

CH: Weve got a picture of it actually. *3:03+

JM: What was that like? [3:04]

VB: I just sort of stared at the front, at the first three people and I just concentrated on
whatever their questions were. Basically, its like a video game. Youve got a hundred
monsters and you just sort of slay them one by one. (Laughter) [3:15]

JM: What is Ethereum? [3:18]

CH: Ethereum is really a project of frustration. What happened with Mastercoin,
Coloredcoins, BitShares and many other of these other projects is, they all have this desire
to build interesting things either on top of Bitcoin or apart from Bitcoin, like Smart
contracts, Smart property, decentralized autonomous organizations, decentralized
exchange, Namecoin stuff, identity management stuff; these kinds of things. So far, the
results weve seen have yielded a lot of isolation, fragmentation and a tremendously high
cost of innovation. Quickly going through it, the projects are hard to discover, so its very
difficult to see whos working on what across the geography. Second, theres over 150
altcoins, theres a lot of fragmentation in the eco-system, which is really unfortunate. Third,
it costs millions of dollars to get even the most trivial things done. These are really the
symptoms of a disease and the disease is a lack of a foundation. Ethereum, in essence, is an
attempt to build a featureless foundation for innovation, so everybody can build on top of
it. What were doing is taking a Turing complete scripting language and were taking a
blockchain and marrying them together in a very unique way with this mechanism called a
Contract and then were going to build a reference client that sits on top of it, which
essentially becomes the Android of the cryptocurrency space. It has a beautiful, large
application catalog and everything is one click installation, so you want a wallet, one click
installation, you want Bitmessage, one click installation. Were going to open this up so
everybody can use our APIs, they can use common programing practices to write their own
applications for the catalog. Were going to resolve those three problems because now we
have a central... I guess its a decentral central app catalog that you know where all the
innovation is... excuse me, you resolve the isolation, in a sense, because you can see all the
projects in a single location. You can search and find them. Second, the apps now talk to
each other through our compatibility layer. You dont have to build Bitmessage every time
you need Bitmessage functionality in your product. You can just simply talk to Bitmessage
through our foundation. Third, because we have a common application framework with this
wonderful, really magical developer tools, youre going to be able to develop things like
Mastercoin in two months for $50-60,000 on top of the platform. Its not something that
requires large scale engineering because its really, from the very beginning, a platform built
for innovation instead of something where we kind of, after the fact, have to figure it out.
[5:42]

JM: When Charles says a Turing complete blockchain, Vitalik, what does he mean by that?
[5:47]

VB: Turing completeness - there is this idea that you can create a programing language and
once that programing language has, at least, a certain threshold of futures, then it becomes
as powerful as any other programing language that you can possibly conceive. Turing
complete programing language can be used to perform any computation that can be
mathematically defined. The idea there is that this is a discovery made in computer science
way back in the 1930s. Instead of having specialized modules to perform specific tasks, you
can have one Turing complete programing language and then you can have computational
modules dedicated to executing that programing language and on top of that programing
language, you can build all your applications. Imagine if we didnt have that, then today, we
might end up with computers that had a hardware module for Solitaire, a hardware module
for Internet Explorer, a hardware module for World of Warcraft and thats kind of silly, isnt
it? [6:39]

CH: Basically, the notion is, if you can dream it, you can build it. [6:42]

JM: Why do we need Ethereum for this? Isnt there something that we could put into
Bitcoin, or do it with another coin? [6:47]

CH: No, it would require significant changes to the way the protocol works. Actually, to
understand the reason why, its useful to understand the history of Bitcoin and where the
movement came from. Back in 2009, 2008, Satoshi Nakamoto really wanted to test two
things and there were three things he could have tested but he wanted to test two, at the
very least. He wanted to test this idea of a decentralized database. Basically, a ledger
where you could put information into it and you cant take it out. Its completely
immutable, its very secure and its totally transparent. This is the idea of the blockchain.
Second, he wanted to test a transaction system. He says Now that I have this database
with all things I cant take out, let me be able to move positions from one person to another
person with no counterparty risk, there are no charge backs and you dont need any third
parties for this transaction system. These things combined together actually make a very
nice currency but theres this third thing you could test (and he was aware of it) which is a
Turing complete scripting system. The problem is, when one wants to embrace Turing
completeness, it comes along with a cost, which are usually security implications,
implications about bloat, a whole bunch of things and when youre running an experiment
thats already really pushing the edge, and you dont want to invite those kinds of risks.
Now, fast forward, were about five years in the future and weve seen amazing innovation
in this space, weve seen a lot of players really working hard and weve gotten to the point
where everybody agrees Turing completeness, in some way, is a good idea, whether youre
Open Transactions, youre Ripple, youre Mastercoin everybody has their own ideas about
how to do this. It seems to me, the most logical place to use it is on a separate blockchain
structure, so that we can preserve and protect the value of Bitcoin while we conduct this
new experiment. [8:31]

JM: When were talking about the blockchain, theres actually a proof-of-work that youre
using called Dagger. [8:36]

