BBW25 - Day 3 - Next Generation Protocols: Balancing Privacy, Performance & Interoperability

Thanks team that was great. Okay, moving right along. We have a panel on next generation protocols balancing privacy performance and interoperability. Uh on this panel will be Robert Hirsch who is a co-founder and CEO of Zkalix, Helen Sharon the CTO of Selfiant, Andrew Stone the lead developer with Nexa, Will Walrip the director of product management with Avacloud and this panel will be led by Sergey Kusnov who is the managing director of Gain Ventures. Please join me in welcoming them to the stage.

[Applause] There's two of us.

What's your name?

Hey,

sit here. You want to be in the middle?

It's okay.

Andrew.

Yeah. Nice to meet you, Andrew.

Testing.

Hello.

Does this work?

That's an old picture.

You talking about mine?

No. Fine.

Is the mic on? Yeah.

Yes, everything is on. Um, hello and welcome to the next generation protocol panel and today we have a really star panel representing all the different debates on what's the next generation should be. And I I was really excited when we were preparing for this panel and I realized we need one more voice to make it super provecutive and um maybe even um so dynamic that we would uh never leave this place and we'll just debate till the end of the blockchain week. Um and that's uh uh Robert, one of my portfolio companies. Um and yeah, we have Helen with 30 years in banking experience.

We have Andrew from from UMass. He's a professor there uh and early developer on the um blockchain protocol and will from from Avalabs that made really great uh projects recently with the institution but before we dive into it like next generation protocol what's wrong with the previous generation right why do we need the next generation so Helen would you take us on a little history right about the history of protocols.

Sure, I'd be happy to do that. You said 30 years, right? 30 years in financial technologies. Um, which is true. So, I started at State Street Bank just up the road um yeah 30 years ago and uh was working with our clients bringing trades onto the accounting system at State Street and trying to get them to adopt standards called Zitzy or Swift standards.

Um, fast forward to my most recent uh part of my journey which was at Bank of New York Melon and I was doing the same thing. I was taking in Excel spreadsheets and trying to get them into our accounting system and you you take a look at an adoption across something like that and you wonder well can we possibly do that better and the answer to that is yes. uh if I could talk a little bit about the interoperability and the history of that as well.

We'll we'll have questions about that but yeah you can mention a little bit about interoperability.

So so that's a little bit of yes. Well I guess the statement that I just make now is that um the reason why we need interoperability at this moment is because blockchains are multiplying and when it was just Bitcoin we didn't need it. So, all right. Thank you.

All right. So, a follow-up question. Andrew, you were at the center of Bitcoin scaling problem. Uh, can you say what did the early protocols get right and what did they get wrong?

I think that's it's a very interesting question because if you look at the history of Bitcoin, uh, little little tighter. Okay. Um if you look at the his early history of Bitcoin um the originator Satoshi had like this huge vision and uh there were a lot of security flaws and exploits uh none of which in that early times were really taken advantage of but the end result was like a clamping down of the protocol uh and then of course Ethereum came and said no we're going to realize this sort of smart contract vision that Satoshi had kind of um uh hinted at, right? Um and then Ethereum has its own problems. Uh and so I've created, for example, another blockchain which is more along the Satoshi side, but it tries to expand the protocol in what we might imagine, you know, Satoshi would have done, UTXO set style.

Okay. So, Robert, if we talk beyond tech, what are the other issues that you see the evolution from early generations to the current generations?

Sure. Uh, unfortunately, I'd like to talk about the tech. However, I for you, I'll talk about other stuff. And I think you started it really. So as soon as we had the second blockchain like that moment as soon as it became enough popular the very first thing people wanted to do was move from Bitcoin into uh Ethereum and that all of a sudden we needed a way to do that.

forget the tech. There had to be a way. Beyond that, especially in America, we like regulatory clarity didn't exist. Like I'm enjoying like I'm not a big fan of regulations in general, but clarity I'm a fan of. So if you're going to say we're not going to regulate it, then be clear on that.

Or if you're going to re regulate it, then be clear on that. So that made it so that crypto companies had to do weird things like Cayman Island companies and foundations and all that kind of stuff making it kind of like we're dragging our feet in the mud when all we wanted to do was develop cool stuff. So regulatory clarity not a particular regulation is good but we missed out on I don't know 10 years of clarity that we could have had. Um, and then I think the last thing really was we're a little bit naive as an industry on on how to deliver the vision that we had. So bridging all these different protocols together.

