During the exclusive hour-long interview for Crypto Insider, cypherpunk Jameson Lopp has talked about two of the most important events that took place in the world of Bitcoin this fall. First of all, there’s the initiative that Giacomo Zucco and Alena Vranova have announced during the Baltic Honeybadger conference, which is called The B and seeks to support Bitcoin development. Though the event has been covered in a previous article, Mr. Lopp provides a candid insider’s view on the situation which helps us understand the context and actions a little better.
Secondly, Blockstream’s Liquid sidechain gets scrutinized from a technical and objective point of view. Mr. Lopp explains some details about the necessity of this type of federated sidechain for Bitcoin, and further extends the scope of analysis towards governance. Through his clear line of argumentation, the Casa HODL CTO makes the understanding of Liquid a lot easier and provides a broader perspective on facts and events which complements the reported launch information.
You may read or watch the entire interview by clicking this link. If you would like to find out Mr. Lopp’s opinion on Ethereum, Ethereum killers, and Ethereum Classic, you can also check out that specific part of the interview.
Vlad: That is very diplomatic of you, you did not make any assumptions about the future other than saying it could be challenging. I can take that, now let’s get back to Bitcoin. I have seen your involvement in the B foundation which wasn’t supposed to be called a foundation. It was supposed to be just “The B” but as I have learned from Giacomo. It was supposed to be just a B but he had to fill out some forms which forced him to make it a foundation for legal reasons. It leaked and didn’t end so well just because people have such a bitter memory of the bitcoin foundation which somehow still exists for reasons. What is your involvement more precisely?
Jameson Lopp: That is more a branding vs a legal technical issue I guess. I’ll generally refer to it as the “B” but yeah for legal reasons it has to have foundation on the legal documents. So really Giacomo Zucco is really driving this effort because he was basically doing similar stuff with his PhD network in Italy where he was funding various projects, basically on his own. Then Alana is the force behind the legal entity but she is taking more of a hands-off approach in doing more of the advising which is what the rest of us are doing. Which basically means we are all in a chatroom and email lists and discussing various decisions that must be made.
This is mostly inane stuff like “Do we want to put this project into our tree that can allow for people to funds into?” “What are the major initiatives we want to fund in this space?” I think inevitably there will be more contention in our outreach efforts. Some people may get triggered with them thinking we are trying to manipulate certain parts of the ecosystem. I was pretty up-front with not being involved in anything with government propaganda or perspectives of people thinking what bitcoin should be. I am interested in funding different projects that are trying to build on top of bitcoin and lightning, really any other technology to build on Bitcoin just to try to continue to spur adoption and developer interest in this system. I was actually trying to do something like this on my own about a year ago I was talking to attorneys in the US trying to figure out if I could form a charitable organization and it turns out that the IRS and the US made it very hard for open source projects about 15 years ago. There are only about 3 or 4 like the Linux foundation that are charitable organizations that support open source software.
When Alena came to me and was saying she was trying to something similar in Lichtenstein because the regulations were different there. I said I was all-in and whatever I can do to contribute will be great. It turns out there are a lot of other people in this space who have been thinking the same thing and just from conversations I have had over the years I think that there is a fair amount of demand and funding out there that would be interested in basically helping grow the ecosystem by donating to different projects, there just has not been a good vehicle for it. I think the Bitcoin foundation had an opportunity to do that but they made a number of mistakes by spreading themselves too thin. They tried to be everything for Bitcoin. I am hoping that keeping a more narrow focus by focusing on the technical side of things we can succeed in ways that they failed.
Vlad: I think you are being too nice to the Bitcoin Foundation, they had financial interests in the first place. It did not begin that wanted to preserve or improve the protocol or maybe help with scaling shifts or the next generation of developers to emerge. It was just made out of Charlie Shrem, Mark Karpeles, and others…
Jameson Lopp: It is more than industry association but they I think they also compounded their issues. Without talking about the specific personalities, there were a number of people there that ended up having legal issues, which didn’t help. They also made it this general membership organization. They made a very rigid bureaucracy basically. I think the bureaucracy did not help and probably slowed stuff down. It also made it easier for misallocation of resources because they ended up blowing through tens of millions of dollars.
If they had taken a longer term approach and held on to some of those funds then they would have been easily sustained for 10 years if not longer. I think the main reason that they still exist, because I still read the meeting notes from time to time, it seems like donations from Board members like Brock Pierce. They can continue doing whatever they feel like doing it just seems that they aren’t doing much anymore. I am not entirely sure why they exist. Francis Pouliot, he was on the Bitcoin Foundation board and seemed to indicate that it was basically a phone call once a month and not much else going on.
Vlad: I think at the end of the day Bitcoin does need lobbying but it does not need to be centralized, you can speak on your behalf as a person who is involved in Bitcoin. It doesn’t make much sense for a protocol that is distributed and at the same time it is open source. You should not be speaking on behalf of everybody because usually you find there are so many differences of opinion.
I am about to ask you about the Liquid Network which Blockstream has launched a few days ago, you think ultimately that it is a good idea to centralize some transactions from the exchanges and have a sidechain just for them as a way to decongest the mainchain? A lot of people seem to be skeptical, and point out to Blockstream that they are turning bitcoin into something they don’t like. At the same time it is not mandatory to use it, if it fails we still have Bitcoin the way we know it and use it.