CH: Yes, thats correct. It has some interesting characteristics and properties which are
directed acyclic graphs. Dagger was designed to be a memory-hard proof so, its intended
to be ASIC resistant by simply recognizing the economics, the basics that says if you build an
ASIC for it, 90% of the ASIC would be computer memory, which is already highly optimized.
Basically, a CPU system, a laptop with memory or a desktop with memory, would be the
ideal miner, not a graphics card. Unfortunately, Dagger does have some issues with its
ASICs resistance. While it is cryptographically secure, it uses the same SHA hashing
mechanism that Bitcoin uses but it should improve one because were using SHA 3. Dagger
does have a problem with shared memory, so it cant be used with the property of ASIC
resistance in its current implementation. Thats actually OK for us because we went to the
drawing board and we talked to a lot of people in the community from some good
cryptographers to other people and we came up with a pretty good plan. Moving forward
into the future, after weve cleared the fundraiser, what were planning on doing is holding
an academic contest, where were going to... inspired basically by AES. Its really useful to
examine AES and were kind of taking a lot of inspiration from that. Basically, the Federal
government paid IBM and a few other contractors, a boat load of money to develop DES in
the 70s and unfortunately, DES had some issues with its implementation. Learning from
that experience and seeing the pains that it caused the industry, NIST and others, really
wanted to take the game up a notch and so they created a large circle of academic partners.
They worked very hard with them and created a competition where they invited the best
and the brightest mathematicians and cryptographers in the world, and computer scientists
in the world, to participate. We had Ron Rivest, Bruce Schneier competed many teams.
Eventually, Rijndael went out and became AES. We looked at that and we saw the value
gained from competition and the value gained from collaboration. We said we could
certainly fix Dagger but, in a sense, a much better idea to take the notion of a proof-of-work,
proof-of-stake hybrid and hold a competition with the same economic model that we have,
the same linear inflation rate and all the parameters we desire, for example either ASIC
resistance or ASIC immunity, if thats possible and get a wonderful team of judges, selected
from the applied and theoretical space, both from the hardware and software side, and hold
a large-scale competition with a fairly robust bounty to develop a replacement for Dagger.
[10:59]

JM: Why is it that it just cant be completely proof-of-stake? What is the desire of using
proof-of-work at all? [11:04]

CH: OK, theres this new (?? shit) over equitability so youre kind of trading demons when
you go from proof-of-work to proof-of-stake. When youre on proof-of-work system, you
are vulnerable to 51% attacks and those attacks are forced by he who owns the mining
hardware. When youre in a proof-of-stake system, youre vulnerable to 51% attacks and
those are vulnerable to he who owns the currency. If you look at distributions of currencies
like Bitcoin and other such coins, youll tend to see that its quite allegorical, in a sense, a
small group of people tend to control a large scale of the currency. If youre comfortable
with that, proof-of-stake is actually a fairly good system. If youre not comfortable with a
lack of equitability in the eco-system, then you probably need to embrace some sort of
other hybrid. There are numerous other problems with proof-of-stake, like how do you
distribute the money and so forth and, I think Vitalik can elaborate further on this. [11:53]

VB: Right, so the basic issue is that proof-of-work actually serves two functions. The first
function is securing the network and the second function is providing an issuance
mechanism. The thing is that if you move to proof-of-stake, then you also lose the issuance
mechanism. The only way that you have of issuing new coins is to, basically, give them to
existing stakeholders and thats basically equivalent to having a currency thats highly
deflationary. For example, if you look at Peercoin, Peercoin is a proof-of-stake coin and it
follows that model. There is actually a blogpost that was looking at the distribution metrics
for all the coins and Peercoin is pretty much the most allegorical of them all. If we are going
to be heavily reliant on proof-of-stake without a proof-of-work component, we would need
to come up with some alternative mechanism of distributing the currency even if its in the
long term. [12:42]

JM: I thought the thing that Ethereum did was it allowed miners to execute code on behalf
of a user? Couldnt that be the mechanism by which you could distribute new currency
issuance, is essentially by the amount of code that you execute on behalf of the user rather
than just by mining, like SHA 256 or SHA 3? [13:00]

VB: Theoretically, that would be ideal but the problem is that how do you verify that the
miner actually executed those computations as opposed to just pretending that he executed
those computations, generating some random results? [13:13]

CH: Right. The point of the proof-of-work is that its something that is beyond reproach.
Once youve done it and broadcast it to the network, it is verifiable and its done in a two
part way you do a hard set of work to find an answer and essentially, like a lottery system
and once youve done it, its easy to verify. There is no way of getting around that. You
have to do the work. If we were to follow that kind of a model, you would lose that
property. Another thing about proof-of-stake thats interesting is that it is a good way of
getting people who own currency to have a skin in the game for consensus mechanisms so
thats a valuable property to explore and think about. You have to be very careful about the
equitability of your currency. You dont want to have a situation where you have a group of
say five, or ten people who own the bulk of your currency and therefore, can control the
consensus. With our model, we think that proof-of-stake has some promise but we dont
think its good for an issuance model. *14:11+

JM: SHA 3 seems like a peculiar choice. Im not a cryptographer but it seems like the
debates always been between Scrypt and SHA 256. Why is it that youre mixing it up by
going with a different algorithm? [14:23]

CH: OK, there are a couple of reasons. Number one, SHA3 has a wonderful cryptographic
primitive, the sponge construction, which is eventually going to be used to construct block
ciphers and new random number generators. Its a beautiful construction just by itself. I
think its revolutionary (??) circuit. Second, SHA3 is going to eventually work its way into
central ASICs and CPUs, both on the ARM side, the Intel side and the AMD side. Theres this
idea of specialized cryptocores. Weve already seen them with AES, for example. Its nice to
say Hey, your CPU already has a built-in advantage that your cellphone has, your desktop
has and so forth. Also, it just seems to be cleaner in the way that weve designed things to
embrace the newest standard, especially since the standard has been significantly vetted.
NIST has gone through it and many other agencies have gone through it. [15:14]

JM: You were involved with Invictus Innovations. [15:16]

CH: Thats correct. *15:16+

JM: They too, have a memory-hard algorithm. [15:18]

CH: Yeah and there are some issues. Its called Momentum but theyre moving away from
that to a proof-of-stake system. [15:24]

JM: Why is it that we need to decentralize mining to CPUs? I dont understand, I thought
the whole argument with ASICs was just let it happen because its a transitional phase and
then eventually, everyone will have it and then the effect of ASICs will just be gone. [15:38]

