Matt Luongo: tBTC – Bringing Trustless Bitcoin to Ethereum #387

Transcript

[Music] hi welcome to epicenter my name is sebastian cuccio and my name is federica ernst today we're speaking with matt luongo he's the ceo of thesis and thesis is a crypto production studio and they've been working on several projects and products over the years uh keep is one of their products fold which is a bitcoin cashback product and today we're gonna be talking about tbtc which is a wrapped bitcoin i guess or like a version of bitcoin that exists on the ethereum blockchain

and so we're excited to talk to matt about tbtc today uh but before we talk with matt we'll just like to tell you about our sponsors this week periscope is the fastest and most liquid dex aggregator on ethereum it's got a state-of-the-art algorithm that beats the market price across all major dexes and brings you the most optimized swaps with the best prices and with low slippage check out paraswap.io epicenter and claim 50 gas refunds for a swap of at least one eath traded we're also brought to you by solana which is a fully capable smart contract chain with lightning fast blocks and that supports over 50 000 transactions per second scalability is perhaps the single

biggest challenge facing the shift to using blockchain technology as a backbone for the world's financial system and today solana may be the best solutions we have so go to solana.com epicenter to learn more and we're also brought to you by exodus it's an easy to use wallet that supports hundreds of assets and has native apps for all platforms including ios and android and as a fully non-consolidated wallet there are firm believers of the not your keys not your coins mantra so go to exodus.com to give it a try matt thanks for joining us tell us a bit about yourself and how you got involved in the crypto space thanks for having me i first got into crypto because i was uh buying selling gift cards as a side hustle working on another startup

so it turns out that there was a period of time where people had tons and tons of starbucks cards and i realized that you could buy them for like 50 or 60 cents on the dollar you could resell them make a nice tidy profit and uh and that's what helped fund my first startup was uh schemes like that so eventually i tried to scale that into a startup and when i launched it the idea was you could go to the site you could put in your gift card info we'd pay you in paypal paypal didn't like that so at the time i didn't know much about gray finance and kind of all these like new instruments um but apparently you know buying and selling gift cards were against paypal's terms of service and so my introduction to bitcoin actually was just looking for

censorship resistance and some sort of alternative to paypal so i relaunched the site card for coin.com uh this was like the end of 2013 early 2014 and in the first week it did fifty thousand dollars in sales which was more than i had in my bank account so i was like having to hustle to keep the bitcoin going in circles uh money orders all sorts of like early coinbase shenanigans and yeah that was my introduction to the space and you started a um bitcoin cashback company pretty soon after that right yeah so originally like we had all this gift cards and we and we started kind of actually understanding crypto a little bit more and getting more into bitcoin and that's what led to full and at the

time it was it was straight up a payments product right so all the things we used to laugh about uh when the block size debates came on like buy your coffee with bitcoin but as the market started to move and it kind of became clear like actually you know block space is scarce and we probably shouldn't use it for every coffee purchase um that's when fold pivoted to this rewards model so now if you want to get bitcoin back on every purchase you can go to foldapp.com and you can check out their card their growth has been incredible frankly and the new ceo will is just a much better consumer ceo than i think i'll ever be i'm sort of jealous when i when i see the numbers they pull and uh check it out people seem to love

it forward kind of uh was being folded into this portfolio company thesis right i mean the one that that's still around today so but but it actually predated thesis right we're running a production studio but that wasn't the plan right the plan was just to launch a startup and you know i don't know what is the plan after that to like profit i guess like we were growing this thing and i think when we started we were really focused on application layer work so um let's help you buy spend use bitcoin but then as i got deeper and deeper into the space and more engaged on the tech side that eventually led to us starting a new project which was keep and and on top of that tbtc and we knew

full was a great idea and it had a strong team and and it needed a little bit longer to to really um get to market and so that's when we decided to launch as a studio so yeah fold is its own independent entity now um keep and tbtc have their own team we actually have another project called saddle which launched in january as well and a few more that will be launching hopefully i'll share with you guys later this quarter so cool um tell us about keep what does uh keep set out to do the basic idea um because i came from bitcoin when i started playing with ethereum stuff i i was surprised by a lot of things so you'll hear like i get all up in arms about things that i think a lot of ethereum developers consider um basic i'm surprised by but

one of the ones when i first got that got into just solidity dev was like where does all the private data go and you know obviously i understood how the chain worked but i just thought um with my own background that there would sort of be a lot of options for developers who wanted to keep data off chain and then interact and um the reason i thought that is because there's a lot of cryptographic tricks to do that right so we have all sorts of provable mechanisms where you can keep data off-chain and so i went after the problem using multi-party computation and the idea was that if you wanted to keep say your social and you actually wanted that to be tied to some on-chain information but obviously you don't want to put your

social security number or another personally identifying piece of information directly on ethereum you could use this tech and if you kind of think of mpc as like a generalized shamir split so like you know choose a computation and now imagine you could do it over a threshold of parties and that's the basic idea behind multi-party computation so anyway we dug in we started working on this we launched a random beacon we beat eth2 actually we launched a random beacon on each one um that's bls based and then we started saying okay like we have this very general purpose technique and at this point we're in like end of 2018 early 2019 we're wondering like where are all the developers and one of the things that became clear to me is like

if you went from javascript to solidity you probably don't even understand the problem we're trying to solve right and so instead of attracting devs we said well let's build it ourselves so the first application built on top of keep is tbtc and the idea is that the private information that you're trying to custody is a bitcoin key pair and um that you're using mpc instead of the usual bitcoin multisig to actually custody of coins what the keep network does for tbtc in a nutshell is that it gives you a trustless representation of bitcoin on ethereum right i'd say what keep does is this the

