Arthur Breitman on the Biggest Problems in Blockchain Design

Someone asked a question, what's your opinion about crypto? Like everyone, no matter what, people are just like want to know. Someone from the audience submitted a question about how crypto would impact inflows into investment grade and you know, interesting thought, Well, it's crypto is one of those things too where I, regardless of everyone gets an opinion on it, regardless of everyone wants to know everyone's take, even if it's not.

So this is very true. But I'm very excited because today we're gonna be speaking to someone who knows a lot about crypto now just a tourist, and I think a topic that we haven't really talked about that much. Is um blockchain architecture and design, and you know, all of these panels like everyone's talking to is like they're

super like fanciful. It's like, I'm just gonna create this world like openness and transparency and it's gonna cut out all the fees and it's gonna be so great, which is really weird because when I think of block change, I think of high fees in low settlement or long settlement times and basically like all kinds of interesting tradeoffs and many things that are worse than the existing financial system. So I feel like people are jumping over some like

basic architectural points in this whole conversation. Right. The other thing that gets me, especially at conferences like this, is everyone wants to talk about crypto. Everyone seems to have an opinion about it. But I have my doubts about whether people actually understand the underlying technology and whether or not they're differentiating between different blockchains and things like that.

I think people might understand the basics like proof of state versus proof of work, layer two versus layer one or whatever, but like within those technology buckets, I don't think people are really thinking about the nuance. No, it's a lot of like it's all just gonna be really good, and it's gonna be really great for financial clues, inclusion and democracy and all that stuff. So anyway, let's have a real conversation about how these chains work and what

you can do with them. Let's do it, all right, I'm really excited. Our guest knows a lot about this stuff. We're gonna be speaking with Arthur Brightman. He is the founder and creator of the Tesso's blockchain project, one of the sort of original projects that thought about smart contracting and malleability in a way that you know, much more advanced than are seemingly more advanced than what you can do on say coin. So we're gonna talk about what

you could do with the chance. So Arthur, thank you so much for coming on odd lot, and thank you for having me. You know, we've been interacting on Twitter for years and years, so I'm excited. I'm excited that you're here. Yeah, meets too. So you know, like when you what do you think when you hear all these people at these conferences and you're here too, and they're like, Oh, it's gonna like be really cheap. It's gonna lower the

fees for everything. It's gonna be super fast, transparency, financial inclusion, it's gonna save democracy, it's gonna save the planet, etcetera. Like what goes through your mind. I mean, I think some of it is true and some of some of some of these it's false. In terms of reducing the fees compared to UH traditional financial infrastructure, I actually think, you know, this is one of the real ones that's

that we can actually do this. Yes, we can lower the entry costs for UH creating financial products or financial systems, make it a little more innovative, and and developed these things much faster than they have in the past. I do believe that at UM you can remove all of intermediaries, and a lot of the friction in the financial system comes from the fact that you need to rely on

trusted intermediaries UM. As an intermediary, you have oftentimes a big opportunity for fraud UM and monitoring that fraud has a lot of costs minutry. Also, you have to deal with only a few people who are going to be trusted. If you can get rid of that, you can actually generally reduce costs. So I I do believe this part

of the story. I don't know that it's going to save the planets, and and and do all these grand use saying I have a story I have about this is I once give I talk at a you know, some sort of dead like events, and it was about the promises of aluction. And I give an example for some of the over hyped ideas that I said, Well, imagine, for example, that's we're gonna put you know, plastic bags are killing turtles. But the problem is we don't know where they came from. If we could identify who leaves

a plastic bag, you know, it's solve the problem. So let's put the plastic blag and obloction in, we'll save turtles. And I give that as the example of like some of the nonsense you can see, And someone pitched me that exact idea. That's amazing. Um, just going to fees though, I mean a very cynical person would say that the fees exist because yes, there are underlying costs like fraud and k y C and m L and stuff like that.

But if you're being very pessimistic about the whole thing, you would also say that financial intermediaries traditional financial intermediaries, they like to make money. Uh, and a lot of those fees are opportunistic. So I guess my question is, like, do those fees actually exist because of what the intermediaries are doing and the cost or because of the way the system works? And how do we make sure that in crypto we don't end up with centralized intermediaries that

are going to charge big fees anyway. I mean, you know, I think everyone who's in business likes to make more more profit than likes to charge more fees. And people are going to charge what amount of physics can get away with in general, so at some point there's competitive pressure rights, and in finance it's to that. Sometimes a lot of the competitive pressure is not is not presents.

You'll have people pay you know, one percent commission on a trade because they're doing it through a private bank and you know, the trust of the private bank and do good execution and on and so forth and have nonsense. It doesn't cost that to execute a trade none at all. But the reason that they're doing it is because, well they feel that they need a trust of this very prestigious intermediary. If you remove that need, if you remove

if you remove that the notion of trust. I think you get something that's more competitive because you know, if the thing is is going to work, regardless of who you routed through, interriputation doesn't matter all that all that much. It limits the ability of for intermediate is to charge

our fees. Now some people will try, of course, especially I would say there's a there's gonna be a college industry of there already is um in crypto of people who want to do the most, more traditional investors, and who really shows them that? No, no, no no, it's all going to be fine. I mean we see it. You know, you have you could buy you could buy bitcoin and even hold it with a custodian if you're worried about

self custody risk. Right. But nonetheless you'll find funds which charged you, uh, you know, management fees for for for holding this. So there's there's some people are always gonna want that, but it's still it's it's putting some pressure down on costs. Can you talk a little bit about your background and the founding of tests, because you're a trader at Goldman Sex, right, and so what do you

what did you do? What was your position in traditional finance? Originally, And what did you see early on UH that you thought it was like an opportunity to port some of these ideas, or the opportunity you saw in creating your own chain. Well, my background is in computer science and statistics, and my first jobs I was working on as a quant So I started out in stary school arbitrage, and then I moved to UH in Southern nine A. I moved to Goldman to do high you can see trading.