We put a band-aid there and they're called bridges. Um, we said, okay, we're going to make it simple through front-end stuff and that's not enough. Um, and so we need to find a way to kind of get more stitching together of everything so so that we can actually achieve the the ease of use and liquidity and revenue sharing that we all want to actually have out of this industry.

All right, that's that's an interesting thought. So Helen, back to you. You you advocate that interoperability is more important than privacy. Why does interoperability will unlock the gates and get more users and institutions on board rather than privacy? uh interoperability in bridging um as Robert was saying is a um thorn in the side of blockchain adoption right now.

Uh we saw with the with the bridges coming um as a first round of interoperability passed the custodial banks. Um we we saw financial losses um in 2023 a billion dollars of of financial losses which is 0.2% of all the transactions going across um across the blockchain and that's much too big for us to be able to gain adoption and so there's a real fear there. So for us to uh solve that problem and go into the the next phases of it where blockchains are actually talking to each other with protocol layers and moving past bridges is going to be extremely important. I mean privacy is important as well and I'm sure we'll talk about it but um if we don't solve this we we won't get the adoption that we're looking for.

Can I add a stat on that?

Yeah I think you solve the same problem but from the different angle. So go ahead.

So, so like 100% what you just said is all right. Um it's you but I think how bad it is wasn't communicated well. 82 billion dollars lost in bridges and exploits. The fact that we need custody as a solution to do things. Every single place in our industry where we have to trust something or someone is a is an attack vector.

and true interoperability like where everything is trustless from one end to another helps resolve that leak of funds as going to state actors that we don't like and all that kind of stuff. So yes, we need we need rock solid interoperability, smooth interoperability such that like right now we're doing uh a new bridge and it's a great bridge or whatever, but the we can't the future can't be more bridges. Every time we're at 100 bridges now, somebody comes up with a new bridge. Now it's 101 bridges. Like it's not solving our problem.

The problem has to be smooth interoperability from one chain to another. And then we can actually have well that's part of the solution for an industry that people can use and not be not be afraid of.

Yeah. And I know those two can talk hours and hours about those issues as we've seen yesterday during the dinner. Um but we have to move on a little bit. So will Avalapse had a project with JP Morgan recently. Uh can you talk a little bit about it?

Why it's important what it brings to the institutional adoption sphere?

Yeah. So uh you know

really close.

Real close. Okay. There we go. Uh yeah so that project was an interesting one. as part of uh Kexus uh project epic.

And so the key theme with that project was how do we bring uh tokenized funds to the blockchain, right? The primary thesis being by having these assets on chain enabling some privacy enhancing technologies it would help to increase price discovery increase adoption increase you know revenue and inclusion particularly on secondary markets. So the interesting part here is you know we talk about interoperability we talk about privacy you know for this project and kind of included a little bit of all of that stuff right. So it proved out hey we can have a chain that just serves a specific purpose which was for uh DID and so we had this chain that ran on one side that pro that provided DID. We had an a chain that was public but still had a uh privacy preserving protocol that allowed for uh private fund tokenization and then uh user inclusion was verified based on you know the DID protocol that was implemented.

So all of this happened across multiple chains. All of this happened with you know a a trustless validator set. So all of these sort of components and it starts to prove out hey you need a little bit of all of these different protocols for you know this adoption for some of these goals to become realized. Okay lots of uh technical terms. Can you explain in a simple terms what is ERC encrypted um ERC encrypted tokens are?

Yeah. So so uh another product that we released earlier this year was a encrypted ERC. So uh you know ERC token is kind of the de facto standard. There's a ERC20 token, a ERC 721, a ERC 1155, and then there's a whole variety of other token standards out there. Um, this token standard that we released uh helped to support confidential payments, you know, and by confidentiality I mean uh offiscation of transaction balances and transaction amounts.

So you know you may say hey well this is available on other privacy preserving chains like Monero or you know with Zcash or things like this. Uh the key thing here that we see is you know uh Ava cloud and you know Ava labs we work with a lot of institutions and enterprises and you know a key component that we need saw is one it needs to be lightweight it needs to be deployable on any EVM chain so it can be easily adopted and you know protocols can kind of consider this and figure out how do we incorporate this into our stack and then two it needs to be auditable to m maintain compliance right because I think uh whether or not we like regulations and all these sort of components. It is the world that we live in and figuring out the right balance of uh private public and then auditability is becomes pretty critical towards adoption you know beyond just uh the dens out there.

Yeah. Andrew you your approach with partial transactions take a different um uh take on the problem. So, how does it improve privacy and or decentralization compared to today's EVM model?

