Below are some paraphrased notes from the new “blockchain 2.0” interview conducted by Adam B. Levine (editor-in-chief of Let’s Talk Bitcoin) between Adam Back and his business partner Austin Hill.

Be sure to listen to the full interview (and here is my write-up from the previous post as well).

• When people talk about building on top of TCP, this is the way to do it, which is the interoperability using existing bitcoins themselves to move them.  If I have a bitcoin to buy for small payments like a cup of coffee, I move it into a sidechain that has higher transactions per second and then move the change back into the main Bitcoin network and then put it into a different side chain to invest it a Bitcoin denominated derivative against US dollars or buy electronic shares or something like that.  Bitcoin is used as interoperability level moving across the pegs, allows open innovation in a neutral sense without creating a new scarcity race.
• Building the infrastructure so these sidechains can take advantage of the global hashrate through merged mining but with some additional extensions. But there are some core services that you do want such as good PKI for the registry, digitally signing for sidechains and new asset issuers, clear disclosure if people can move assets between chains, wallets can tell what properties of the side chains (when you get asset from the side chains, you are aware).  We don’t see a justification for a lot of these altcoins switching out the proof of work besides Adam’s contribution with hash cash, it ignores $250 million in ASICs and datacenter that bitcoin is self-funded as a platform for verification.  We think trying to bootstrap a new global hashrate infrastructure is kind of pointless.  Makes more sense to use what is out there Namecoin has achieved 80-85% of Bitcoin hashrate through merged mining.
• It is a preferable approach to these other 2.0 projects because it is an interoperable approach so you can move money around and interoperate between different networks, different side chains.  The typical TCP analogy people use here is inaccurate as they just send watermarked bitcoins; with TCP you send users messages point to point, if you send it over the bitcoin network it’s an n-squared broadcast and the things sent on the bitcoin network should be about the minimum amount of data necessary to ensure the bitcoin properties, that the value transfer can be tracked, that smart contracts can be evaluated like multisig and so on.  Any data like “this is my email address,” or “this is a receipt,” does not belong on the bitcoin network.  That is what the payment protocol is for, point to point to people. [BIP 70 is the payment protocol]  I think some of the people building on top of Bitcoin are doing it in a naïve way, which is a disruption to Bitcoin.  For example, even Colored Coins which is quite neutral and clean, no digital scarcity race, but has scalability issues because if transaction volume reached a significant volume it could saturate the Bitcoin network.  Right now the transactional limit is 7 transactions per second, increasing block size incurs centralization risk because you need a highspeed link, decent bandwidth if it gets too large.
• It also breaks with colored coins, Adam showed Austin, David Chaum’s ecash server he had come up with coloring DigiCash coins and watermarking them and even last year he still thought it was the best approach to add extensions but saw that with SPV wallets, Colored Coins don’t work with SPV wallets and we live in a world where mobile wallets are a predominate device so if Bitcoin is going to reach its full potential for interacting with billions of people, Colored Coins just doesn’t work in that scenario because you cannot have a full node on a smartphone.  On top of which nobody had contemplated how will this capability of watermarking work?  If people color different assets the same color, who is the arbiter (e.g., ‘blue’ for both a share and copyright registration)?  So there were ideas but no one had really thought out, with SVP, with some sort of asset registry, whether you do that in a distributed basis like Namecoin does or you that in a centralized PKI signed registry service, need supporting infrastructure to make it work.  People got enamored and went off and watermarked a bunch of things.  How can we allow for some of the properties of native marking, new asset issuance, extensions to the scripting, build on a neutral platform.  The principles from our project: permissionless innovation, decentralize wherever possible, decentralize and distributed.
• A lot of people are interested in the potential for user created assets and smart contracts, they see that can be used a lot in the future, trustless escrow.  Colored Coins, Mastercoin, Bitshares and Ethereum have come in and add stories, creating networks.  Pegging technology is the next step of technological improvement in an interoperable way.  Built on top of Bitcoin in a way that does not result in spamming or watermarking bitcoin transactions that makes every transaction a bid/ask, saturating Bitcoin.  You don’t need to do that.  Sidechain that is pegged to bitcoin, so there is no counterparty risk, no escrow agent holding your bitcoin.  Your bitcoin can move between networks which are tied, in that sense they are merged mined.  People can do their innovation in interoperable way.  Early days in TCP/IP, if every time somebody wanted to make media streaming, webpages, online shopping, each time they make a fork of TCP protocol, made a few changes so it is an incompatible network and said “great we’ve done online shopping,” yet none of these things talk to each other, you have to pull them out and put them back in to achieve anything.   So you get network effect by having interoperable systems.   So if we have different people working on micropayments, online shares, high frequency trading, to do all these things on different networks that are open networks, preserve the freedom to innovate, fully interoperable and operate with two-way pegs, best of both worlds: freedom to innovate, avoid the silo effect, and we avoid these self-defeating selfish ‘newshares’ that some things get built on top of.