I worked on et F market making, natural guest market making, also word that Morgan Stanley and a few other places on this on these topics. I've also done some robotics after that, but it's quite quite different. The thing that attracted me to UH two group of currencies. It wasn't the intersection of a lot of centers of interest that I had. I have been interested in the theory of money in banking for a long time, so you know, how does moniorize what makes good money, what makes bad money?

And I remember, in a way before bin cooin, you're convincing myself that the best, the best money possible is backed by nothing. Right if you use gold, for example, there's a problem with the fact that if you know, if the ment for gold increases, you get more mining, and so you know that's a waste, you know, because gold is used as a monetary instruments, you know, and in an ideal world we would have mind all the

gold and increase them in. Doesn't create stimmen for all all this because it doesn't serve a purpose to have more gold once you have a given supply. And I guess we could argue that having a city in the in the monetary supply can have some some value, but it's I didn't see that way, and um when so when group has come around, I know this this bad criticism around it. So people always say like, oh, it's back by nothing, and I'm like, no, that's great, that

is what you want with the currency. I was interested in the cryptographic aspect because I also had, you know, I have a made medical background. It was interested in photography. The individual sovereignty aspect was also something that appealed to me from a political standpoints, so I really it really attracted me early on. So you were one of the first ones to move from proof of work to proof of steak? Is that right? Or we never used proof of work? Sorry, I mean you were one of the

first to like actually do proof of steak. What was it, Like, what was the opportunity there, and like why did you immediately latch onto that versus proof of work. I got interested in doing taste was because of my interesting proof of steak um. Around Stan's thirteen. There were a lot of innovation in this space around U proof of steak, smart contracts, privacy people were coming up with. It was an explosion of research and innovation around the around the space.

And one thing, and it's early in the bitcoin culture, is that there was not a whole lot of appetite in trying to integrate any of this, any of this upgrading biguine. It's sort of a point of pride for the right, like that it's so it's the code is so assified, or that it's so hard. There's a big part of it is pride, but I also think part of it is uh sour grapes. You know. For a while,

the narrative was very different. For a while was people admit concircles who were saying, you know, what's all these alcoins as you laboratories are going to find the ideas and we can always integrate the ladies into bitcoin and we moved from that to, oh, all those ideas are bad, and now you know we we couldn't we couldn't benefit from any of them bitcoin, which I think is a little sad because a lot of these ideas are good and important and have hound product market fit. This is

one of the ironies of bitcoin. I think it's technology is going to save us in many ways, but also we don't want the technology to advance too much because we like it the way it is, or we can't actually do it. And then I understand the perspective. I think from the bigcoins perspective, there's a big risk if you if you let people change the ledger. That's the changes that you end up having are not merely technological improvements but actually change um the nature of bitcoin, and

it change its economic properties. So I think what bitcoiners, all of these coinners feel is that if they open the door to technological changes, they're also going to open the door to social control of the economic properties a bitcoin, which is something that's they absolutely do not want. So in some sense they felt like they had to shut the door completely on almost completely on changes in to preserve the economic properties. Let's talk a little bit about

what you see happening on chain. We had a recent episode of the podcast with another person who wanted E t F market Making or e t F trading, Sam Bankman Free, and he was asked to describe yield firming, and we thought we were going to get this sort of very complicated answer about I don't know something. But it turns out in his characterization yield firming is you they they'll pay you to put money in a box, and if you put money in a box before other people put money in the box, then you have a

bigger part of the box. And it kind of sounded into a lot of people now that are different from a pot this game. What did you think about that? Is that a fair characterization of yield firming? I think it's a it's a fair conquisation of the way it's practiced. Uh, you know, if you wait buy volume or or by prominence, then yes, it's a fair calacterization. I wouldn't throw the baby with the bast water. I think there's something there,

you know. The more generous way of looking at it is, let's say you want to you want to launch a token, you want to suit it in someone you want to get some liquidity, so you use part of your token supply as a way, we need to incentivize people for providing liquidity for it. Uh. And you could see you could see a company doing this. You could do this with equities. You could say, look, I have some equity,

my business will bit more appealing to investors. Is a liquidity around around this equity, so I could set away you know, I could set aside some equity and and

and incentivized my investors to pride equity. The issue with that that it seems to me, and I think we have seen this in crypto, is that once the equity is distributed, if your model inherently is about I guess paying for customers in the form of equity, then once all the equity is distributed, do you really have good customers or do you just have a base of people who are going to now go find the next company

giving out equity for liquidity. And when I look at like crypto, you know, I look at all these like DE five protocols that were huge in the summer and now they're like charts are way down, and I kind of get the impression that the game is, yes, you find the company or the protocol giving out government to token. This is what they're called equity, and then at some point the equity runs out and rather than's sticking around, you just go find the next thing. Yeah, I yeah,