CH: There are a couple of reasons why ASICs cause problems in the eco-system and some of
them are problems of taste and the other ones are problems of regulation. The problems of
taste are if youre OK with only a small group of people having access to the hardware and
only a small group of people ever being able to run large ASIC pools, if youre OK with that,
then thats not a problem. If youre not OK with that, then that is a problem because thats
the inevitable momentum of ASICs in general. [16:05]

JM: CPUs, cant you just do that with botnets? *16:06+

CH: Sure you can do that with botnets but everybody has a laptop, everybody has a
desktop. You never have to buy anything, so everybody, if they wanted to build a large-
scale mining pool, I can just go buy server blades. I dont have to wait for a pre-order from
Butterfly Labs, or wait for another KnCMiner to come. It takes time to get these devices and
the people who get first access to them are not everyday consumers. They are not well
distributed. The people who get access to them are the people closest to the companies
and the people closest to the pools, OK? From that kind of a perspective, thats fine. Its a
commodity business but honestly, it seems to me if you want to have the freest and fairest
distribution of hardware, you go with something that is the most distributed, in this case the
CPU. It is the most distributed platform. Second, is a problem of regulation. Imagine if you
had two lists a blacklist and a whitelist. OK? Imagine if the maintainer of the blacklist and
the whitelist went to the ASIC manufacturers and said OK, Im going to go ahead and
create a protocol where an ASIC miner wont process transactions that have touched things
that are on a blacklist, so I take a coin in essence. You couldnt possibly do this with Intel or
AMD or ARM. Theyre not going to modify their architecture to placate the will of an actor.
For ASIC manufacturers who are quite small, theyre very boutique hardware, their market
capitalizations are not so robust they can be compelled to do this, if desired. Some will
cooperate and some will not. The point is because the hash power is now centralized to a
small group of people, this could happen within a three to five year spread and then youd
have a situation where you could have your Bitcoin, you just cant send them anywhere
they cant be sent through transactions. Thats an example of a blacklist attack that could
be possible or engineered in a very creative way with ASICs. [17:51]

JM: Right but I mean, centralization with CPU mining, it always happens because they
always move to GPU mining. [17:58]

CH: No, they cant. Technically, its very difficult to move to a GPU space. One, because the
processing cores themselves are slower and second, because the memory space is smaller.
GPUs dont have 32GB of RAM, a lot of desktops do. *18:12+

JM: Earlier today, we had one of the founders of Litecoin who was here. [18:15]

CH: Yeah. [18:15]

JM: Litecoin was created specifically to give CPU mining back to people who were
overcrowded by GPU mining and the thought was its un-ASICable, its un-ASICable. [18:25]

CH: You dont say that. Theres the notion of ASIC resistance and that its basically, a war
game between algorithm designers and the intention of the original proof-of-work system.
Then, theres ASIC immunity where there are structural features that make it physically
impossible to develop ASIC. You can pursue ASIC resistance and the designers of Scrypt did
and, for a time, it worked well. Now, people have discovered ways of using Scrypt on GPUs
quite efficiently. Thats just the nature of the business. *18:52+

JM: How is that not going to be the case with Ethereum? [18:54]

CH: As I said, were going to have a very robust competition to build a very good proof-of-
work thats going to exhibit characteristics of ASIC resistance. Now, youre absolutely right,
it perhaps could be the case that somebody develops a GPU algorithm and finds a way to
enjoy mass concurrency thats fine because GPUs are still well distributed. I can buy them
on Newegg or now, with Bitcoin on TigerDirect. Thats a good thing for consumers. I dont
have to wait for six months for my GPU pre-order. Also GPU manufacturers are not going to
change their architecture to placate generic attacks on their system. [19:28]


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JM: Whats a distributed autonomous organization or corporation? I hear Mastercoin and
BitShares talking about it and how is that going to fit into Ethereums Turing complete code?
[21:07]

VB: OK, the idea behind the distributed autonomous organization is that you have an
organization, it could be a company, it could be a non-profit, it could be anything made up
of people but the organizations structure, the organizations bylaws and its constitution,
theyre not enforced by a legal system; theyre enforced directly on the blockchain. The
organization might have a rule that says We need 70% of our members consent in order to
move the funds and you could have that enforced as a contract in the blockchain. An
organizations funds would actually be owned by this sort of virtual account and in order to
make withdrawals from that virtual account, the blockchain would actually enforce the
requirement that you need 70% of the members consent. In general, decentralized
autonomous organizations are something that people have been talking about using that
term for a few months but not using that term really for quite a few years now. The
problem that there has been, so far, is that in order to have a DAO, you have to have some
kind of distributed consensus platform for it to live on. Bitcoin is a distributed consensus
platform but Bitcoin is far too limited for most of these kinds of computations. For example,
Scrypts are Bitcoins equivalent of contracts, theyre binary. They can even be spent or
unspent. Thats really not enough state in order to encode an organization. An organization
is much more complex than just spent and unspent. An organization has to maintain what
its rules are, who the current members are, if its a company what the percentages of the
current members are, maybe it might even need to maintain its own decentralized
exchange for the shares, it might need to have accounts in other contracts and so forth.
Ethereum and I would say Mastercoin and BitShares, as well, are all seeking to create
consensus layers that are powerful enough in order for these kinds of decentralized
organizations to actually be possible. [22:56]