Um, can I back up for one second? Uh, I just like to say something about uh the difficulty of interoperability. Um,

sure.

Okay. And, um, basically something that everyone should think about is it's not an easy problem, right? Because see the security model of all these different fundamental blockchains can be very different. So you might wish that you could just easily move funds from one blockchain to another, but what you're actually doing is changing the fundamental security model that is holding your coins, right? And such a thing especially to happen automatically like transforming um like okay if I look at data from a separate chain and I pull it into my chain, right?

Um what if that what if that other chain doesn't have finality yet? So the data just magically changes but I have finality right. So this becomes a very difficult problem.

Can you break it down to in simple terms like if I move my money from one chain to another?

How about this? It's like uh it's like you ship something via like FedEx, you know, and then um lo and behold, you know, someone shows up at your destination uh with like, you know, a golf cart and it just kind of t dragged behind your, you know, on a in a you know, just like it's just attached via a rope being dragged behind the the car, right? And you're like, "Wait a second. I signed up for quality, right? what I got was, you know, or maybe they just open up all the packages, right?

And then, oh, maybe grab something, put it back.

Okay, so if I'm shipping a simple example,

if I'm shipping something overseas and I have FedEx and the last mile would be some local partner with very different uh protocols. Exactly. So, my package would be safe until it goes to another carrier who might lose my packet.

Right. But you say, "Oh, no, but when I ship with FedEx, I FedEx gave me certain guarantees." Right? So, there's your problem. But anyway, so what partial transactions does is it allows you to sort of um make a bid um and just throw it out there on any communications channel.

And unlike uh think of like a stock bid and then someone accepts that, right? But the difference is after that in a classic bid accept model um you then have to get together and settle right but what we can do with blockchains is have that bid actually contain sufficient information that the taker can accept the bid atomically they don't have to communicate back to the originator. Um so this is sort of an advanced protocol that allows even though blockchains are decentralized sometimes the smart contracts are settled and handled in a very centralized way. Go to this web page and interact with it. Right?

But this allows you to just take some data and that data is in fact a valid offer for an exchange.

All right. Yeah. very interesting uh stuff that we're talking. How how technical are you guys? Are you developers or like trying to adopt the tech?

No. Okay. Okay. Some some of you. So, let's um shift gears a little bit more to the fundamental discussions um in in the industry.

Uh, Robert, what u privacy levels um do regulators um actually want? True anonymity or auditable privacy? And how do you design for both? You keep asking me the government questions. I'm probably the least government supporting person in this room.

But uh let me ask everybody a quick question. How many people have been in blockchain since before 2013? two. Um, so the reasons we got in are probably not the things that the government are going to be supporting. That's the way I kind of look at that.

We got in because of a lot of freedom, a lot of privacy, a lot of things. what we're seeing now, especially with uh actions in Europe and so forth, there's a lot of dedication to um deanonymizing or um having uh a third party control over coins so that they can they can provide the features that government generally provide. Um and so that's that's the idea of that government is providing security and so they're they are putting that into the stable coins that we're seeing. they're putting it into pro uh uh uh kind of rails around how crypto can work. We're going to see in RWA also.

And so um that's the stuff that they do do like there was a time when a number of governments were trying to ban um P2P apps uh messaging apps because they can't control the anonymity in there who I did it. Um, and so their general the way they generally want to push is not the same thing that a lot of people like me got into crypto for because I think I thought we could kind of create protocols that obiated the need for that. I don't think that happened. So government's now stepping in to sort of make that happen. So they like a lot they they like a lot of activity.

They they want an economy. It's very clear that they're wanting a crypto economy. We created that for them. Um, and but they're also wanting the rails that they've always had um to help. They they look at it as we can foster a good economy as long as we put up the rails that we can protect.

So, I think we're going to see that's what I think that's what I'm seeing so far. I don't know if you look like

how do how do you design how do you design for both for anonymity and auditable privacy?

Yeah. So um the thing is I think you can so for example what you the thing you just need to do to make government really happy is you have a noninity. So when I'm transacting with somebody my transaction with that person should be private the other person shouldn't be able to see in right that's that's private right the government would like that we can open that up if we need to. So for example midnight's doing that there's a couple other ones doing that. So it's private until we need it to not be private.

And that's kind of like how you can do both and work within government rails.

All right.