I don't disagree with that. There's a lot of uh uh, it's it's very secular. The way frees it sometimes is that you see a lot of innovation in DeFi from a technological perspective or even from a financial engineering perspective. But the point of DeFi cannot just be the trade DeFi tokens, and right now that is mostly the point of DeFi. So you need to I think you need to encourage to some actually you know, I really use

keys and where real demand comes from. So historically Testos has avoided DeFi, right, you haven't been that involved in it in the way that say Ethereum has. But I think you started something last year called liquidity baking, Is that right? Yeah? Absolutely? Can you explain that, like, how is that different to the other bad yield farming all the way down type DeFi? Of course, So first of all, I would challenge the fact that has is cute. You

defy the way it is is not sentient. It's a it's it's a project, and they are defied protocols running on the DIES foundation helps UH in general the growth of the eatiscal system. We distribute grants and we've given some grants to some defied projects, so there's no one there's no animosity or anything against the DeFi I think it has had a little distraction on Tails and on other chains for a variety of reasons. But yes, so

liquidity making is interesting. It's um It was a modification of the protocol itself, so at the protocol level, um in amendment was passed and ratified and voted on by the by the valuers of the network. That would take a small fraction of the very small fraction of the to cornsmitted on every block and then use that deposited into a pool to incentivise liquidity provision between Bitcoin and tests. So the idea is that you have a little more

inflation in your protocol. I think it comes down to about zero points three percent per year, So you know, it's not it's it's not very very meaningful for you know, something that has a daily standard reviation of lack about five percent. You know a few so it's always percent per year. But it sent advised people to be willing to provide liquidity between bitcoin and and the point is that,

first of all, these are not gigantity yield. The point is not to try to attract people with giant into yields, or the point is not to try to strap something something new. It's just it's a cost. You be a very small cost in terms of inflation, and you get something in return, which is the provision. I want to go back to the box for a second, because in theory,

the box could become a bank. Right, so in theory we could all put money into the box, we get some equity, and then in theory it could start I don't know, making loans or doing something with economic purpose, something that actually creates value, such that defy is not just trading of defy token. Right. This is like the spack argument. Right, you're sort of putting money in a box that might put something maybe, but is anything becoming there? I mean, I haven't we have the famous scriptos back.

You physically have something that's nonsense, you get a high valuation, and then you turn that into actually making Yes, some some people attempt that. I don't know that anyone has really, really really succeeded that pulling out the cryptos back so far. But it was an interesting certainly, like people pointing at project like changing for example, Yeah, you know, started out a little you know, not not not very coherent, and then started you know, hiring serious academic and like doing

really serious working in photography for this um. So you know, it remains to be seen whether or not that that's pulled off. But for me, it's more about it's not about how serious you are, it's more about you do at the end of the day. You know, it's about value creation, like what value are you creating? And it can't be completely internal. Another way to think about it is sometimes they obviously a small town and I'm thinking

what are the exports of this down? Right? So you have economic activity, you have restaurants, but the restaurants is for the people who work here, so they have to work on something. So at the end of the day, you know, what do what do you export? What does defy export? Yeah, it's a good question, right, you know

what what what are you doing? Are you because if you're looking at there's there's a cynical view of financial mark gets that's I really, I really reject, which is the ideas that all the financial market is just a trying because you know, everything is zero. Some it's very popular view, but I don't. You know, financial markets are

very important because um they help get liquidity. Uh you know, signal market gets get liquidity and it helps capital formation for companies and companies actually build things, right, So there's generally value in financial marketed to help companies that do things and build things. And unless you're actually doing this in some ways, uh, we defy, it's it's going to

remain incestuous and it's going to remin circular. Since since you said this, since you're not a fan of DeFi for the sake of defy, can I broaden this out massively and ask what is the use case of block chain? And we ask this all the time, and you know, yesterday Joe was on a panel with Alcoran and they announced a big partnership with FIFA, and Joe asked the FIFA president, well, what are you guys going to be doing in this new partnership and he basically said, we

don't really know. We have a bunch of ideas. We're just really into crypto and we want to be a modern company, and we hear so many of these partnerships, and I feel like it's still kind of unclear what it is that you can do with a blockchain like

tessos versus traditional technology or financial architecture. Yeah. Absolutely, so I think for me that the basics, the most basic use case and maybe the most important one is a censorship resistant store of value, like being able to store wells in ways that isn't anyone's liability, because if you think about it, if you have a bank account, that's

still the banks liability. If you have a brokerage account, you probably don't even own, you know, their shares in name, and even if you did on the shares, it's still the company's liability rights by a bit of the company to you. There's very very few assets which are not someone else's liability. You have really estate, but it's not easily portable. Um, you could own precious smetals, but again, you know, as bare assets, they're kind of complicated. So

it's unique in his respect. It's a bare asset that you can transact with across the world. So that second use case, making very easy cross border payments, very cheap corsebolder payments without intermediaries. UM. And I think you know, if you live in a in a reasonably free country, it might not seem like a like a big deal. But as soon as repressions starts started turning on, you're

pretty glad that you have a sensory resistant store of value. UM. That's view points often gets a little derided because people will point at people holding Bitcoin or all these other coup of currencies and say, well, look at you know, look at them, you know, holding bitcoded exchenders. They're not concerned with that. Well maybe they're not, but maybe they think that other people are going to be concerned with that. And they helped set a price for the for the

store of value. So I don't you know, it's it's basically easier using the store of value or speculating the fact that people are going to use the store of value. And I think that's completely fine. So here's my other very broad question, which is do people actually care about decentralization in crypto? And then secondly, how do you measure decentralization?