decentralized custody component so like tbtc still needs spv proofs and kind of some other cross-chain stuff to actually like make the experience for users reasonable but the part where you need a whole bunch of key material that's not on the ethereum chain absolutely that's key we'll go into how that works in a bit tell us why you would want that first why you would want to have wrap bitcoin on ethereum i mean everyone has their own reasons but for me i went to buy a house and so i have two kids and when we hit kid 2 we realized we should probably leave california it's a little too it was before that became super trendy right it's just a little too hard to do the bay area with

two kids so we went back to atlanta and when i went to buy a house i um you know i kind of looked at our finances and i said well you know most of our personal wealth is crypto so i'm sure we'll find a lender right who who will accept it so this was um 2018 2019 so this was kind of before blockfi had become what it has now so i wasn't immediately gonna say oh retail lender let's go to block five like a lot of people would today so i talked to um some local mortgage lenders and my favorite conversation was was the one where they said oh yeah no we we love bitcoin and it's so great that you're involved sell your bitcoin come back to us in 30 days we'll pretend like we didn't have

this conversation and we'll lend to you and uh i don't know that really bugged me right like the whole reason i'm interested in bitcoin the whole reason i got involved was to avoid in my case paypal and centralized payment processors but really the entire like why am i talking to anyone if i'm good for it if i'm good for this mortgage why do i have to talk to anyone to get permission and that really kind of bugged me so what got me into tbdc was really that i wanted to use my bitcoin as collateral to buy a house and since then like this was all before d5 summer right so since then the use cases have exploded and i think that in a lot of ways collateral is king

and uh so people talk on the bitcoin side people say bitcoin is super liquid well it's super liquid if you make it super liquid right it's super liquid if you hook it up to everything else so that's that's kind of what we're trying to do with uh tbtc there's a bunch of different ways of getting bitcoin to ethereum right so basically there's um different trustless alternatives like run btc but then there's also trusted alternatives like rap bitcoin that's backed by like consortium of coinbase and bitgo and others right so why do you think the trustless route is interesting and necessary that's like a two-part question like why do i think it's interesting

and what's my evidence that the market cares because if i found anything in this space it's like just because something is um interesting or even ideologically satisfying doesn't necessarily mean the market will will care about it why i think it's interesting is i don't want to ask permission by the way i'm going to sound super negative about wbtc but i actually i think what they've done for the space has been great so just there's the preface but if i use something like wbtc and i say okay i'm going to put my bitcoin down as collateral let's say i'm i'm finished with that and i go to withdraw wbtc can block my withdrawal back to bitcoin and it's actually it's good marketing that you think it's a consortium

but it is just bitco bitco is the sole uh custodian so even though there's a there's this idea of like a community multisig and and they have partners who have come in only people holding the bitcoin ultimately are bitco so look i don't think that bitco tomorrow is going to target matt luongo but i think bitco tomorrow might target anyone who's been in a particular jurisdiction that threatens their business and you know i don't blame them for it they're a regulated business but that does mean that i'm pretty uncomfortable putting you know most of my personal wealth in a system like that let's maybe turn the question around then what are some of the caveats or to using a trustless system as opposed

to using something like rap bitcoin let's say rap get bitcoin was you know had better multi-sig and maybe a better uh key yeah like still man rap bitcoin sure right yeah so some downsides to so first it's hard to call anything trustless right so the way that the bitcoin l1 works it was not built for interoperability with other chance there were not other chance to interoperate with uh when when the bulk that was designed so when you look at bitcoins all one you realize it's very easy to prove what's happening on bitcoin's l1 to other chains but it's very difficult to prove what's happening on other chains to bitcoins l1 most of the op codes and script that you would need for that there's a there's a whole slew of different ways to do it but most of them

are politically unsavory it's kind of the same uh why aren't there more trust minimized side chains on bitcoin and it's well because we as a community of bitcoiners haven't decided that it's worth the risk to the l1 um to actually make the change so if you look into the history of things like drive chain and and some of paul strork's work you'll see um kind of goes right to the the debate on the bitcoin side um but that means that anything that claims it's uh trustless or trust minimized that's bringing bitcoin to ethereum has to be making a compromise because there is not a technical way to do this perfectly so in the case of tbtc the tbtc v1 the compromise that we're making is in capital efficiency

so the idea is that okay basically bitcoin cannot validate um ethereum consensus and i don't ever expect that that'll change so what we do instead is we say you know if we want to ensure that your bitcoin is safe and you're and you want to be able to use it from ethereum cell one we ask that each custodian on ethereum's l1 put down ether and then basically there are fraud proofs where if you go to withdraw your bitcoin from tbtc back to your keys or back to bitcoins l1 and you don't get your money back you can prove it and then you get the backing collateral in ether it's sort of the best you can do right like i wish we could say we could do better than that uh

it would be fantastic if we could say well no uh like you know the bitcoin chain will somehow slash these people and you'll get your money back that's just outside of the technology today you know most people book flights on travel aggregators to get more options and the best prices for the travel plans so when you're making defy swaps use pair swap it beats market prices across all major decks and thanks to their network of professional market makers you'll get zero slippage on your trades they just pushed a huge update that's even faster and more liquid thanks to a brand new algorithm it's cheaper than unit swap and it comes with a new gas token that cuts your gas fees by up to fifty percent snow wonder metamask argent and monolith all rely on the