What I'm talking about is any communications mechanism is also a way to do an exchange. So I think that that might be relatively hard to regulate. Yeah,

question to Helen because I like to ask questions to Robert and Helen u one of the another. Um where do you see standards and uh regulations clashing or aligning in the nearest future

within within the blockchain environment or between web two and web 3? within blockchain environment but I I don't see a lot of difference between web two and web three but you can touch on both points

okay well the the reason I asked that that question is I think the blockchain world has an opportunity to really move forward very quickly and far in front of web two and entice people over into this whole arena of the democratization of assets and money which is hugely important and I think that's probably the reason why many of us are in this room today. So in interoperability be becomes um extremely in important and and creating the standards for that become really important and everyone who's in the blockchain needs to be thinking about how we communicate really well really quickly so that we can offer this opportunity to the to the world to transact data and get ourselves off of fiat currencies. Um so t taking on those models figuring out um how we can we can move assets through protect privacy as well as transact um at at the rate of speed that's un unseen in the world today is hugely important. Um so getting those protocols right is really going to matter. And I think as we do our development and as we think about what it is that we're building and how that's going to evolve, we need to keep this in in mind having it always be the elephant in the room is what are we doing today and how are we going to ensure what we do is going to bring this forward for all of us so that we truly are a 100-year technology and we truly do solve some of the problems that are facing the world today.

Thank you. Robert, back back to you. Which one thing in UIUX should disappear so people would not see that they cross onchain and and start being web 3. Um I think other people should also answer this but uh for me um I don't think in terms of UX and like that feels like a lot of front-end stuff and I I think there's like that's always a problem for any industry in any part for me it's really our two friction pain points which are bridges right now which I think we can obiate you're doing clearly work there I think everybody appears doing work there avalanche is also kind of in that ecosystem is very much like that um so for me it's really eliminating the needs for bridges and then utility tokens is the other one. I I honestly believe two tokens required to do things is a dumb idea.

Um and uh it's it's very confusing. It's it it uh provides a lot of friction of of of when we want to move things or move assets from one chain to another. You got your token to do the thing here and the feed token. You want to go over there and it's a token and another fee coin. Like all of that is very that's not natural.

Like everybody else on the planet and all the countries are using one form of currency and so we definitely tokens like definitely memecoins definitely RWA definitely tokens is a valuable technology but requiring a token to be able to do an economic transaction a second token that's kind of silly and I think those two things need to go away. Okay, thank you. Will the same question but from the institutional perspective? Which improvements should be in UX for institutions so they will adopt blockchain tomorrow?

If it's about institutional adoption, I think it comes around how are you securing the network? What are the controls in place? Like we spend a lot of time talking with projects around, you know, what does your validator set look like? who's able to deploy contracts, um, who can see the data within those contracts. And I think those are the not necessarily like UX because I think UX tends to be more on the, you know, front end side of things, but I think those are the, you know, considerations around adoption that we spend a lot of time, uh, talking about.

And I think also when you start to talk about uh this kind of like problem space, it's what is the right problem to solve, right? And I think this is where when you have too many tokens or too many options for users, like you have to kind of question what is the problem that we're solving. You know, we talk with people who are issuing stable coins. And it's like, well, do we need another USD denominated stable coin, you know, to serve some market in the US where really digitized fiat is already prevalent with like Fed now and, you know, the clearing houses RTP network versus it solves like critical problems, you know, in underdeveloped countries, right? And I think that's where you have to start also to think about what is the problem that we're targeting.

Rapid fire question. 30 seconds to answer. Andrew, what is the most important protocol innovation that you will see in the next two years? And same question for everyone.

Go. I I would guess some sort of quantum resistant uh encryption that's uh NIST is currently working on um certifying certain you know and I think that would add a lot of uh confidence in the future of blockchain and blockchains adopting these quantum resistant techniques

quantum resistant

will

uh yeah I mean I think we spend a lot of time talking about privacy and you know kind of how to make that more flexible. So, I think that's that's a big topic for us.

Robert,

I'm super biased. Um, so I think our technology that allows layer 1 blockchains to talk together without bridges is important for this entire industry and I also agree with quantum security, but I I think we have solutions now that blockchains need to deploy. So um so yes on that one too

Helen

let's just make um everything that we do interoperable and keep it in the forefront of our minds.

Yeah we talked for 30 minutes about the tech but the technology adoption requires trust interperability and real use cases. So whatever we're talking right now makes sense if there is a real demand for that from institutions from retail uh users and we'll hope to see the panelists next year to kind of refresh their their forecasts and see where we are in in one year. Please join me in uploading our panel participants today. [Applause]