And again I asked the question because this happened again at Milkin, but Cathy would from ARC was talking about the new thing they're working on, is some sort of systematized way or systematic way to actually measure decentralization in crypto, So how do you actually do it? And doesn't matter? So if you're looking today at the behavior of of you know, price setters in markets, whoever is, you know, the marginal buyer forocurrency does not care about decentralization, right,

That's the next thing that's been pretty clear. But I believe that for these systems to present some values, they need to be decentralized, otherwise they'll be able outcompeted. You know, if you have some use case for your blockchain, you have to ask yourself, you know, what do I do that? I'm only with you guys kind onto better as the service, And I think the answer to that often time is going to lying in the centralization. So there's been a

d coupling in the sense that people don't care. But at the end of the day, when the rubber hits the road, um, the centralization doesn't matter. But I think who'nt need to see more cases of bloctions being insufficiently decentralized and running into trouble for people to start caring. How do you measure it? The centralization. Yeah, there's many

ways to think about it. You can have the would say digity decentralization, where like, well, you know there's no no single parties in charge UM, but then the fact of the centralization is like not only is that true, but on top of that, you know no part no party is too prominent or has too much of a of an impact on the network UM. And then you could be looking at it in terms of the most

narrow sense would be the consensus algorithm. You know, who can attack the integrity of the chain, But it could also be you know who has influenced in this worry who can who has the cloud to h serious hard works for example UM, And it could be who is who is building infrastructure that's critical for for this So you have many many degrees of of that. So just on this topic, I mean, there do seem to be benefits and drawbacks to decentralization. And we've seen for instance

with Ethereum. Ethereum has a figurehead in the form of Butteran, and they have been able to do some stuff relatively quickly that probably a truly decentralized protocol would have difficulty doing. And I think Tesso's has a unique governing structure where you are quite decentralized from what I understand, So has that been like how do you feel about that? Has that been a drawback or is that a big benefit

of the protocol And how do you weigh those two things? Well, I think in general, decentralization is a cost right that you have, and there's benefits susciated to that cost right. So I think it's it's worth spaying. But it's it feels almost like an insurance premium, you know, right, you busy insurance and months after amounts and you say what am I paying this insurance? And then you have a

fire and you're glad you paid for the insurance. So it's it's very easy to see the cost of the central station, and the benefits are are not always as obvious immediately. In terms of testos, we have a governance procedure that's allows four upgrades to the chain, so anyone can propose an a great one tests chain and it's set to a vote in names of vote passes and it's a very conservative vote happens overse three months, but

if the vote passes, the upgrade is adopted. There's a side effect though, because in order to have a mechanism that completely atomittate upgrades through voting, a lot of engineering work from the from the very beginning, went into making easier upgrades, and just as a side effect of that, that's that's a benefit, you know, unrelated to the decentralization. It's just the fact that it's really easy to to to do hot swaps of the protocol has let us

U upgrade faster. We've had about nine upgrades in the best three years, and we have a tense upgrade being puted on right now. I want to go back to Tracy's question about use cases, because Okay, store value, I get it, cross border payment or payment, I get it it.

On the other hand, like I kind of think bitcoin just solved those problems and so or to some extent, And so when I think about like a smart contracting platform, and when I'm here at Milkin and everyone is talking about we're gonna be trading real estate on the blockchain or virtual worlds and you know, virtual land and where like you know, your cartoon ape can live or whatever, I want to push further on, like what can we do with a blockchain that we can't do with a

traditional database, and what that's gonna look like and what what applications are gonna take off it actually change society or as you put it. And I really like the phrase, and I'm gonna steal it from now. And there's like the block what are the blockchains exports going to be? Yeah? Um, and I think you know it's the most natural that the highest impendence match is total value and then we go down from there. But it's there just still a

lot of value that's present. So we you know, we did. Uh, there was a friend umber of security token offering and on it was bloction and a lot a lot of them have come from the rested world and they were people of the world real estate work. There were a lot of people took anything real estate on on blockchains and they weren't doing it. You know, it was not an innovation nowative banks saying like, oh we gotta do

something with blockshain. You know, they came from people who actually had the need and actually had the use case and this all the value and I don't think it's impossible for a centralized system to um to do this. But having a system that secure, that's automated. That's global. I think the global aspect the fact that it's it just works and you have this entire infrastructure around it. You have wallets, you have custodiuns um think of it some sort of layers that plugs in into a large

ecosystem m that supports it, that lowers your costs. So there's value here. It doesn't come straight from the incentralization. I think it comes from the network effect of having a ginering platform where you can build all sorts of things. So I have a dumb question, and I think I've asked this before, which probably makes it extra dumb. But when you actually tokenize something like real estate or you know, a JPEG that becomes an n f T, what exactly

are like, what are you buying? Because my understanding is you're basically buying a database entry, and then there has to be some external body like an open sea that points you in the direction of it. And also just to add on to it, in theory, there needs to be some legal legal recourse right such that the owner of that token actually is entitled to the cash flows of the property, whether that's in the rent or in the sale of it. That as opposed to whoever it

just happens to be there. It takes the month. Yeah, there's a lot of arguments in around this space that and I've been guilty of that. That's if you follow the argument, you you will reach very strong conclusions. And there is there's always some subtleties, see like oh, this could be centralized and therefore is there's no value and

so for example, the legal resource is a really good example. Um. Sometimes you'll hear, Look, there's no in having tokenize real estate on the chain because at the end of the day, you're not going to be able to you know, if you want to a certain rights, you'll have to go to the course you'll have to go to like whoever is issue is, they can refuse to honor it. So all the security of the blockchain is for not and I think that's, um, that's taking the argument a way

too far. You know, that's the saying that possession is nine tenths of the law, and in some sense smart contracts is automated possession. So sure you could have legal challenges, you can have all of all sort of things, but it reverse the burden. I think it's an example who says that smart contracts reverse the burden of the lawsuit. And that's really interesting because you know you'll get transferred the title of something. You can start doing things because hey,

you know it works with lending protocol. It's integrated and everything. And if people somehow saying that you know, you're not entitled to it, they have to sue you, and they have to to claim it back, as opposed to you saying like, hey, I need this so And you see this in theternational financial system in the form of scrow. Right, if you have a small party dealing with a large party and it's a look, if you don't pay us, there's no way we're gonna be able to sue you. Right,

So you use Scrow for that. And I like to think of smart contracts as automated is grow Escrow exists because the two parties don't trust each other. So the solution that you're creating is basically trying to fix that trust problem. But I guess, like I guess, my question is it goes back to that what are you buying aspects?