paraswap api so give parasaw a try at pairswap.io epicenter this url allows you to claim a 50 refund on gas fees for your first swap of at least one eth this offer is available until may 1st 2021 and refunds will be made every friday starting april 9th we'd like to thank paris swap for their support of epicenter maybe let's go into a little bit more detail here just to make this more um tangible so basically say i have bitcoin and i want them to have them on the ethereum chain so basically i want to turn them into tbtc how would i go about that yeah so today um what you would do is you would let the ethereum train know so uh you just sort of say hey i want to

ment uh 10 tbtc for example i guess that number sounds bigger and bigger it used to be a perfectly reasonable demo number but we'll stick with that so you say look i want to meant 10 tbtc and so on the ethereum side what happens is a random beacon chooses three custodians they come together and they set up a three of three threshold ecdsa setup which is kind of like a somewhat fancier bitcoin multisig and they say okay cool here's this three of three here's the address and we have required eth from each of these three custodians that is worth i believe the current governance says 200 of the bitcoin they're going to put down and once that happens you say fantastic i'm going to send my

bitcoin and then you send a with your bitcoin you send it proof uh once you've got enough work so once you've hit around six confirmations and that proof goes to the ethereum chain and it says look i sent bitcoin i sent it where you told me to give me my tbtc there are a lot of other little options and fiddly things you can do at this point but most people just take their tbtc and and are sort of free to use it in d5 or wherever and then whenever they like they can turn that tv dc in either for their exact same utxo that they put in in the first place or some other bitcoin that'll come out the other side it's a bearer asset right the tbtc so basically if i give it to someone else they can redeem the bitcoin on the other side so by just

specifying a payout address that the three trusted uh community members send the bitcoin to that's right and and to be clear those that three of three is chosen from currently we have 200 separate stakers and we're working on 10xing that number what's the benefit of being a staker so what's in it for them you earn fees right so obviously there's a bunch of economic activity that bitcoins would love to take advantage of on ethereum right now um and you know it's not just 2017's latest shitcoin it's also um you know let's let's lend and take btc positions and and kind of do some pretty complicated um financial maneuvering so uh some of your

bitcoin over has value now right now tbtcps are cranked all the way down by governance and instead stakers are earning primarily a subsidy in the backing work token keep and the idea is that 3-bit fee right now can be cranked up to between 30 and 60 bips and start to really generate some revenue and there's another thing that i was interested about in the mechanics of how it actually works so as i understand there's actually two separate tokens so there's the fungible erc20 tbtc token but then there's also a non-fungible token the i mean it's an erc 721 and it's called tdt so what's that and what do i do with them the tdt token

so most people don't know they exist and do nothing with them frankly so but some very fancy users do some kind of cool stuff so the idea is that when you deposit your bitcoin you're actually getting this non-fungible bearer asset for your particular deposit and um if you want you can turn that in for fungible tbtc and it'll be minted but if there's a reason that you want to hold on to your particular utxo and make sure that you can redeem just that one then you hold on to that nft and and you can trade it you can loan against it so there's a lot of interesting things depending on your belief around all of the taxes of this situation where um some people really want to say no no i never disposed in fact this is the exact

same uh bitcoin like you know with air quotes that i put in right but then there's also some really kind of advanced interop stuff you can do where when you get utxo level control you can you can really get wild but what we've seen since tbtc v1 launching is you know a few of us take advantage of that sort of stuff but the actual infrastructure for nfts on ethereum right now is very much focused on like dancing cats and not really on the financial use cases that we've been considering so for example discussing nfts with maker it's been for a long time they've talked about bringing in nfts into uh into basically the collateral class that maker accepts uh for loans but at the end of the day

they have to have a price fee and who's going to provide that price feed so even though we love the utxo nft idea and i personally play with it a lot most users have just found that it's it doesn't really mesh with the rest of ethereum yet you can just pretend that you would never lev you basically you've always retained control of your bitcoin so no taxable event has happened yeah that's the idea that's the idea is um if you're taking a loan directly against a particular utxo i mean a lot of people would take that argument at all moving bitcoin into tbtc you'd say well i'm rapping and so i haven't disposed i'm not an accountant you know but uh it's obviously it's a really complicated topic

yeah i think also like depends on the jurisdiction and where taxable events occur very much yeah germany does not screw around with any of this stuff the us is a little bit more flexible around some of it in france for instance like a crypto crypto is not a taxable event that sounds nice in the documentation i was reading that was 150 collateral and you mentioned like 200 collateral and i believe that is one of the parameters that where you current like where the team currently has control over not the team anymore it's been given over to a five of it community multisig um that was community elected eventually i expect that i'll get replaced by dow okay yeah we can maybe talk a little bit more about those parameters and which one of those parameters are uh or

maybe given authority over by dao but um why 150 why 200 percent like who who decides this number and why is it relevant no it's a great question so um there's a short term and a long-term answer here which is what how do you feel about the efbtc price and i think you know everyone kind of has a different uh different thought like oh wow eat this underperforming or oh no this is where it should be and you know there's lots of discussion to be had but when you build a system like this we're asking stakers to do and what we're guaranteeing to users that we do is that stakers have to hold your bitcoin and they have to give it back to you when you ask and the only way that we can guarantee that is by holding stakers ether in escrow now if the value