CH: Id just like to add something real quick about them - decentralized autonomous
organizations. I read, I think, the first paper ever written that used the term DAC. I
proofread it when I was at Invictus. Stan Larimer wrote it and he did a really good job.
Nobody really fully understands how to actually build a decentralized autonomous
organization quite yet. Everybody keeps using the term. What we, as an organization, are
going to do is were going to kind of try to resolve one of our issues in a very creative way.
When youre a global movement, it doesnt really make sense to base your global
movement in a particular location. For example, why should Wikipedia be based in, lets
say, the United States, or Europe, or Asia? Why should ICann, which handles the domain
names of the internet be based in the United States? It makes no sense. Its a global
organization. What if you could uplift that organization and make it live in the cloud and
make it live in the internet and get the same level of trust and performance? What were
going to do, working with CoinTalk, is develop a documentary over 12 to 24 month period
after we launch, to take our central organization that manages the Ethereum project and
gradually convert this step by step into a decentralized autonomous organization. It will
basically become a How To Manual and in a way to engage and evangelize your community,
were going to ask them to compel other organizations, like Wikipedia and Wikileaks, to
embrace this model as well, so that we can see an emergence of a new class of company.
Furthermore, DAOs where the killer application for them are... its kind of hard for people in
Western Europe and the United States to understand this, but if you live in a developing
country where the rule of law is not very strong, you usually have two options when you run
a business. Option A you bribe a lot of people, you get in good with the government and
they give you a government sanctioned business. Option B you run everything off the
books; its in the grey area. We see this in China, we see this in Cuba, we see this a lot in
Latin America and South America and Africa. [24:54]

JM: Its referred to as System D and apparently, its a $12 trillion economy. [24:58]

CH: Yeah, its amazing. Actually, Ive seen accountants actually have columns on their
spreadsheets that call them Public Servant Fees and theyre just effectively bribes but
thats the only option you have. Those are the only two paradigms that you have. Its really
terrible because its toxic to capital investment and its toxic to actually proper
entrepreneurship. With this decentralized autonomous organization, once Ethereum has
been produced, really the killer application, a few years in the future, once all these kinks
are worked out, the real killer application is going to be the third option. If youre in Cuba or
youre in China, youre starting an organization and youre building an organization, now
you can choose to embrace a DAO and put your accounting, put all your transparency, your
management into the blockchain and the rules are the same no matter where youre at in
the world. Investors can look at that and be assured Hey, the Chinese government cant
shut this down. The Cuban government cant shut this down. I can safely invest. I can get
an ROI and all the rules are predefined. The reputation is inside the blockchain. We think
this is really going to bring a tremendous amount of innovation to the developing world in
the way that they structure and do business. [26:01]

JM: When you say contracts and when you say organizations, whats the difference
between a contract and a DAO, or is it just a DAO is a series of contracts? What is that?
[26:10]

CH: Yeah. Things are built in blocks so Ethereum starts as a Turing complete system and the
language has a syntax, right? With that language, you can construct things. We really
embrace this notion of emerging complexity so its kind of like cellular automata or a
simpler example would be sand dunes, where very simple things aggregate to very complex
structures. The reason why building a DAO is hard is because nobody knows the particular
configuration of small pieces quite yet to build up to it. Part of our experiment is to identify
which contracts have to be layered together in just the right configuration to end up
producing an effective DAO. A contract is like the building block and then you layer the
blocks together to eventually produce an actual functional organization and these are quite
modular. Wikipedia, necessarily has to be a different entity than a political party and that
has to necessarily be a different entity than a club, or a trade group, or necessarily a
different political entity than a for-profit corporation and thats the beautiful thing about
having abstract foundation. If you have a featureless system, it gives you the robustness to
be able to engineer any configuration desired but the beautiful part is, once its been built
once, its called the Smart Cow Effect its what defeats DRM. Once you defeat a DRM
system, one smart person has to do that its now globally accessible to everybody. If
youve ever ripped a DVD, you probably werent the person who figured out how to do that,
it was somebody else. The same deal with a decentralized autonomous organization. The
reason why were so committed to the user experience is we really want to build the
reference contract and then give it to the world and then its a one-click organization and
you just change the parameters. [27:44]

JM: Vitalik, the thing I dont get is even now, five years into the 140 year life span of just the
issuance of Bitcoin, were already having blockchain bloat issues. How is it you can put code
into the blockchain and thats not going to bloat the blockchain? How is it we can have
thousands or tens of thousands of these distributed autonomous corporations running
inside a blockchain, have it all be running on one blockchain and have there not be like
massive lag? How does that even work? [28:13]

VB: Its a bit of a misconception where a lot of people, when they see about the idea, they
think that just because its computation, it means that it has to be hard. The reality is that
Ethereum is not your personal Amazon EC2 instance. The Ethereum cloud is not going to be
able to do anything that your Smartphone from 1999 cannot do. The fees are going to be
similar and prohibitively high. Its not the point of Ethereum to run heavy computations.
The point of Ethereum is to run things like business logic, computations that run, basically,
just enforce the rules of an organization. Is the number of votes greater than 70%? Is the
transactions signer the correct entity and so forth? Then, theres also going to be some
with somewhat more complex computations to do various cryptographic validations but
thats pretty much the extent to which it goes. Ultimately, even code itself like were
using a byte code and most of the scripts that were going to see running in contracts are
going to be less than 100 bytes of code. It really is not that much more unmanageable than
even Bitcoin and even if it turns out that it does become too bloated, then there are ways of
sort of compromising between using Ethereum and using a completely separate system. For
example, you could have a completely separate system that stores some data off-chain but
you use Ethereum to actually audit updates to the data. There are lots of different
compromises along the way, like you can do the data off-chain computation on-chain or you
can do both of them off-chain and have mining on-chain and so forth. The thing is that even
if you look at where Bitcoin is now, people are still thinking of various optimizations that you
can make in order to make Bitcoin more scalable. Thats still five years after the protocol
was released. We dont need to have all of the solutions now. What matters is that we
have the scripting language and because of the concept of Turing completeness, the
scripting language can be used to implement literally anything that can possibly be
implemented. If a solution exists, someone could just slap it on later. [30:17]