So I buy tokenized real estate, I still have to trust the person who's selling it to me, because there still has to be an entry somewhere or there still has to be a centralized party that's telling me that this database entry points to that thing over there. Absolutely, but I still say you trust them with less than

if you were just signing documents. It's a matter of degrees. Absolutely, And in some sense with the jap eggs and the arts, I think it's it's more trustless in some sense with it because there's no there's nothing tangible, right, It's not like somehow they can say no, you don't own that. You don't know that saying, because what you're buying is a I think if you buy a piece of art,

for example, and you know, just to be sure. A lot of people buying jim Pegs are just buying it because they see it to go up and they say like, I'll buy it and I'll say it tomorrow. There's a lot of gambling associated with it, right, But there's also a genuine art community. Uh, there's not generally digital artists who are minting digital art and selling it. And the argument that like the most here it's like okay, so digital artists are saying, and that's not going to go away.

People want to collect it. People always want to collect arts. So what's the alternative. You know, before before that people would collect digital art and it would receive a paper certificate saying you own you know, you you own this piece. You're not going to put it on some corporate database. You want something that's that's going to be here for the long run. You want something that gives you some meaningful form of ownership. So the best slubstrate for that

is a portrack. So I do think there's a really good impendence match for art, digital arts and potact. Let's talk a little bit more about what the future looks like. And you know, Tesso's is an Ethereum competitor and a lot of the things that you can do a test as you could do on Ethereum and presumably on Salana and Avalanche and the finance chain and all these and algorand etcetera. Is your viewer. There's a question that I was wondering, like in your vision, is there one chain

that wins out? You know, is it? I mean, you would want it to be Tessos, but are we going towards one chain that's the winner or is it, as they say, a multi chain world. So again to my points, is there is ABSOLUTEI arguments where you can say, well, you know there's network effect in having one chain. Um there's and you know, like you have more security, you have more assets, more compossibility, so one chain wins all uh,

and there's the midst tools is absolutely argument away. Like to think about it is um as you know, if you have als in a h A in a solution and then new let it crystallize. If you criticalize very very quickly, you get something like like glass supercalize very slowly you get a few big crystals. So the lowest energy state is just like one big single crystal. But you're not going to get to the lowest energy states

because at some point you'll have things that crystalize. So what it means is that yes, we haven't one touch multilze in the world, but the applications on the change will say because they have their own network effects. So I don't think we're going to have change that specialize on a use case. In a technical technical sense, there's no way you can meaningfully say, oh, this chain is the best technologically speaking for sports, and this change is

the best technologically speaking for finance. The designs are largely going to converse to converge. However, if you have a lot of really really popular applications which are talking to each other and form their own ecosystem on a chain, they're not necessarily all going to mike greater way from one chain to another just because they can get you know, epstin and more security in doing so. Can you can you talk a little bit more about that interoperability point,

Why is it so technologically difficult? You know, give us a really easy to understand explanation of why it's so technologically difficult to make the chains work together. The main chain that a block chain does is maintain consensus. Right, That's a hard problem that they that they solve. And if you want to have two chains communicate with each other's, they need to be in consensus with each other. I mean, each chain needs to know what states the other one

is in. But at this point, if to to to have them been consensus with each other, you would need to have all the valuers of one chain, the all the valuers on the other chain, and some and by the time you've done that, you've essentially emerged the two chains. So fundamentally, bridges that supports state from one chain to another are hard you are um either increasing the competitional

cost on your network or you're losing security properties. And we have some of the big hacks, and we haven't I don't think we've talked about it on the show before, but some of the big acts that people hear about in crypto lately have been on these bridges, right, yeah, So can you talk a little bit about like what's going on, how are they, why are they, why is security inherently difficult? And what have exploiters discovered about the

weaknesses inherent in these bridges. So, first of all, the bridges are big honeypots because in general, the way a bridge work is you're gonna put all your assets on a chain in one needle pots and then you're going to mince a representation of those assets on the other chain. So you have a big pot of money that's sitting there. So first of all, you're a very good to target

for us. So I lock up, say ten million dollars worth of value on Ethereum, and then I meant ten million dollars on Tesso's that represents a claim to that ten million one, that's right. So that's a lot of money, all right. So that's a honeypot, but keep going. Yeah, but that's the first saying. It's like, you know what

what what motivate security attacks is is money. And the second thing is so it depends not every bridge is created equal, and then some bridges of were more way more secure design if you look at you know, the entire costmos ecosystem is built is built around the idea of having these bridges light client bridges between chain. Now that's more secure than other approaches, but the a typical approaches,

you can't have a set of Steiners. So a lot of people said of people who are going to monitor bus chains are going to see what happens, and then they will sign messages saying like yep, I got deposit on this chain, and you notify the other chain that the pus it happens, and vice versa. But those signatures have the power to take away the funds because they could pretend that the deposits happened that never happened, or that a withdrawal happened that never happened. They need to

so they need to be in concerns. They need to follow the two chains. But there's a lot of attacks you could do. First of all, you know if you have I don't know um the polygon for example, So Polygon is, uh it's an l one chain that markets itself as an alto chain on on on a serrium. They have five billions. Explain that just quick diver what do you mean it's an l one change in. Yeah, so is an l one network. And the proof is