of their ether goes down too much it can't possibly safely back bitcoin anymore so a key part of tbtc v1 is this price feed which is a maker price feed and i'd probably say this is the most centralized part of tbtc v1 there's this maker price feed that that gives us the btc price and what it says is if btc drops too far some of these particular deposits might have to be liquidated and there's a there's a time window where stakers can return funds and can avoid any negative liquidation stuff but it's pretty unfortunate frankly because i'm a sticker myself and it sucks to actually enter into this like kind of awkward btc position where on the one hand

maybe you're backing tbtc because you're a bitcoin bull but on the other hand you're getting punished um if bitcoin does too well relative to ether and so there's there's kind of this option that you're opening up and so what the community has decided to do while we add a little bit more tooling is they've actually increased that 150 starting collateral to 200 percent which is very high and they've done that because a lot of the stickers are just tired they're tired of managing an ethbtc position so we have kind of an upgrade mechanism so tbtc v1 is absolutely immutable to the point where um we're constantly struggling with our past selves at that decision it was uh it's it's difficult to work with sometimes ideologically satisfying but

difficult so what we've done is we've started looking at how can we make this easier on stakers basically we're bringing outside capital into a system called coverage pools to actually allow that collateral ratio to go a lot lower but until then the communities decided let's keep it at 200 let's get coverage pulls out and then we can drop it to more like 130. what do coverage pools perform here yeah so the basic idea is they're they're a backstop so right now if you go into liquidation as a staker so as a user this is what's interesting as usual none of this matters to you you just kind of like float along and you have this great experience but that's kind of on the backs of these stickers right and

they're the labor in this particular system so what the coverage pool does is if you go into liquidation basically the coverage pool will always be the buyer of last resort and will always act as a backstop for auctions so you can just put a whole bunch of collateral in it but what's great is that it's a it's a fund that's socialized across all these deposits so instead of acting asking a particular uh staker to put down more and more and more ether you can say okay well there's a there's a whole passive bunch of capitalists who are going to put down capital and back your deposits and then they're going to earn fees on that so it's an insurance it's insurance it's a it's a backstop there's a lot of different ways to look at it but yeah so the idea is

like it allows passive capital to be passive and active capital not have to put down quite so much and manage quite so uh tightly okay and these coverage pools are are sort of separate from the system they've kind of come up organically as a way to mitigate for this funny that you say organic because i'm like well it's not organic we're we're writing it but actually yes people have basically built their own in-house coverage pools so like staking services and whatnot are already having to do this and having to manage these collateral ratios in a socialized way because it's more capital efficient and so we're launching a way to do that on-chain where anyone can participate rather than working with a particular staking provider let's get to our sponsor solana now this

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and basically incur the opportunity costs that come with that right so basically is there a plan of alleviating that burden on stakers is there ever yeah so when we first designed the system there wasn't a lot of yield to be had on eth and now i mean it's still one of the lower yielding assets in d5 but now you know people are talking about 20 20 to 100 everywhere and it's crazy to have to compete with returns like that and so it's really important to us that we find a way to really minimize the use of additional collateral outside bitcoin so there are a few ways to do that there's um you know if you look at the space today one there's just like sort of the yolo trusted way

so if you look at uh liquid for example by block stream you say look you guys know us we're good guys you know don't worry about it you can sue us if something goes wrong and there's this rough consortium if you look at something like wbtc it's it's both better and worse like on the one hand uh it's worse because it's just bitco as a custodian versus uh these i believe it's uh 15 in liquid but on the flip side it's bitco and they're professional custodians so there's some comfort you can get to that so one is just this like trusted like yolo everything will be fine and it's where you kind of have given up on a technical solution a little bit another way to go after it would be to say something like well we're still decentralized but instead of requiring people to put down

capital we'll require them to use say trusted hardware i mean if you talk to a cryptographer trusted hardware it's kind of a joke in the sense that you've you've given up you've given up on cryptography and you're instead going to rely on someone else's supply chain being strong so it's kind of like if we assumed well instead of using shaw and bitcoin let's just have everyone use a super super secret hardware that has an attestation key and we'll just trust that that key is good so it's really disappointing to me as a system designer to see when people when people go that route so there are two approaches that can improve capital efficiency both of which are pretty distasteful so another way to do it uh which leans a

little bit more into the math is to say there's also the d5 way which i'll touch at the end but you can also say okay well if you have enough people so a thousand two thousand people and you make your wallets large enough you can start to see that okay well how many people have to be malicious for this bitcoin to actually be at risk if you're going to custody it there's a reason we launched tbtc we won first with eth and it was really to like steel man this entire idea of putting bitcoin on ethereum in the first place but if you really want to get capital efficiency you have to remove the ether and if you want to remove the ether and you want to do that without falling back on a small consortium or trusted hardware you have to make all the other numbers

go up so our plan for tbtc v2 which will be a separate token as i said v1 is immutable we don't have any like cool upgrade buttons or anything is that uh we'll be picking from over 2 000 nodes each wallet will be 100 plus signers i expect it'll probably land somewhere between 55 and 75 um of 100 signers required to move your bitcoin and the idea is okay what percent of stakers do we think are malicious and if we believe that the number is less than a majority then we can remove the additional collateral and instead move to an explicit insurance mechanism in case something goes wrong which is you'll notice the coverage pool that's the piece that we're taking from v1 and also using mv2