Jameson Lopp: Interestingly enough, I have a very privileged perspective of this, and that is why I’ve spent 3 years working at BitGo. And BitGo services a lot of the large crypto exchanges out there. So we actually have the ability to see what some of the fund flows are between exchanges, and what we could tell very easily is that there’s a lot of redundant fund flows between exchanges. And the reason for this is that, when you have 10.000 on OkCoin and they also have accounts on BitStamp and they want to send money from OkCoin to Bitstamp, then each of those users is going to request a withdrawal from OkCoin and put it in their Bitstamp address and click “Submit” and do whatever security steps are required. And then OkCoin is gonna see a list of addresses, and it might be a little efficient to batch them up in a list of a few transactions and outputs. But still, at the end of the day they’re going to be creating a lot of transactions and a lot of UTXOs to essentially move money from one entity to the other.
So this is highly inefficient and this is mainly due to the pseudonymous semi-private nature of the network, because OkCoin doesn’t know that all of these users are sending it to Bitstamp and it’s the same entity. All they see are these random addresses. And take that particular example and basically multiply it by a factor of like infactorial for how many different exchanges there are, and users on these exchanges. And I think that, as result, there is a significant fraction of block space that is being used up doing nothing more than sending money from one exchange to another back and forth, as users are rebalancing their accounts and just going about their activities.
So there’s a couple of ways that you can try to get around that and make it more efficient: one way would be to kill of the privacy and have people identify that they’re sending to a specific exchange, and then the exchanges confirm these private agreements and settle up on the daily basis, not unlike banks; another way is that you can use a second-layer network, so hopefully one day all of the exchanges will also be integrated with one another on the Lightning Network, and a lot of these cross-exchange transactions can happen on the Lightning Network. But we’re not there yet and it’s unclear how long it’s gonna take before we see major exchanges adopting Lightning Network for withdrawals and deposits. I think one or two small exchanges already have.
And then, of course, another way or second-layer solution can use some sort of sidechain or another thing which is cryptographically tied to Bitcoin. So Liquid is one of those and just happens to be more permissioned than Lightning is, but I think it’s going to be like a faster way to get towards that. They’ve been working on Liquid for years and now they’re actually deploying it. Hopefully, this will give us a bit more congestion reduction in the near term and provide a stop-gap solution at least until Lightning becomes more of a thing. And maybe it takes off and it also ends up doing a high transaction volume itself, as it’s also got additional privacy features that you don’t get on Bitcoin. Arguably better privacy even than you would get on Lightning Network, though it’s kind of hard to compare those two.
But yeah, nobody is forced to use Liquid either. So from a moral perspective, I have no problem with it. From a technical perspective, if people look at the security model and the privacy model that Liquid offers to them, and they decide that Liquid is going to benefit their use case, then by all means I think they should use it.
Vlad: I think the only part about the Liquid Network which I do not understand clearly is how they want to be geographically-diverse in the sense that they don’t want to concentrate too many exchanges from one continent or one country, so that they political factor (the government which imposes new policies) shouldn’t shift the governance of the sidechain as a whole. But at the same time, we can see that exchanges are very much concentrated in certain countries, some which offer better financial policies, better tax situations… so I find it hard to understand how they’re going to make this work and how they’re going to maintain the balance.
Jameson Lopp: That is the tricky thing when you have a federation. Though you could argue that they have a little more control over that balance than we have in the permisionless systems with miners. Basically, nobody can control what they geographic distribution of miners is. That’s an issue of natural resources and a ton of other factors out of the control of pretty much any human. It’s a different security model and it may be difficult to reason about, especially if you’re looking at the nation state attacker level. I guess the ultimate game scenario is “What is the worst thing that can possibly happen if you’re using Liquid?”. If say, there are some sort of even multi-nation state level attacks that manage to shut down the whole Liquid Network, my understanding is that you should still be able to retrieve your coins back on the main Bitcoin chain. So as long as it is protected against total loss of funds, which seems to be the entire point of the sidechain, is that you can screw around on there… and even if the sidechain fails, no one should actually lose money. That seems like a win-win.
Vlad: I was thinking about this model of governance, that at some point we might see a Chinese exchange that wants to get in. And they will say “No, just wait until another US exchange gets in so that we have balance”. And they want to have this sort of harmony which may be a good idea… I also like the fact that they don’t care about the size or the volume of the exchange – they don’t care if it’s Coinbase, Binance, or OkCoin. They just have one exchange and one vote. But then again, that can also be exploited in the sense that you can divide the big exchanges into smaller divisions and have more voting power.
Jameson Lopp: Well yeah, you have to be aware of the type of issues that we’ve seen in EOS, for example. They had the issue with block producers voting for themselves and all that.
Vlad: Oh yeah, that was nasty, but at the same time it’s expected. Corruption is part of the human nature, even though we don’t define it as corruption. Back in the ancient times, it was all about “How about you and me get together and beat that guy? Because we’re strong together!”. It’s about the incentive and maybe accomplishing something which you otherwise wouldn’t be able to do by yourself.
Jameson Lopp: Yeah, it’s all about incentives.