CH: To add a point to this notion of blockchain bloat, Vitalik is very correct in saying that we
do things in a slightly different way that makes it better but its still a common problem for
everybody in the eco-system. I think its a rather unfair criticism to say Oh well, you didnt
solve the problem and therefore, you dont have a justification to exist. Bitcoin has yet to
resolve this problem. They are nowhere near the transaction volume of Visa or Mastercard.
They are nowhere near the transaction volume of stock exchanges and yet theyve grown to
a dozen gigabytes in size. That is going to, eventually, become very prohibitive if this growth
continues in the mobile space. Youll never be able to run a full client in the mobile space.
You have to always embrace SPV and, eventually, thats going to work its way completely
into your laptops and desktops where no ones ever going to want to run a full node. That
has problems inside the eco-system. We, as a project, are committed to partnering with a
lot of people in the space because this is a common problem. Were going to go to the
Coinbases and the BitPays, were going to go to the Mastercoins and even the BitShares and
the Bitcoin core developers and work with some academic partners and say Listen, this is a
common problem for everybody. Lets figure out a way to better optimize the use of the
blockchain. Thats the first point. The second point is recognizing where you dont need to
do things on a blockchain. Vitalik was very right as he says its a business logic layer, in a
sense. If you want to do a peer-to-peer exchange for example, you could technically store
all the transactions on a blockchain. Thats one way of doing it, or you could do something
better, like for example, Open Transactions (OT) which a wonderful eco-system that Chris
Odom put together and you could take a lot of the auditing logic where it says Well yeah,
you require trust but its distributed trust so it ought to be good enough and say Well, we
can do you one better. Instead of having kind of good trust, we can go no trust. You can
run the trust layer on the Ethereum blockchain and then you can run the entire peer-to-
peer exchange on OT layer. That means there is no bloat produced, or very limited bloat
produced, from the actual operation of the peer-to-peer exchange. Its an example of
where you get wonderful features that could even implement potentially high frequency
trading, amongst many other things and yet you dont have to pay the price for it. Similar to
data storage we keep saying Well, theres this five line dropbox, we keep talking about.
Certainly, youre not going to be storing the data on the blockchain. It will be stored in
other mechanisms in other ways. The final point is this idea of improving the trust model
itself for thin clients. Maybe you dont necessarily need to have a full node and maybe you
dont necessarily need to have quite an SPV node but if there was something that could live
in between, where you could have a minified blockchain and some zero knowledge proofs
and it works for one of those kinds of options too. Weve seen some great, very innovative
proposals, over the last few years, that we think are going to really allow us to have a bit of
heterogeneity in the network but still the same relative trust model that Bitcoin has today.
[33:12]

JM: When we talk about Ethereum and you let peoples minds sink into the idea of an agent
running on the blockchain or code gone wild, the mind starts to think about all the crazy
things that can happen to this and you see yourself moving from programing to magic.
What I want to know is what can Ethereum actually do and what are its limitations? It kind
of seems pretty magical and I just want to know it is just a program. What can it do and
what cant it do? *33:39+

VB: What Ethereum can do, you know, weve got lots of examples in our White paper and
our other materials. You can do a domain registration, you can issue your own currency,
you can do decentralized exchange, you can have an identity system, you can have a
decentralized social network, on-blockchain gambling so decentralized SatoshiDice,
decentralized dropbox, crop insurance, financial derivatives and decentralized autonomous
organizations. Thats all stuff that we can do. Ill give you one example of an incredibly
attractive feature that we cant do which is a full 100% trust-free cryptocurrency whose
value is as stable as the US dollar. In a lot of ways, that is the Holy Grail of cryptocurrency.
If you can create a cryptocurrency that maintains the value, thats at least if not exactly the
US dollar but maintains a value that fluctuates as little as fiat currencies do. That pretty
much takes away one of, probably, the largest problem facing the Bitcoin economy today.
We do come close, however, even though we do not solve that particular problem. What
we have is we can use this concept of a hedging contract where two people enter into a
contract, they both put in $1,000 worth of Ether and then, after 30 days, you get $1,000
worth of Ether back. Now, if the blockchain could somehow discover, by magic, how much
Ether is $1,000 worth of Ether, then weve solved the problem but we cant, so we do need
to rely on either a centralized price feed or a voting pool of price feeds, or some similar
mechanism. Its still a lot less trust than all the other previous systems involving issuers but
its not perfect. Another example, Ethereum cannot interact with the real world. An
Ethereum blockchain cannot directly be made aware of any kinds of real world events.
Once again, you need some kind of oracle to tell you what the real world events are. [35:32]

CH: These are notions of generic attacks. A friend of mine builds locks and he was
contracted by a car company to build a new type of door lock. He said No matter how
secure you make the door locks of the car, theres always a way somebody could steal it.
You say Why? He said Did you ever see a tow truck? Thats the problem. You can build
a system incredibly secure within its own eco-system. You can build a system perfectly
robust within its own eco-system. Ethereum can do magical things. Bitcoin can actually do
some very magical things. Cryptocurrencies in general can but the moment you start tying
Bitcoin or Ethereum to physical things, like gold or oil, then you actually invite trust because
its a generic attack at the system. We stare at that same limitation with all things - the
same limitation with a DRM system. You can build wonderful crypto but the moment that
somebody has access to a video, they can pull a camcorder out and record the movie
theyre watching on the screen regardless of how good your encryption algorithms are. This
is the common feature. There are generic attacks that do exist. There are generic cases
that we can never solve. Vitalik is right. Anything in the physical world, cryptocurrencies
cannot solve. [36:44]


_______________________________________________


ADVERT:

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cryptocurrency for February 14
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2014. BCNext, the creator of Nxt has revealed Part 2 of his
four point plan for the cryptocurrency. Here are three key points. First, the mechanism for
determining who will forge the next block will be completely deterministic. This will allow
blocks to be generated at a fixed rate which, by the way, can be adjusted. Second, mining
rewards will be obsolete. The true rewards will come from services built on top of Nxt.
Third, Nxt is intended to become a system that doesnt need trust because everything will
be transparent. When its impossible to cheat, BCNext says, trust is irrelevant. For the
complete essay, read BCNexts plan for Nxt at www.wiki.nxtcrypto.org and stay tuned for
more news on Nxt in the next Lets Talk Bitcoin broadcast. *37:44+



_______________________________________________


JM: Ethereum is doing sort of a Mastercoin style raise, is that fair to say? [37:51]

CH: Yeah, were going to announce some more details about our fundraiser at a slightly
later date. Thats kind of the notion. Its going to be a (??) and well discuss that at a slightly
later date. [38:00]

JM: One of the main criticisms for the Ethereum project is this notion of a pre-mine, the
founders pre-mine and the investors pre-mine. Why is it necessary to have people have a
stake in this system? Why cant they just get it like everyone else in the way that Invictus
Innovations went about having a fair and equitable place and then once the starting gun
went off, everyone had an equal chance at getting a piece of the pie? [38:25]

CH: I think Invictus is, actually, one of the first great case studies of where this is not going
to work anymore. Everybody would like to embrace the Satoshi Nakamoto model of lets
just launch the network and mine and that works really well when you have a very small
eco-system because youll end up getting a large amount of the currency - number one.
Number two - the cost of developing Bitcoin was quite small. It was, aesthetically, a very
small group of developers who were working on Bitcoin for most of its early history so there
was almost no development cost, if any. In the case of these large scale projects, they
require huge amounts of upfront capital. You have to do security audits, you have so many
things that need to occur and so, you have to embrace this idea because youre going to
have much different mining competition, as ProtoShares did, I believe one third of the
currency base got mined out in two weeks, that idea of just mining only distribution is the
best way of doing it. Second, Invictus started to embrace a Mastercoin self fundraiser. They
had this notion of Angel shares. Why? because they didnt actually get any money from,
or very little money, from the release of ProtoShares. They werent able to acquire it.
Philosophically, lets take a step back and think what this proposal means. Not only do the
developers have to put up all the cost upfront, they receive absolutely nothing but now
theyre competing with everybody else in the eco-system and they have to spend their own
money and time to acquire some of the currency and their own money and time to try to
make the currency valuable. That doesnt seem to be a very inviting entrepreneurial
endeavor. Instead rather, we would like to look at whats happened in venture capital and
whats happened in Silicon Valley over the last sixty years. If you look at the great success
stories like the Googles, and the Amazons, and the Facebooks, and the Microsofts and so
forth, generally speaking, you start with a high amount of equity from the stakeholders who
started the entity, the people who built it. For example, Bill Gates had 64% of Microsoft,
when Microsoft was started. What you want to see is a general deterioration of the
founders holdings, a general divestment of their influence, so Bill Gates holds, I think, 5% or
6% of Microsoft right now still quite a large amount of money and I think its over $10bn.
Its pretty good to be Bill Gates but hes no longer as powerful as he was when they flipped
the switch. Thats the same thing were trying to do here with Ethereum. We really want to
reimagine the notion of venture capital. We say If you come up with a good idea, instead
of having to go through the traditional seed round, the Series A, the Series B, or do some
strange kabuki where you launch the currency from mining and try to compete with all the
other miners somehow, its probably just a simply better idea to be as transparent as
possible and say This is my stake, this is your stake, these are the terms, do you want to
onboard, yes or no? Create a divestment schedule so that, over time, the currency supply
becomes more equitable. I think pre-mines are terrible when the currency supply is fixed.
For example, if you have Bitcoin you have a maximum of 21 million coins, its a really bad
idea to say this person will own 5% or 10% of Bitcoin forever. Thats a really bad idea to give
somebody that kind of endowment. With Ethereum, we dont suffer from that problem.
We have a linear persistent inflation model which means the same amount of coins are
produced per block, so over time, you see deterioration percentage wise of the founders
holdings but as the eco-system grows and more uses occur, you see usually non-linear
growth and demand, so peoples ROI is still very stable and they actually get a good return
on their investment, just like everybody in Microsoft got a very good return on their
investment but you also accomplish the dual stake of equitability. You have much more
equal distribution of your currency base. If you want to do things like proof-of-stake, thats
incredibly important. If you want to do things like building DAOs, with consensus
mechanisms based upon the currency holders, thats also incredibly important because if
you have a deflationary model or if you have a fixed currency model, then a small oligarchy
will always have control of the network. We think this is the nicest balance that we were
able to find inside the eco-system. We say Here are the terms, we start with, initially, a
fairly robust percentage, over time the percentage deteriorates thanks to the mechanics of
inflation that weve developed and we have every incentive aligned. *42:34+

JM: It is open source? [42:35]

CH: Thats correct. *42:36+

JM: Whats to stop me from just doing a hard fork from a genesis block? *42:40+

CH: You could absolutely do that and thats what we call firing the founders. Its a great
idea in theory but, in principle, it generally doesnt work. I dont think a lot of Bitcoiners like
the US government. There are reasons why people enter a magic internet currency, right?
Why havent they hard forked Bitcoin to remove the US governments holdings of Bitcoin?
After the Dread Pirate Roberts seizure, the US government controls a meaningful
percentage of Bitcoin. [43:04]

JM: It sounds like a good idea. I could get behind that. [43:05]