it's pretty out there it makes us it makes many of us uncomfortable right like if you do the math and you say and i'm just gonna like throw it out in case anyone wants to wiki real quick for every wallet that you open the chance of picking a malicious wallet it basically follows the hypergeometric distribution so you say okay if two thirds that i'm picking from are honest and i'm now picking a wallet and you know 60 of 100 needs to be honest um what's the likelihood and it turns out that if you do that 52 times a year the likelihood of getting a malicious wallet is vanishingly small i would be uncomfortable saying all the zeros on this podcast if you lower it to 51 of 100 the likelihood is 0.04 that that would happen in a given year

so i think you know you start leading into the probability you say okay how can i make sure that we have as many honest players as possible and then how can i make sure that we require as many signers as possible and suddenly it's a tech problem networking networking networking and pure cryptography and you can get the numbers to do what you want at least that's the hope the v2 will no longer be so capital intensive but will therefore rely more on implicit insurance what's that transition going to look like is going to be sort of like hardcoded into the v2 or is it something that is where the construction of the v2 allows for that to eventually like transition to happen so with v1 we went governance minimized because frankly for

me governance is an attack surface i wish that i were more progressive on this because it'd make my life easier but the idea is that v1 will sort of continue running as long as people want to use it and so v2 is going to exist not in a vacuum but with v1 next to it we're launching this coverage pool in v1 and part of the reason that we're doing that obviously is to backstop v1 but the other reason is we're building up tvl so we can apply it to v2 so as v2 launches there will be a governing body that can basically say okay how much insurance do we have is it 40 is it 10 is it 1 what are we comfortable with relative to the stakers that we have and then it can actually divert fees from stakers to insurance and back and

forth until it finds a balance that it's happy with matt are you familiar with um the arguments surrounding dark taos and vote buying and so on because i feel like this would be applicable here yeah very familiar so actually zooming back way back to talking about keep one of the things that you find in in multi-party computation is that every single npc setup that you ever use has a corresponding dark dial that can break it 100 and you hit this point where this problem is intractable if you believe like this problem is mathematically intractable there will always be a dark dial that can break it and in practice like that hasn't happened right so um i

expect we'll get there eventually and we'll get really fancy and the numbers will have to get pushed higher and higher and higher okay now it takes a thousand signers are there a thousand and and and this is kind of where the uh the keep token gets involved right so we need a civil resistance mechanism and if you have a work token and the work token there's only so much of it to go around and there's a min stake you have this built-in civil resistance and so if it takes a thousand min stakes for a dark dow to attack the system you know you start doing some math and it's like oh it cost you 60 million dollars to do this so it starts to become more and more difficult but there will always be a cryptographic way to break

an honesty threshold i find it super interesting to talk about this i mean not because i want it to happen but just because you know it's really fascinating yeah it's fascinating this is the sort of stuff that really kept me up at night especially with a lot of our v1 work with keep and i what i've realized is that um you can take advantage of the fact that what all of us sort of like sickly want as cypherpunks to see happen you can sort of take advantage of the fact that the delta between kind of this apocalypse that we all kind of want to see and then like reality is is not zero right and whatever that delta is that's what the system has to take advantage of so um that was a pretty big mindset shift for me

i think some people are gonna see this new design and they're gonna be like oh matt trust people now it's like i don't i don't at all what i trust is that a whole bunch of people are sort of just like disinterested participants like most people are not actively looking for the best way to destroy a system now if you make it really really really easy for them they might click yes but they're not going to design a novel dark dial and so that's kind of the balance that we're trying to strike with this system design is as long as there are lovers governance can actually respond to any dark dow situation and the way that they do it this gets really gross but i'll say it out loud the way that they do it is they say okay well if we assume that two-thirds

was honest at the beginning as more and more stakers come online we can actually increase these thresholds higher and higher and higher now the system's liveness will suffer but the trade-off is that like if there's a whole slew of new nodes coming in and you suspect that they're all part of you know an attacking force you can actually have some resilience but if enough people with enough money want to break it like that's the case with tbtc v2 or v1 right and it's just this scale of money that you put in it's scary and uh also really exciting let's get to our sponsor exodus exodus is a fantastic cryptocurrency wallet that strikes the right balance between ease of use security and great features

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hundred dollars worth of crypto through their ios app and pay just one dollar in fee so go to exodus.com epicenter and check out their wallet we want to thank exodus for their amazing support of app center so keep network is merging with new cipher can you talk about this what's the rationale behind this and how will it improve the system as a whole this is weird because i don't think this has been done before if we were to look at um two chains rather than two projects on ethereum this kind of looks like a hard double spoon you're taking state from these two projects and you're trying to shove it into one new project

it's an opt-in so it's not it's not a hard fork in the sense that you're not forced to do anything and you're not going to lose money if you don't but probably you want to be on the new system rather than the old over the long term because that's where most of the people and integrations are going to happen but here's the idea new cipher is another threshold cryptography project that we have gone back and forth between competing with and collaborating with over the years and they're great cryptographers and they're attacking a pretty different use case um they're really focused on just straight up um being able to actually move files privately the tech they use is called proxy re-encryption and behind the scenes some of our um community members pointed out to both of us that the new

cypher team was considering like maybe they would do a bitcoin pack they were kind of experimenting and so they got us on a call and we started talking about our roadmaps and the roadmaps just looked remarkably similar and so the idea here was why rewrite each other's work when we can just combine into one network so we proposed this to the community and this was uh actually suspect like i'm like uncomfortable to even say this there was a unanimous vote from both groups of stakers to merge so i believe that was two or three hundred thirty stakers across both we have way fewer stickers than they do they have around 2 200 and we have around 200. but yeah so the community is really about it

