Charles Hoskinson: Shifting the Blockchain Tradeoff Profile for the Entire Industry

With over two thousand altcoins on the cryptocurrency market, it can be difficult to determine what distinguishes them from each other. As an investor, looking into the teams, technology, product and culture behind each coin is a daunting proposition, although that’s the best way to go about crypto investment. Even among the top 10 coins, some enjoy – or rely on – a certain degree of hype, while others maintain their impressive market caps and continue building their products in relative media obscurity.

Although Cardano is usually one of such “un-hyped” projects, quietly focused on extensive research and dedicated engineering, the platform has been in the spotlight recently. In the past month, Cardano’s community Guardians of Cardano and the two companies working on the platform’s development, IOHK and Emurgo, have published open letters expressing concerns about the governance and operations of the Cardano Foundation.

Charles Hoskinson, CEO of IOHK, the engineering company responsible for building the Cardano Blockchain, sat down with U.Today at the StartEngine Summit in Santa Monica to talk about what happened with the Cardano Foundation, the significance of original research and the main purpose underneath it all – providing access to the global financial market for the billions of people who don’t have it.

Leadership in crypto communities

U.Today (Katya Michaels): In the crypto space, often there is an ideological leader associated with a cryptocurrency – Satoshi Nakamoto, Vitalik Buterin, Charlie Lee, Roger Ver. How do you feel about being the person to fill that role for Cardano, and how do you think this kind of idolatry affects the Blockchain community?

Charles Hoskinson: It can be a good thing if there is proper balance of powers and the people at the top use their influence to move the currency along. When you start something, you’re very small, very fragile and you need to have a lot of consensus to be able to get things where they need to go. As you get larger over time, you lose your ability to influence the ecosystem unilaterally.

There is no greater example than Microsoft. It was a monarchy under a king with absolute power – Bill Gates. Throughout the decades, Gates’s influence waned year by year, and eventually got to a reduced role within the company, until he stepped down from the chairmanship of Microsoft.

Cryptocurrencies are no different. People don’t like complicated systems, they are too hard to understand, so what they do is compress a very complicated ecosystem to a single person or a simple idea. When you get bigger, as happened with Bitcoin and Ethereum, eventually that can lead to conflict, and you end up with things like Bitcoin Cash or Ethereum Classic. It’s the great governance challenge in the space – how do you deal with these big personalities, but at the same not allow them to overcome the ecosystem.

Another thing is – I’m not perfect, no one is. Eventually, you’re going to let people down. If your entire reason to participate in the cryptocurrency is not its philosophy or its utility, but rather your liking of a person, then at some point that person will say or do something that will disappoint you. So, people leave the space for emotional reasons and create volatility in the currency.

Governance challenges

UT: Let’s talk about the open letter and the Cardano Foundation. Despite the precautions taken to avoid governance conflicts, you find yourself in this predicament. Was there a better way to do it, in hindsight?

CH: I think the checks and balances that were put in place are working properly. The whole reason we build redundant systems is that somewhere along the line one of your systems will fail. So, it’s nice to have at least two, and in our case we had three – IOHK, Emurgo and Cardano Foundation.

The issue with the Cardano Foundation is a problem of inaction. For over two years, there were no meaningful investments into community management, into regulatory outreach, into trying to engage the community and build a community-based governance system. We realized that if this trend continued, there was no way to effectively put Blockchain-based governance, the treasury system and the Cardano improvement proposal process in place.

We told the foundation there have to be some material changes, and for 15 months they kept saying “we are going to do something” and it never materialized. It really came to a head when the community as a whole, Guardians of Cardano, decided to publish an open letter. At that point, we thought it wouldn’t be too destructive to the Cardano ecosystem if we also wrote an open letter saying that we’re moving on without them. We have already been paid, Emurgo already has its funds, so we can execute autonomously without them – that was the whole point of checks and balances and the foresight of the way we constructed the system.

Would we have done things differently? We probably would have been more proactive in the initial setup of the foundation if we got a do over. To be fair to us, though, there were four people on the board from the beginning and there was an understanding that it would be replaced gradually over time with a board of seven people and a strong executive director.