CH: Yeah, exactly. A lot of people would agree with that. They say Maybe we should
divest the US government. This is a good idea or maybe some people say Satoshi is no
longer productive, why should he have 10% of the currency base forever? People would
have the notion to do this, yet they dont. Just like people would have the notion to use
Bing if the features were better, yet they always seem to enter Google.com in the browser.
These networks are not made valuable by the source code that imbues them. Theyre made
valuable by the social consensus within the network. Theyre made valuable by the user
base in the network and the infrastructure built around the network. Miners are going to
stay in the chain that has the highest value. That usually means theyre going to stay on the
chain that was launched first. Investors are going to stay on the chain with the people that
have the highest probability of adding value to the chain. If the founders are a bunch of
idiots, they might hard fork and remove the founders and replace them with others to
incentivize it. Thats actually a really great option to have but, more importantly, thats not
a problem for the eco-system because if you hard fork, all youve really done is fire the
founders. Its only a problem for us and thats great to give that option to the community.
We have to kind of earn the right to keep that. [44:17]

JM: I was looking at the market cap. You said linear persistent inflation. [44:21]

CH: Thats correct. *44:21+

JM: There are quite a number of zeros that relates to the market cap of Ethereum. Does
that mean there is going to be several trillion units? [44:27]

CH: No, thats not true at all. Thats complete FUD. There are not going to be several
trillion units of Ethereum for a very long time. Theoretically, one could reach this. The
amount of Ethereum produced is going to be proportional to the fundraiser. Currently, the
fundraiser says 1BTC = 1,000 Ether, and were going to institute some form of hard cap so
there will be a maximum distribution of Ether. If we raise, I dont know, 30,000 BTC, then
well produce some set of Ether. Every year, well produce .4X of that. Were not going to
reach massive amounts... many, many trillions of Ether for quite some time, unless my math
is completely off. Is it Vitalik? [45:07]

VB: No, your math is not completely off Charles. [45:09]

CH: Yeah, I didnt think so. Some people seem to confuse the maximum amount of Ether
that could be made in year 10,000 or the year 20,000 with the amount of Ether in
distribution today. Lets go through some numbers real quick so we can kind of get an idea
of the market capitalization because this is very important for people. Lets say we have a
very successful swap and Bitcoin is valued at around $800-$840 and we raise 30,000 BTC.
With the pre-mine factored in with the IPO, the initial market capitalization, at launch,
(meaning after the IPO has concluded) will be $37m, give or take. With linear persistent
inflation, for neutral ROI, youd have to add about $12m per year to the eco-system in value.
My shirt Im wearing right now has five lines of code on the back of it which completely
replicates Namecoin and Namecoins worth that much. Im pretty certain we can reach a
market cap that high within year one. In fact, I believe, probably higher. I think the ROI
proposition, for investors, is quite nice. We were really careful about how we designed this
so that we could see balance in our eco-system. We really would like to see a lot of balance
in our eco-system. We want to have every party, whether they be a speculator, maybe a
miner, maybe an application developer on top of the Ethereum eco-system and be able to
get a positive ROI from their endeavor and be able to change things with the eco-system.
We feel that this model is really the best of our world. We could certainly be wrong and the
beautiful thing about the open source movement is that people can take whatever weve
done as weve taken some inspiration from Bitcoin and those who have come there before
it, and change it and maybe soft fork or hard fork it. Thats really the beauty of the system
because, in the end, the ultimate winner regardless of what happens, is the consumer.
[46:58]

JM: Well, thank you so much. I know youre about to pass out after the handful of hours
youve slept in the past couple of days. *47:05+

CH: Yeah, I think Ive actually been up for about two days straight now. *47:08+

JM: Vitalik, thanks so much. [47:09]

VB: Its been a lot of fun. [47:11]


_________________________________________



BFC: Hi, Im Brian Fabian Crain. *47:27+

SC: Im Sebastien Couture. *47:28+

BFC: We are the co-hosts of Epicenter Bitcoin where we play podcasts on Bitcoin news and
developments. We were just at the Inside Bitcoins conference in Berlin. It ended yesterday,
so its Friday now and weve had two really vibrant days talking to tons of people doing lots
of interviews and were going to tell you about the conference and our experience there.
Sebastien, do you want to start? [47:50]

SC: Yeah. I just want to say first of all that this is kind of an unusual setting for us because
usually Brian and I are talking on Skype and this is the first time that we do a podcast
segment sitting across from each other. [48:01]

BFC: Thats right. Usually, were a few thousand kilometers away from each other and we
saw each other for the first time in real life this week, so that was really exciting too.
[48:09]

SC: What was your takeaway on the conference? [48:11]

BFC: It was a very vibrant atmosphere, I think. People are very excited. You can feel that
theres this belief that were on the cusp of something really big. I think that was one of the
main takeaways was this great atmosphere; this great sense of beginning of something
important. [48:33]

SC: Yeah. The impression I got from speaking to all the people that we talked to there is
that 2014 is the year Bitcoin blows up. This was my first Bitcoin conference. My main
takeaway is that the Bitcoin scene is very, very vibrant, especially the German Bitcoin scene,
in contrast to France, where not much is happening. Its just beginning. Anyway, here in
Berlin, particularly in Germany, things are moving along quite nicely. Another thing I
noticed is that there were quite a few Americans there investors, entrepreneurs, people
interested in Bitcoin for different reasons and that tells me that Americans are realizing that
there are things happening here in Bitcoin, so I think thats why there was such a high
American attendance. [49:13]

BFC: Yeah, its a very international scene and I think thats exciting. I think its exciting, in
general, about this Bitcoin community. Its a really global thing and I think thats great. One
thing I want to briefly talk about that its been kind of surprising and that is that there were
only a few traditional venture capitalists. Ive seen that in various contexts where people
talked about that we are on the cusp or wave of Bitcoin start-ups and a wave of venture
capital money flowing into Bitcoin. I think of traditional VCs, I was only aware of Pamir from
Hummingbird but, apart from that, there was a lot Bitcoin investors who bought some
bitcoins and now theyre involved in the Bitcoin scene but theyre not from the traditional
start-up background; theyre now trying to build Bitcoin companies. Maybe thats coming
and maybe thats more the case in the US but here, it wasnt where I expected it to be.
[50:08]