but the the actual difficulty of course are the details so um the community likes the idea of merging yeah how does it work please explain i mean the everyone's favorite question is is there a new token and it's like probably there will probably end up being a new token but first like how do the networks even do anything together so we've started a spec for a shared staking contract where stakers on either side can opt in to this new network which is codenamed kianu because i swear to god we are not going to stick with that name forever definitely code name but this new network you can stick keep or you can stake new cipher and then you'll be able to participate and actually run tbtc v2 and earn fees from it so the idea is that that is a 50 50 stake weight split

so half of the work will go to the keep network and half of the work will go to new cipher what the new network benefits from here is if we were just doing this on keep we only have 200 stakers and getting to a thousand or 2 000 is a pretty heavy lift it's hard to get a whole bunch of new stakers fairly technically involved on new cypher's side they have 2 000 stakers so they've got better distribution on the staking side and we have better distribution on the app side so we're trying to do is take both those things and put them together and say okay like this is basically the the best outcome that we could get for tbtc v2 which was a ton of economically independent stakers both sides are going to have to give up half of the pie as far as fees

but the idea is that we think that by putting networks together we'll make more in the long run and what about the teams oh yeah we're definitely staying independent this isn't like uh the companies are not involved in fact we do not have a single signed piece of paperwork um between any participants as far as i know unless someone's done something i haven't been involved with so you'll both be contributing to the code as independent teams so is it like a dow merger yeah it basically so the expectation is that there will be a new dow on this new network and uh it's a dow merger where one side only has a community multi-sig the other side has a dao and technically this is the funny thing neither community needs to agree

like if both communities said they didn't want to do this any developer could put this together so what's interesting is like we're kind of exploring the the social consensus aspect here where neither team wanted to build it if the community wasn't behind it but no one can stop us from writing code we want to write weird space maybe just stepping back a little bit so keep network like currently like the i guess the only sort of killer app on keep network is tbtc i'm not super familiar what's going on on the new cypher side uh but what other types of applications will this sort of like merger allow to emerge and what things are you anticipating to come about on this keanu network you know post merger

so a lot of our original plans for keep are also already things that new cypher is starting to work on so what new cypher can do today you can do decentralized key management you can do um a sort of uh file sharing and file marketplaces i know at least one project called masterfile is working on an nft basically the idea is you can buy the nft and then there's actually an offline master file that you can also get access to if you're the nft holder so what this will eventually let us do is actually open up the network to all threshold cryptography so right now keep does bls which is the random beacon and ecdsa for tbtc a new cipher does pre proxy re-encryption

what we'd like to do is rsa bls on different curves sort of like the you know aes and des the whole gamut of symmetric and isometric crypto but threshold uh we have the infrastructure and i think if we can bring all of us together we should be able to ship the thing but what's funny about that is you know it's not an obvious killer app you're still waiting right so is the killer app going to be um encrypted files on filecoin where we've got all of the interop components and we have the file encryption component our dao is going to start you know sending around secret files i don't know it's going to be interesting but i do know that uh right now there's a really clear interop use case and so like let's run with it how strong

do you think the network effect is here i mean if there's a killer use case how easy would it be to just copy it i mean your technology i mean this is like right at the heart of uh a lot of the debates i think we're seeing crop up right now around licensing and stuff where uniswap for example just announced v3 and it doesn't actually become a free and open source license for two years and until then it's a business license so dealing with this a couple different ways one brand becomes much more important like where everything is open source and this is kind of backwards but brandon trusts become much more important in a trustless world you know like um the brand of bitcoin for example is

the strongest brand in the space and that's why something like bitcoin cash is such an affront right is you can't dilute um bitcoin the brand so for us i can speak to maybe five or six different chains that are in active discussions about porting tbtc over to the chain and most of them would much prefer to just work with us and kind of keep one set of custodians across these chains rather than splinter but yeah i mean anyone can copy anything and i gotta say like if you can do it it's good for the market it's good for consumers to see all of these choices pop up um but i think that as a consumer you have to be really

the hard thing is just figuring out like is this legitimate we recently had another token with the name tbtc pop-up on uh binance smart chain it is not associated with us but i'm currently stuck doing support for it in our discord i guess and uh and so yes this sort of stuff happens um because you know we're not all using trademarks against each other we're all in different jurisdictions and and we're all just sort of falling back to the chain so yeah if you if you want to be the sushi swap of tbtc i welcome you please do maybe push your stuff upstream too if you fix any bugs and uh but ultimately i think that the team that moves the fastest and gives the market what they want they're gonna win i want to bring this

conversation back to the broader context of defy i want to ask you what you think is the interplay between btc on ethereum and some of the projects that have aimed to bring defy to bitcoin so we've had stacks on the show uh recently we're releasing an episode with um with rsk uh soon is there any interplay there and if so what is it because i'm not i'm not necessarily seeing it i have a lot of respect for folks who are sort of trying to be bitcoin native i think the label is maybe wrong but a lot of them want it to be the label because you want to be you want to be like satoshi's son or

whatever you want to be like the blessed you know so um but when you look at for example something like rsk they are following a similar or or worse security model to what we're following today with ethereum what's interesting to me though about rsk is that the mindset is a bitcoin mindset and i think that that's really important so even though the tech stack is both similar and different rate so they have an evm fork that part is very similar but the way that it is secured is different yeah they rely on hardware to some extent yeah and and to be clear i'm like for me that's anathema like if you rely on trusted hardware i kind of feel like you've built a