The governance crisis got worse because of attrition. The people who were there in the beginning gradually retired and were not replaced, and the people that we thought were going to lead the Foundation were terminated. At IOHK we thought – it’s a big ecosystem, the foundation is not a necessity for the system to be successful, so we’re just going to go ahead and hire our own community managers, our own lobbyists and we’ll do what the foundation was supposed to do.

Resilience through community

UT: In the letter, you place a lot of emphasis on community. How important is community involvement for Blockchain adoption at this point? Does the public really have to care? Can’t they just be plugged in when the technology is ready, as happened with the Internet?

CH: The reason why community is so powerful is that it ultimately gives you a level of resilience that technology can’t. If you take a skin cell, you can replicate its DNA. Structures are resilient if one member of the system can independently go and replicate, rebuilding the entire system, its culture and its technology.

It’s super important that people in the community understand the philosophy behind the structure and how it is accomplished, as well as have the skill set necessary to do their own variant in the event that the system becomes ossified and no longer effective. That means sometimes you can have splits, but that also means that you don’t have the 2008 financial crisis which was brought on by over-centralization and over-optimization around concepts that were wrong.

It is essential to have people understand decentralization, decentralized control, checks and balances, resilient systems, the ability to replicate a system in the event that most of the nodes die. That means you have to educate people, you have to write great documentation, you have to have infographics, podcasts, do AMAs, often do interviews, conferences, debates, and you have to see people face to face and have conversations with them. That’s how they system propagates. It’s what’s allowed Bitcoin to grow from one person to the massive multinational movement that we have.

Rational ignorance and adoption

UT: Even in the community that has adopted cryptocurrency to a certain degree, there seems to be a misbalance in terms of people owning crypto and people running nodes. This technology depends on not just adoption, but active community participation, a new kind of citizenship. How do you mobilize the public to take control of their data, become aware of privacy issues, become a part of the Blockchain fabric?

CH: It’s a very difficult task. You’re never going to get people to read the end user license agreement. You have to understand this concept of rational ignorance – the idea that the cost of acquiring knowledge is more than the value of having that knowledge.

Right now, there is absolutely no incentive for running a node, so most people don’t do that. If the system is resilient, just a small group of motivated people can ensure its survival. There is actually good evidence that cryptocurrencies have that property. Even if 1 percent of the total user base are running nodes, there is still enough nodes that it would be insanely hard to take the network down.

But you can use economic incentives to sculpt consumer behavior – mechanism design – and we have a whole group at IOHK that does nothing but that. Over the next 5-10 years mechanism design will be applied to create monetary incentives for people to run nodes. A great example is the Brave browser. Just by changing from one system to another, the user can make part of the advertising share and have more control over their data and their privacy, and we’ve seen user numbers spike up for Brave as a result.

If that model is successful, we’ll observe a sea change in people’s perceptions about why they should own their data, how to host their own nodes, how to take control of their user experience. Some people are very tightly knit into behavior patterns, but you start with early adopters, you create the incentives in a way that they can find sustainable ways of using the system, and eventually those people onboard their friends and family and that becomes the dominant consumer behavior.

There is a big democratic experiment occurring right now with Blockchain and treasuries. A Blockchain prints money, and right now we give all that money to the consensus nodes. What if have a decentralized bank account and people can submit ballots to get funding? Dash has done this, PIVX has done this, and we are going to do this with Cardano. The value of having a treasury system is that now people have incentives to stay informed and think about what the best direction for the cryptocurrency is. That’s the new economy and the lessons we learn there can be ported to democracy as a whole.

Blockchain pluralism

UT: With regulations coming in, there is a move from the “wild wild west” feeling in the space to a more practical approach. Solutions like going off the chain or regulating token offerings may not reflect the pure ideology of cryptocurrency. Is there a sense in the community that this is a betrayal of Blockchain’s original principles?

CH: No, it’s not a betrayal of the original principles. People tend to take a particular application of a broad concept and say, “this is the only way to do it” like “this is the only true religion.” That’s a really bad deal. You have every right to have a different view – frankly, you should, because you are a sane thinking human being, and sane thinking human beings have the ability to disagree with each other and often do.

Now we have over a thousand altcoins; we have permission ledgers like Hyperledger Fabric. We have a lot of philosophies that are completely contrary to what Bitcoin is all about.

