Zavain Dar is an investor with Innovation Endeavors and adjunct lecturer at Stanford teaching a Symbolic Systems course which covers the burgeoning segment of digital currencies and decentralized applications.

Today he had three guest speakers, Max Levchin (one of the original founders of PayPal, now with Affirm) and Matt & Robby from Counterparty (I wrote about Counterparty in Chapter 3).

Below are some notes from their discussions.  All errors are my own.  These are mostly paraphrased statements they made (i.e., these are not 100% word-for-word statements).

Max Levchin

Max presented both a bullish and bearish case for cryptocurrencies such as Bitcoin.

On the bearish side he did not consider it a viable currency because of its continual volatility [note: David Evans published a paper last month that found BTC was 18x more volatile than the Euro in 1Q 2014] and because it does not have any government backing yet (he discussed a hypothetical future scenario later below).

On the bullish side, he thinks the underlying protocol was interesting because it solved the Byzantine General’s problem in an elegant way vis-a-vis a distributed ledger which creates a trustless system of interaction.

One subsequent hurdle he saw with the mining aspect is that it consumed enormous amounts of energy (he compared “miners” as a type of Congress and the core dev team as a type of Federal Reserve — or in other words, neophytes perhaps without the necessary experience or background in economics and international politics).  Again, he was not trying to be antagonistic but descriptive.  He also did not find the code quality that he has looked at to be particularly high.

He observed that the scripting language it used (comparing it to Forth and Lua) as interesting and concise and found the m-of-n transaction system to be innovative (he cited Shamir’s Secret Sharing concept and two-man rule).

One area he found of future interest is that of a “smart agent” (which is essentially what Mike Hearn would call an “agent” and Vitalik Buterin calls a “decentralized autonomous organization”).  Max foresees a period in the future — perhaps not necessarily with the Bitcoin protocol itself — in which a smart agent sells a service in bitcoin and receives bitcoin as revenue for service; propagating and cloning itself based on its performance through AWS clusters.  He mentioned reading about some of these proto-ideas in scifi literature (name dropped “Game of Life” though this is not really scifi).

Max then segued into a discussion on, how based on actual numbers, Bitcoin as a payments platform will likely not uproot existing players, despite the much ballyhooed “2.5% + $.20” (also called a swipe fee) that anti-establishmentarians like to espouse.

Based on his description, if fraud rates ever reached 1% Visa, MasterCard and others will kick you off their network.  And in practice, they will likely put pressure on a merchant with increasingly higher fraud rates prior to reaching 1% — thus incentivizing merchants to get their house in order… or else.

Fraud itself only accounts for 0.07% (yes, 7 bps — see “Credit Card Issuer Fraud Management, Report Highlights”) of the cost that is factored into this total of 2.5% — he noted that this reflects that most people and most customers are quite honest (give yourself a pat on the back society).

He then mentioned that what is concerning are scalable fraud — that most theft is small-time purchases that are written off.  The bigger issues that companies like Visa have to be on the lookout for are those originating in Eastern Europe that can scale yet even with that, the actual costs dovetail into the 2.5% cost.

He then mentioned the history of how gambling, or rather the illegal processing of payments related to gambling came into being.  He also touched on the evolution of cashback rewards, VeriFone, the competitive fight with interchange fees, AMEX black card (also called the “Centurion Card” which can be used at new lounges in airports).  None of the credit card companies are on closed loop solutions: AMEX lends their brand to other cards (ala “white labeling”).

Perhaps one notable – hypothetical – point that blockchain enthusiasts may find of interest is CanadaCoin (or Cancoin as he called it).  Basically in his view, a country like Canada could utilize a cryptoledger by experimenting with well-defined revenue segments such as real estate taxes, connecting those moving parts (payments, transfers, etc.) with a distributed ledger.

The tl:dr version of Max’s talk: he finds the Bitcoin protocol to be very interesting, potentially seeing its use-cases emerge with interchanges (not to be confused with fiat exchanges) but finds the actual bitcoin token and its mining/development system to be no bueno.  As a consequence he does not see bitcoin as a payment platform competing against established players who despite opinions to the contrary actually are squeezing out lots of utils — and that most cryptocurrency advocates don’t actually understand how the numbers break down (e.g., what fraud actually accounts for).

Counterparty

Robby and Matt work as volunteers for Counterparty.  Counterparty is a “2.0” platform that sits on top of and uses the Bitcoin blockchain (as described in Chapter 3).

They discussed several capabilities of the platform:

• Currency creation (creating your own brand)
• Creating digital assets for crowdfunding (like LTBCoin)
• Ability to trade any asset peer-to peer (contracts for difference, binary options)

They call themselves an embedded consensus system (because it uses the consensus system of Bitcoin and is embedded onto it).  One new piece of tech they are working on is a “Vennd” (digital vending machine).  Both of them answered a number of questions from the audience related to how the decentralized exchange (which has been active since January) allows order matching and native escrow by the protocol.

Another point of interest was their discussion of CODA and the various legal issues surrounding the exchange of instruments and potential interaction with organizations like the CFTC and SEC.