castle on sand a lot of people use it as a step toward like a more robust solution which i'm sympathetic to especially since we arrogantly launched an immutable project uh thinking everything would be fine actually it's really hard so i understand people who are doing this a step in the middle but i would say like rsk stacks we're all working together i've talked to both those teams about um like literally about bringing tbtc to both rsk and stacks but i don't really think that's probably maybe that's not really the question like our relationship with tbtc to these sort of like bitcoin native projects is going to be positive because at the end of the day we're all going to be writing code that's very similar even though the underlying layer is different like we have lots of tips that we can share and and mutual respect and

whatnot but i think what's really interesting is will there be users on their chains and i don't claim to know you guys might know i don't know but i think that that's an accurate representation of what's at stake here it's like will rsk or stacks or some of these other chains like bring in a significant amount of users and build you know a d5 ecosystem there i think what i find really interesting there is the potential for those platforms to become areas where innovation can occur that's sort of like natively on bitcoin because like as someone who's been in bitcoin since 2013 like i would really like to see that happen for like the broader ecosystem i'm also perfectly fine with bitcoin funding projects and funding liquidity and infrastructure and

consumer projects on ethereum but there's like there's so much capital in bitcoin that's just sitting there not doing very much and like i don't care what it does i don't care where it happens but as long as it happens somewhere or in places i think that's like a net gain for the ecosystem so like how important do you think bitcoin plays in providing funding and liquidity and like you know for crypto as a whole whether that's like on ethereum or any other chain or on bitcoin i like both sides if this is a side thing both sides don't like me um the best way to get a bunch of bitcoin first technologists mad is to talk about the brain drain that's happened

there are things built in the ethereum space right now that don't have good analogs anymore in the bitcoin space and it's because there are new ideas that are genuinely they genuinely cropped up in a theorem and i know that that sounds obvious like okay people go different places and they come with different ideas but but if you say this to a lot of uh to the technologists who have stayed bitcoin only makes them pretty mad because they'll be like no no no this zk roll up is actually this thing we talked about on bitcoin talk in 2013 and it's just a repackage well no no it's actually not it's genuinely a new thing and so as far as where users go and where innovation happens there is a serious catching up where if you are trying to be a bitcoin native technology which really means if you are

trying to not build on ethereum with bitcoin you have to find a way uh to catch up and it's not just devmindshare because there are a lot of there's plenty of dumb devs you know it's not just like are there developers here but it's also like is the new stuff happening and and how do we catch up our ecosystem that's that is the hurdle that for example stacks is going to run against or or any anyone even even someone like tesla's who's not bitcoin native they've run into how can we possibly get over this mode of the ecosystem but setting aside the mode for a second i want bitcoin to remain the collateral in the space i want bitcoin to remain the collateral in the world and so for me i think that there's always going to be an argument on something like ethereum

for the native asset and that pisses me off because i don't like the native asset i it doesn't follow it's not because i'm like you should've just used bitcoin i'm not one of those people who's frustrated that someone launched their own asset it bothers me because what i like about bitcoin is the certainty you know and it's the the certainty of the emissions schedule it's it's the the certainty that even if the tech breaks the social consensus is stripped so strong that it will get back on track and so um i'm told things like uh ethics ultrasound money and i'm like well that's not what it was last year so clearly it's not you can't both tell me that this is our new meme and also tell me that this new meme means that we're never going to change because

you just anyway so i think for me what i want to do is i want to make sure that we can bitcoin get bitcoin as close to a native asset on these other chains as possible so that it's not constantly at a disadvantage relative to the native asset because i think the strength of bitcoin is is the certainty and that's what i want for my life savings you know like okay maybe if i'm like aping into the next thing in d5 that's not what i want but if i want collateral that's going to back my house or kind of like longer term longer term wealth then i'd rather be bitcoin so i guess all that to say it's gonna be bitcoin we're gonna make sure it is so matt how do you see the long-term security guarantees of bitcoin then

oh yeah let's do it yeah so so i'm i'm one of those people who's like yeah it might not work so to to catch up like listeners with this particular debate and i got in a lot of trouble uh with bitcoin friends for saying out loud that maybe we would need to eventually have a tail a mission there's a security idea where there's a security budget right um and this is mostly an ethereum idea but the budget is um how much are you paying the people who are securing the network and in bitcoin you're paying people who secure the network through a block subsidy notice we often it's called a reward but in this context you want to call it a subsidy and you're also paying them through transaction fees so as time goes on and the block reward goes down

the idea is that transaction fees have to go up it is core to the design to continue to maintain security of the chain but what's interesting about that is there's actually some assumptions in there that we need to maintain the security of the chain so once you've hit a certain point in bitcoin where maybe if let's say transaction fees aren't high enough to cover security that doesn't make the security of past transactions less it means the security of future transactions is less yeah yeah that's true right again not for you guys but for everyone else right so if that's the case like you get to this point where people theorize well maybe there will not be enough mining power backing bitcoin anymore to actually securely transact

and it won't be six confirmations it'll be 300 confirmations if you ever want to move money on bitcoin and so now what you have is you have a system that can't clear the amount that bitcoin can clear safely and quickly today however the supply guarantees have been maintained which i think is really an interesting idea so i am not saying this will happen um a lot of people will take the counter and they'll say well actually and sometimes they won't even tell you how much but they'll basically claim that bitcoin will go up so much that it doesn't matter which that might be true or there's going to be so much demand for block space regardless that it won't matter also might be true i don't know but for me i do know that in the in the bad security case or in the good security