The STO revolution is about saying, “look, there are billions of people in the world who lost the geographic lottery and as a consequence, although they have the ability to create value, they can’t get access to capital.” But that person could issue a token, sell that token and use it to capitalize their idea on US markets.

The problem with ICOs is that they only cover a certain class of unregulated products. So, what happened was everybody contorting themselves in bizarre ways to try to cram regulated ideas into unregulated products.

There is no greater example than EOS. They raised $4 billion dollars and they say we have no fiduciary obligations, we owe you nothing, you could do whatever you want to do, and we could do whatever we want to do with the money. No reasonable person would think that’s ok. The STO makes sure that if you’re actually going to raise money and have fiduciary obligations to people, there’s a regulatory framework what works for both sides.

The reason why people aren’t doing traditional IPOs is that they were built in the 20th century. The regulatory framework is too cumbersome, too expensive, the reporting requirements are too high, and they are divorced from any of this technology that we’ve created over the last eight years. There needs to be a middle ground. There were some good ideas in securities regulations – insider trading provisions, proper disclosures of information, conflict of interest. Those checks and balances are good ideas, but all this bureaucratic, cumbersome mess that comes along with it is a bad idea.

With STOs, we can automate the bureaucracy so that it costs very little but gives access to capital on a global scale. That’s why I think there is so much excitement. ICOs were super exciting last year because people were getting rich, that always happens with a gold rush, but it’s not sustainable. STOs are sustainable because they are backed by real things – revenue flows, gold, stock, bonds. I think that’s a good step in the right direction. It’s philosophically a bit different from Bitcoin and will require different types of systems than Bitcoin, but in no way invalidates the whole notion that decentralization is good.

Shifting the tradeoff profile for the industry

UT: There is a Blockchain triangle of speed, decentralization and security – like the fast, reliable, cheap triangle where you can only choose two. Where does Cardano fall in that tradeoff? Or are you finding a way not to make that tradeoff at all?

CH: The tradeoff profile of any protocol lives within original research. Only original research can move that triangle a little in a direction that will be better at all of those dimensions. You can make it operate at less of a cost, get higher security and better throughput.

What we’ve done over the last three years for Cardano is engage academia and use an almost Dartmouth-sized research budget to move the tradeoff profile. First, we defined what exactly we are doing – what is a Blockchain, what is a network, what is a transaction, what is a programming language with respect to cryptocurrencies. Then, once we’ve defined them in a very rigorous way, we wrote a lot of papers.

The first step was saying, can proof of work and proof of stake ever have the same security model, or are they so different that you’d give up something when you go to proof of stake? What we discovered with our research is that proof of stake achieves the same security as proof of work. What does that mean? You can do everything proof of work does, but you don’t have to pay the electricity cost. That’s a huge tradeoff enhancement and we’ve been able to do that.

In terms of scalability, instead of it being a replicated system where everybody does the same work, make it a distributed system where the work is broken up among people. What’s the tradeoff of that? It’s availability. When you go from a single replicated notion to a group of people doing something, there’s always a possibility that one of your shards doesn’t show up and that basket of work is missing. But there are things you can do – like erasure codes – to chop it up in just the right way to make that tradeoff go down. There is a lot of great research trying to model this – RapidChain by Visa Research and Dfinity, what we’re doing with Ouroboros Hydra, OmniLedger, ELASTICO.

At IOHK, instead of taking a position on the matter, we said let’s have a dense research agenda. We will study how to do things off chain and on chain, and study how to shard the chain and be very neutral about different possibilities, and then look at which one will have the best tradeoff profile for what we want to accomplish. If it lives within the amount of decentralization that we want to have and the speed we want to have, then that’s the way we’re going to go and that’s what we’ve done so far.

It’s very expensive and time consuming, millions of dollars and 3 years, but we’ve published over 21 papers and I think we have another dozen that are in peer review at the moment. We’ve been moving the science of the entire field along, and we’ve seen a lot of people cite our papers. Real researchers, real conferences, real scientists are now all collectively working on this. Compared to where we are today and where we were 5 years ago, the tradeoff profile has been moved substantially, so we can do these things better and not give up as much.