that they are actually investing in the two solutions. You know, if you're an alter, you don't invest in healthy solutions for for scaling yourself. But it's part of a lot of their marketing. Initially was like no, no, no bill and Polygon is just like billing on etherium because we're all part of scaling ethereum. But their incentive or at

odz without of the asyrannical system keep going. It's been a good growth hack to to to say like no, no no, we're complimentary to asyrium, but everyone's computing and uh so the Polygon contract has is a five out of eight multi sig and it has like a few billions of value like if you're if you're holding a signature and so there's eight people. Yeah, and in theory to access those billions, you just need to get five of them. That's right, Okay, just just high stakes. Yeah, yeah, and

uh so yeah, it's it's it's it's high. Second, you're not where you could put the signature. You're not going to put it in your apartments. You know, you need to be acceptable to access it, so you can't even put it in the Bengal So you need some sort of probably some data center. But even if you have a data center, now you have to sing a black

well who has access to it. You know, when there's billions, if your attack is worth billions a budget that you have for actually tricking e sais, I mean you have people being kidnapped for example, there's a there's a lot of I mean for billions of dollars. It's not you know, it's not impossible. People have been kidnap for a lot less than that, So that's you know, there's a lot of there's a lot of risk associated with running a bridge.

If you look at Accine Infinity for example, so they're not on ethereum, they're running a clonavicorium and there's a bridge, and they were hacks for like a dohndred million or something like that, And it's easy to look at this and say like, ah ha ha, you know, silly and fty games they got, they're probably sloppy with security. And I have no idea. I have no idea what's you know,

what's backing it. But I've seen a bunch of people say like, apparently the evidence points that, you know them being like North Korea, because you know, for a six hundred million for North Korea, that's a lot, that's a lot of that's meaningful money. But if your adversaries or nation states, that puts the you know, that puts the security, and you don't really have the security problem. The way that bloctions are designed like that, the security works a

lot a lot better. You know, everyone's responsible for their own safety. You don't have this giant an epot of all the funds of the one bridge we're try in the same place. This actually reminds me of something that I want to ask you, and it gets back to the multi chain versus absolutist argument or tension. And I guess Tesso's has been around for a long time, and you know you've been doing this for a while. You people, you're well known in the industry. You've talked to a

bunch of people, you have different partnerships. What is it like actually going out and selling the technology to a company or convincing some sort of entity to use it, Like what is that I guess endeavor like and how do you compete against something like Ethereum or Salona or whatever. Yeah, so you know, in general, it's I don't go around to companies who have no interest in using block chains and salem like you should be using you should be

because in general there's some existing interests. I'm sure some blockchains do that. I mean, there's probably a few of them at this conference. Yes, it's it's it's it's it's it's quite possible. But you know, by a large people are you know, even every large institution has at least you know, every bank since to sell in certain has like an innovation center that actually wants to do something important. So there's already you know, like at least some easting

interests and some ideas of doing something. So it's more about like, you know, why should we use what you what should the use testos as opposed to any other any other blockchain, And then you know, we rely on some of the good attributes of testos, which is a very stronger centralization, um the fact that we have a really good software stack for building take your application, it's I think a lot easier to verify the security of contracts written on and on contracts that that use solidity,

good developer community. Sometimes it can just be handolding. Sometimes people say, you know what, I've tried to build on this chain and I couldn't find any help. And being able to go to these people and provide technological expertise

makes some big difference. And I want to get your take on another big thing that's going on in crypto right now that's attracting all kinds of controversy and medium posts and tweets, and that is the chain Luna and is like this, So the deal is in my understanding. Maybe you'll you'll explain it better. But there's a chain called Luna and they have a stable coin called ust and they've you can get on USC if you buy this coin and then like stake it, and people are

making tons of money and it's going up. And then also I think the Luna Foundation is buying a bunch of bitcoin, like billions of dollars worth to build this war chest to hold the peg of the stable coin because to hold a stable coins peg. There's a lot of interest in stable coin architecture and design. And some people think like this is like gonna blow up. And someone once told me it's like all the stuff that you're worried about with tether, you should be looking at

Luna and other people like super bullish on it. What is your reader the situation? I see more talk about this story than a lot of other things right now. Yeah, I have, you know, I have my My theory is no convertibility, no parody. So you cannot if you cannot convert your assets from from your dollar civil coin into dollars, you're not gonna have any form of parody. And it's it's such a powerful law. I mean even you know

you saw it in equities. The classical example is um Shell Royal Dutch where after where after a merger they had shares treading on in Amsterdam and chares ring in London, and there's the same equity. They give the shareholders exactly the same rights, and one treaded you know, for for years at like a discount to the other, and and and there's the same instrument. But because you cannot convert

one into the other. So if you don't have, if you cannot just hope that people are gonna be rational, you need arbit chargers to be able to come in and easy arbitrage. So with a lot of fractionalized with a lot of like fractionally backstable coins, the arby chargers can do that to some extent. But the system realizes on constant growth in the number of people who wanted

to hold a coin. And if you don't have this growth, and if you have, you know, as soon as you use through contraction and people start asking for redemption, then the system collapses. So that's you know, how business, for example, it's built, and that's how or wanted to be built.