case my existing bitcoin is still really strong collateral which i think is interesting like i don't need the bitcoin l1 to be the best settlement network to still get the same collateral requirements out of my bitcoin so i'm happy if this happens on another network and bitcoin is just the thing that that we hold i'm perfectly happy with all that now obviously there's going to be a counter which is like do you really think bitcoin is going to hold its value if the network stops working yes because we saw that happen we've seen that happen multiple times every time there's a fee event that we weren't prepared for has bitcoin gone down no that's not been the thing so far so for me i just i challenge the idea that

that this is ultimately going to impact police yeah but that's different because i mean we're talking about specific events that are like constrained in time but if the long-term prognosis is that like bitcoin is no longer a settlement layer i think that's a fairly different like yeah i agree with all of what you're saying here but i think that it's not so obvious that bitcoin would continue to be valuable for me i didn't think it would continue to be valuable when it wasn't useful for coffee anymore seriously that's why i got in the space originally it took me a long time to understand the story value argument so i guess i'm just saying i don't know how worse is better might continue forever by virtue of all that you're saying that

you could actually see the future of bitcoin in a tokenized form on ethereum instead of as basically you think the the value proposition of bitcoin is the 21 million meme that's basically what it is and it doesn't matter whether it works on the bitcoin blockchain or whether it's actually spooned to anywhere else i'll actually go stronger and say that yeah i believe that the bitcoin blockchain is is a broken vessel but i don't think that that matters uh if the thing inside is precious uh you can get a new vessel so maybe it's a spoon to somewhere else maybe it's a whole group of people coming together and saying okay now that we've seen all of the

altcoiners do all the research for us we are going to switch to this perfect new succinct 22 kilobyte blockchain design there's a lot of ways i could see it going um i do here's one thing though that i will say that the dan heltz of the world won't agree with i do think there will at one point need to be serious action on the bitcoin l1 to address security concerns i think that it might be toward the latter end of my career i do think it's going to be a while but i do think there will eventually need to be um be a strong response personally i don't think that it's just hard spoon into ethereum and the reason is and i say this is an ethereum dip i still don't trust ethereum

i like it a lot and i work with it a lot but i have i have had our nodes get hit by a surprise chain split due to what i believe was a borderline irresponsible decision on the geth side the geth team lead blocked me actually when i when i shared how i really felt uh about the decisions they'd made around that there are still like the chance for significant consensus bugs is not gone i mean it's never gone in a sense but like you know we're moving pretty fast and and this stuff still happens so i don't think that we're going to see a spoon to ethereum tomorrow or anything but i do think that um it's perfectly fine to replace bitcoin's l1 as long as there's continuity and consensus now if that's possible

separate we were talking about this earlier before the show but you kind of touched on it earlier it's like you know it's important to you for bitcoin i think you said it's important for bitcoin to be as close as a first-class asset on other chains as possible like currently you know you need all these kind of technical loopholes to make that happen like tbtc is taking one approach other protocols like ren are taking other approaches but essentially you kind of set it up very well in the beginning is that bitcoin can't validate other chains and bitcoin can't validate transactions on other chains now like suppose in an unlikely event where bitcoin can parse other chains i'm not saying that they can they'll be it would be able to parse like ethereum sbb directly but you were talking earlier about

uh you know zk proofs or something like that then do all these rap bitcoin protocols then become obsolete and then what does that look like really like then how is bitcoin represented out on the chains because i'm not sure i really sort of visualize what that looks like i think i like well i at least said yes or like yes they're all obsolete but it's actually a little bit more complicated right so let's set it up though obviously maybe it's not obvious but knowing the bitcoin devs i i do not expect that a big breaking change that is specific to ethereum would ever be introduced in bitcoins l1 what i thought was really interesting is when zcash launched that was the first alt that i'd ever seen launch where bitcoin devs were like oh that tech is kind of i mean they were still like oh why

didn't you just use bitcoin but at least there was like well you're actually adding something that maybe we could one day think is reasonable in 10 years i think probably the most likely would be adding some sort of more general purpose prover opcode validate a snark etc etc i think that it's good that we don't have it in bitcoin yet because already we've moved from like basic snarks to recursive snarks to all sorts of we're still changing curves and and it's very good none of that's made it into bitcoin but if it did so if bitcoin could now validate other chains and their consensus the question will then become where is the economic activity happening so if people use that to basically create a smart contract expressive roll-up

on bitcoin then it's a race because ethereum and other chains will have had these things happening for years and you have to ask um has the market moved on from using bitcoin as the settlement for those activity versus primarily as the asset so i think the theme we keep seeing is like asset versus tech and i'm very much a bitcoin maximalist around the asset and for the tech i'm like it's in a rough spot if you want to compete on technological innovation that's anathema to the chain so i guess what i'm saying is um it depends i suspect that most economic activity at least at the beginning would be on these other chains in which case the rappers still have a long and fruitful life if the economic activity moves back to just bitcoin's l1

with some sort of really clever um roll-up or roll-up of roll-ups then um it could hurt this chance eventually this was super fascinating unfortunately we're kind of running out of time so if people want to learn more about keep and thesis where should they go look probably the best would be come check out our discord at chat.keep.network we're a lively bunch and uh if you think that if you're mad at anything that i've said today maybe come talk to me there or twitter mhlango on twitter and uh happy to talk to you guys about the future of bitcoin and uh defy cool thank you thanks a lot matt thanks a lot guys thank you for joining us on this week's

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