SC: I think it was Matt Roszak who said this For the time being, there is only about $100m
in VC money going to Bitcoin start-ups which is nothing. [50:18]

BFC: Yes. [50:19]

SC: Thats going to grow exponentially over the next year and over the next years to come.
[50:22]

BFC: Yeah, we certainly expect that. That kind of brings me back to a different point which I
talked with Thomas Hessler who is an Angel investor here and the founder of a very
successful company and hes been looking at Bitcoin start-ups in Berlin. We were talking
about this and that is that there is a very vibrant community here in Berlin and there are a
lot of successful start-ups like Soundcloud or a lot of e-commerce companies. Its very
active; a lot of meet-ups and a lot of conferences but of those people, none were at the
Bitcoin conference. I think this talks a problem we have here which is a real separation
between the Bitcoin community and the regular start-up community. I think to really take
the Bitcoin start-ups in the eco-system to the next level, whats really important here is that
we have more of an integration of just the people who have knowledge of building start-ups
and the people who have knowledge of Bitcoin. [51:19]

SC: What do you think needs to happen for that? [51:22]

BFC: People in the start-up community, at least here, have not comprehended yet how
important Bitcoin is and how massive this opportunity is, if youre looking into building
businesses. I think thats the problem because, of course, if they did, at least from my
perspective (Im not exactly objective here in this context) but, from my perspective, if they
did grasp this then, of course, you would come to this conference, of course you would start
thinking about how can I use Bitcoin to do something amazing. Thats not happening yet;
not on a scale, at least. I think whats needed for this to happen is education. We need to
reach out to the start-up community and teach them about this. Im giving a workshop in
May at a large start-up conference here on Bitcoin. Things like that are needed where you
go to where they are... [52:15]

SC: Yeah, we need to evangelize. [52:16]

BFC: Absolutely. [52:17]

SC: Not only with start-ups but just with people in general, I think. [52:20]

BFC: True but I think theres a really big need, especially, to evangelize with people in the
tech community and the start-up community because they are the ones who are going to
build the apps, going to build the applications because theyll do amazing things that will get
us to mass adoption. [52:33]

SC: Just touching on mass adoption, the conversation I had with quite a few people is that
were on the cusp of moving towards mass adoption, like that hockey stick curve is going to
start going up very soon and in order for that to happen, we need to get out of this kind of
technical aspect of Bitcoin and get into user services so that the usability of Bitcoin needs to
become much better. By usability, we mean that just a regular person can create a secure,
easy to use, accessible Bitcoin wallet, not have to worry about scanning a QR code or
dealing with addresses, or what have you. This will make mass adoption occur. We really
need to work and fill that gap in between the technical aspects of Bitcoin and the usability
of Bitcoin. Just look at sending email today; most people that send emails have no idea
what an SMTP server is. We need to make Bitcoin become a seamless service. I think that
once that happens... and I also discussed about this with someone and she asked me
Where do you see this conference in five years? Where do you see Bitcoin conferences in
five years? My response to that was I dont know... well certainly have Bitcoin
conferences but youre going to see Bitcoin moving into home and garden conferences, or
whatever because people from that community will create products and services around
Bitcoin cryptocurrency that can serve their needs. I think that were going to see Bitcoin
move into other sectors, as well, and not just stay kind of this niche thing. [53:57]

BFC: I think thats going to be a big trend. You touched now on something interesting when
you talked about where conferences are going. Thats something Ive been watching with
amazement is this explosion of the conference scene. I mean, weve seen this already but it
seems whats coming up is just of a whole different magnitude. We talk about exponential
growth in a lot of contexts but I think there are a few contexts where this is just so apparent
and massive as in conferences. I was talking with five different people at this conference
that are each organizing a conference this year where they are expecting more than a
thousand people. Thats amazing. *54:39+

SC: Thats outside of the MediaBistro conferences. Thats independent conferences or
other organizations. [54:45]

BFC: Exactly and the MediaBistro people, theyve talked about putting on, I think, 9 or 10
Bitcoin conferences this year alone. Thats astonishing and, I think, they were mentioning at
their next conference, or at the conference they are doing in New York in a few months,
they are expecting 3-4,000 people. There was a massive Bitcoin conference planned in
Texas, in Ireland, in Chicago and in Bonn in Germany. Its astonishing. *55:18+

SC: Thats crazy. If you want to subscribe to our podcast, you can find us on iTunes,
Stitcher, or any other podcast aggregator. You can also find us on Twitter were
@epicenterbtc and well be doing a series of episodes in addition to our regular Sunday
episode, over the next fifteen days or so, where well be releasing a lot of this content.
Weve got an episode lined up where we interviewed a bunch of people at Room 77, which
most of you will know as the first brick-and-mortar establishment to accept Bitcoin. We also
have dozens of interviews that we did on the conference floor, just kind of informal
interviews with people from the community and also well be releasing some of the most
influential talks that we participated in. [56:00]

BFC: Yeah and if youre interested in Bitcoin news and developments, you can also sign up
for a weekly newsletter. We send out a Bitcoin newsletter every Friday where we analyse
the news; whats been going on. You can sign up for that at
www.epicenterbitcoin.com/newsletter. [56:17]


____________________________________________


CREDITS:


Thanks for listening to Episode 84 of Lets Talk Bitcoin.

Ethereum House was produced Jonathan Mohan, edited by Matthew Zipkin and
Adam B. Levine
Berlin Update was provided courtesy of Epicenter Bitcoin, with additional editing by
Adam B. Levine
Music was provided by Jared Rubens and General Fuzz

Questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [56:40]