Luna is a little different. Um. What they're doing essentially is they're saying, okay, so we have an idea of the price of Luna in unst dollars, and so anyone who comes in can issue some against you can burn some Lunine, issue some some some us T or do the opposite, and we're gonna pay because oh that's great, you know it will it's it's a growth, it's a

way to grow. The difficulty with that is there's no limits to how much USD can be UH can be created, and the lunit holders are actually paying for the twenty percent are coming from from somewhere. Now. They're happy to do it because they're saying, well, you know, the growth and the demand in the civil coin creates visibility for the ecosystem, it creates hype, and it creates market care. But there's limitations to u to how that works. What

they don't do. What you need to do is you need to be able to set the interest rate in the way that's going to balance the supply and itsupper stoually be determined by what's backing it and the demand, which is, you know, how many people actually want to hold this stable coin and they don't have a mechanism

like like this. And instead of building this mechanism, because you could do that, you could you could do something where you say, look, we want to have no more than of the market gap of them not being into ust and if we have more than thirty percents, and well, well we'll lowers interest rates, including you know, potentially going negative and if we have less, well so that there's making them that work instead of that they're going and so we're gonna buy bitcoin which is, you know, if

you want to have also some centralized ownership and going by you know, go and go and buy some of dollars, Like why would you nationel for doing what do they say is the rationals headlines? Well, it was the biggest holder of the biggest holder of point. How cool is that? Or potentially is the idea is that? Well maybe we

could appreciates and and and and it helps us backing problem. Yeah, um, since you mentioned arbitrage there, I was wondering, given your E t F market making background, do you see a lot of parallels between the world of crypto and UM and E t F trading, UM c F trading, not not just per se right, not directly, but just having in general financial background. I think he's helpful when looking at a lot of the five protocols and understanding how they how they work or don't work. I have a question,

and again it's sort of about these parallels. So one, people got hyped up about blockchains early when the robin Hood stuff was going on, and people started learning about payment for order flow, and they like, oh, you're giving a penny or a million of a penny on every trade. Some high frequency trader jumping ahead of you and so forth. But crypto or block chains themselves and ethereum and other smart contracting platforms have this concept of MTV and minor

extractable value. And if I want to place a trade, you know, blocks only happen every once in a while, and in theory, that trade goes out there and everyone can see it, and a minor can jump ahead of can I think is how it works? Essentially jump ahead of me and get a better price on that execution and then sell it back to me and I get a worse execution. How big of a problem is this?

Can you like talk like and how does it work on tesso's And what are the sort of like things that people should understand about, you know, the power that miners have or the you know what how MTV comes out of the system. Well, that's a big guy, that's that's I know. It's like, these are the things that we haven't really talked about before, and you're gonna explaining these things. So I figured I would just give you a bit have you to hide to hide to dive

into it. So the first thing to understand is that order flu is not funcible rights order flow, that comes from retail trading. Is not the same thing as order flu that comes from Goldman Sachs. So that comes from a fun manager. You know, if I come to you and I say, hey, you know I want to buy this, uh, this equity from you this year is from you make sure sure you know? Or maybe maybe not, but if if if common sucks come to you and say, hey,

don't you want to buy this from us? So this is like retail flow is much more desirable because we're all down. It's not even that it's umb, it's like it's just not informed. You're you're buying. You know you're buying it because either maybe you're gambling or because you're saying, like I like this talk, I want to buy it

for retirement and so and so forth. This is not like you have just received some informations for a wire about something and you've done all of that and now you know that the execution is going the press can go down. So it's quite different. And once, once upon a time, um, you didn't have to mix all the

other flu together. So if you were a big fund manager and you have this large SMP fund and you need to rebalance and you talk to another big fund manager and they need to rebalance, and then you strike a deal because you know that the other person is not trying to screw you, right, so they're just trying to just trying to solve a mutual problem. Yes, and also you're going to do repeat business with them. That's quite important. And that's you know that happened upstairs and

icy uh. And then at some point he looks at this and say, well, you know, we see all these big trades happening, and they're very advantagerous. But the reasons and MS right, this is regulars. Yeah, the retail guy doesn't get access to that. So we're gonna put everything on the electronic exchange and brookers will have to route to whichever exchange has the best, you know, the NBBO, the best beg an Ask and a lot of instrumental investors. When they start doing that, they had no idea how

to do it. So now they start showing these big orders or even you know, if they chop them up, they don't do it in they don't really do it in a way that hides the amount of volume that they want to do, and they get eaten by hYP you cant traders who appear as a college industry as soon as the reaguims is past, and so a lot of a lot of these big cell side people get

very very upset at it. And if you read Flashboys, it's very one sided book that looks only about the cell side, doesn't introduce a single person on the actricancy trading.

I remember there's this crazy bit in Flashboys where he was talking he was about to do like a retail trade and he was about to click like order or buy, and then he saw the price move on his screen and he was convinced that it was because you know, Goldman Sachs was front running his his like tiny retail trade and bizarre because it's also presented I think like in South and ten and is like, oh, I'm uncovering this big secret, and I'm like, I started working in

Goldman sections and nine because people were talking about this on TV and I saw it was cool. So you know, it wasn't CNBC. It's not like they were encovering a big conspiracy um. And you know, people adapted, of course, so they started using execution brokers where you know they will say no, well well we'll take your order, chop it up and then put it on put it on the exchange. But so now as a result, what happens is um you get interrantiational flow. So you get this

retail flow. And if you send a retail flow to the exchange, the retail is going to get a worse price because the exchange doesn't know in this thing. The exchange says, whoa wa, wait a second, we don't know who you are. You could be retailed, you could be a hedge fund. We're gonna be giving you wide quotes because we don't know whereas as a brooker, you know, the order fluid is not is not toxic. That's a word that's used for like informal flow. It's it's not

informal to flow. So you can give it a better price. So you're gonna imagine in generally you're gonna give you a better price in the envideo, which you're a lot. You know you're a lot too. You know. To do that, you're going to report the trade to the exchange and that it's or you're going to give the customers n b b oh. But actually you internalize it for something better, so the customer feels like, oh, I haven't paid anything.

You know, but actually you've made money because you can quote tighter on your interniz flow than you could on the exchange. So retail really went out out of this, like the small retail guy who's like just spuying single in stocks markets much more liquid for that. I would say the losers out of this have been logtituational traders who now have to eisier use execution brookers or dark pools. So here's a very broad question based on that very

long and detailed answer. But what is crypto trading like behind the scenes of exchanges? Like how transparent is it? And what sort of execution are people getting? Right and all the MTV aspects, So it's like what are what are the equivalent like how big are some of these? So the according to MTV is is putting your giant order on the exchange and everyone knows what you know you're about to do, uh, and so people can get

you know, people can get ahead of you. The difference is that if I put a giant order with my broker, at the very least the broker has if you sharing responsibility towards me you know, I mean his client, and so they have to do things a certain way. Whereas I don't have any fidishary relationship with a minor. Now

there's nothing stopping people from building these relationships. You know, as a trader, you could go to a block producers and say, I want you to promise me that when I send you an order, you're never going to include you're never going to show it to anyone else, and you're going to before like you could do that, which people don't do it. Do you think that's gonna happen? No? No, I think what's gonna happen is people are going to build better protocols which are going to remove some of

the some of the extractable value. Do you think regulation will come to the space, like will well the SEC, for instance, get interested in best execution for for retail traders in crypto? So I I don't retalily. I think it's possible because people have made ATV into some sort of moral issue, which I think is dangerous. Uh. You know the words saying like all the miners are exploiting people,

they're taking advantage and so and so forth. One thing that I think would be more helpful to frame you us And again I said, it's like, if you want a fid sue response. You know, if you want toure relationship with your miners, you should ask for it. What I would worry about is the regulation that says that by default, as a miner, you have a responsibility with people,

which I don't think you should have. What about if I have a fiduciary responsibility with a brokerage that, for instance, is providing me crypto exposure through my four oh one k as I think someone is doing now I forgot the name, but you know various people are starting to do this in a sort of more regulated way. How does that fit into the execution? Well, in that case, of course, you know, the brokers should not like favor another client ors themselves, you know, in doing the transaction now,

but if they if I is it trade? And just to be clear, this happens for on chain trading when you use the fire protocols. It's not it's not directly an issue is trading on centralized exchanges. I think you know, at first of all, a lot of it comes from the latency of change. The more latency you have, the more mtvs are is going to um um. It's going to be because of quotes are not adjusted in real time, So it's partly a fraction of that and the way

in which protocols have been designed. If you are an assistant where you can't address quotes really rapidly, you need to build batch transaction mechanisms and is it harder to program? But once you have this, you can reduce the MTV on on its change a lot, and I think we'll

see that happen. So just going back to the turtles at the beginning of this discussion and plastic bags on the block chain, I was I was packing up my apartment in Hong Kong a few months ago, and I noticed that a bottle of balsamic vinegar that I had

that I never used was it was on the blockchain? Right, you could trace it to test its validity, And big existential question here, but it is the future just everything on the blockchain, And how do you differentiate between the importance of having something like plastic bags being tracked and traceable versus having something like a store of value that people are using up to hedge against inflation or for whatever reason. Well, I think there's more value in the

store of value aspects than the supplication applications. A lot of the supplication applications we see on bloctions honestly are stone soup. You know you'll see IBM go to these people and put everything on a bloction. But if you digitalize your entire chain rights where you have, you know, like you can scan your codes and do all of this and put it in a system and then you know like you've you've solved your problem, and then you put it on the bloction, you know, why not, But

that's not really what's driving the value. I believe this value in digizing and having um photographic signature on supply chains. Absolutely. I don't think the bloction adds a hot to to this. All right, Well, uh, the brightman of tess, thank you so much. There's a great conversation. And I feel like the U we have really good conversations with, like the people who did some actually did some time in the trad fi trading world. That seems to be like the

sweet spot for people who can explain things. So thanks for coming on odd locks than thank you for having me. Thanks so much for a thing that was great. I guess I said that at the end there. But I do feel like the best explanations and conversations we have on this space are often with someone who did some time trading and some legacy institution and can sort of I guess I would say, like translate some of these

ideas back and forth. But I also feel like there's a tendency in crypto for people to talk about like all these issues are brand new, when in fact they have been you know, very diligently thought out many years before by traditional finance whole institutions, and there's a reason why, you know, they do it a certain way. But execution, for instance, is something that's been top of mind for a lot of people for decades. I still think people

should just chill out. It's like it's depending or it's like it's just a fraction of a panel, that's the big deal. Um. The other thing that I liked from that conversation was the description of defy. You know, the

question of what is the export here? And we've talked about it before, but like, what exactly are we doing other than dealing and more del Well, you used to make fun of me because early on and some of our first defied conversations, I would like, well, the whaling expedition, and it's like I would never make fun of it is the protocol. Actually, you know, it's like vc I got its roots kind of in funding whaling expeditions. I never made fun of you. I just questioned why you

were obsessed with whaling expeditions all of a sudden. Fair enough, but anyway, like that is like you know, it is other pointed out, like it's not that exciting if it's just tokens, trading tokens, trading tokens and more tokens, or it's not that world changing or boxes but tokens token I's boxes. Yeah, all right, shall we leave it there. Let's leave it there. This has been another episode of

the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't Though. You can follow me on Twitter at the Stalwart. Follow our guest on Twitter, Arthur Brightman. He's at Arthur B. Follow our producer Carmen Rodriguez at Carmen Arman. Follow the Bloomberg head of podcast, Francesco Leave at Francesca Today, and check out all of our podcast at Bloomberg Onto the handle at podcasts. Thanks for listening.