• We don’t want to see another Mt. Gox, exchanges have had a high failure rate (theft, incompetence, internal malfeasance).  New players are doing security audits, but these are in off-blockchain, trust-me model, holding private keys.  We need to extend trustless blockchain into new parts of the ecosystem but you can only do that if the blockchain can scale to have more of every interaction depend on the blockchain.  Some exchanges were doing more than 7 transactions per second.  There was a practical limit to go off-chain.  Creates an IOU situation where someone promises not run away with bitcoins.
• Smart contracts off: build infrastructure, services, exchanges, payment processors — build components in a decentralized way, build service in a trustless way (smart contracts).  And almost all the system players are not using it.  Somewhat an artifact of the transaction limit.  Can switch coins using an atomic swap.  It is a known property, but not widely used.  So an exchange can simply be matching orders and not touch the coins.  Remove the need for audit, audit is after-the-fact-reactive.  If we had audits every 6 months on Mt. Gox, that doesn’t mean the situation would have been avoided.  The point with bitcoin is you have a real-time audit, if someone tries to do something outside of a smart contract, it is a priori prevents this.  By architecting these things where you don’t have to trust them, you trade with air-gapped wallets — exchanges just handle order matching.
• New model: Exchanges can compete on marketing, building liquidity, volume, customer service, regulatory compliance, making it easier for you to file your taxes, a whole bunch of things they can innovate on.  But the basic security model isn’t: trust us with your assets.  It is trust us with creating the best market place where you can find the best liquidity and the fastest and best customer service.  But you never need trust us with your assets.
• We have focused on the last two months on the core science, we gathered a number of the Bitcoin core developers from around the world. Many of whom who hadn’t even met each other.  We set up a house in California where they all came and collaborated, some of them lived in the house.  Called “The Bitcoin Mansion” – not a mansion.  A lot said that this approach was “not possible, we don’t believe in it the ability to do a two-way peg and retain all the properties and build a security wall.”  We have now proven that it is, we have gotten sign off and support from a lot of the core developers.  But even that change is going to require some time.  There is a community at large that needs to understand it, there is a proving period that needs to be there.  These guys are incredibly overlooked by ecosystem that depends on them, volunteers who are controlling some of the most important code on the planet, next to the space shuttle.  If we have space shuttles and stations blowing up, it can ruin space exploration.  If they screw up, they can ruin math-based currencies or set them back incredibly far.  So they have to be very judicious and patient in adopting changes.
• This creates contention. Whereas you look and see that particular project is cool, but you cannot afford to pay attention to a pet project. Can’t accidentally introduce a bug.  It means that innovation on core is slow, because conservative, value preserving, focus on robustness, fixing minor bugs, very careful gradual change.  Two way peg, requires moderate high risk change.  Bootstrap problem, evaluate the change or set of changes and be sure that it is safe.  But once that is done it allows people to do innovation on side-chains, explore new ideas.  If ZeroCash wants to do something on a side chain.  If in 6 months, they want to increase the block chain, they can do that.  If Bitcoin main wants to reduce the block size to increase decentralization.  Someone wants to do something, changing contracting language, tagged user assets that are SPV compatible, they can do on another side chain.  People with different views on a contracting language can do it on a different sidechain.  Frees up the space to allow open innovation very rapidly, without creating risk for Bitcoin main.  Security firewall, you can only move bitcoins in that have been moved out.  Value does not float against other chains, implemented protocol that fully preserves 21 million supply.  Only Bitcoin chain is being mined, the others are repositories where you can move bitcoins into them and back out.
• Incentive to mine these: we believe there will be, not disclosing, in discussion with a lot of the large miners and mining pools on making sure they have good incentives and good reasons to merge mine this.  And there will be an economic model that supports participation.  It won’t be based on mining rewards so obviously that leaves transaction fees but there is a transaction model that is flexible, is market based allow each of these sidechains to have their own innovations, but collectively all of them together can increase the transaction fee revenue for people who merge mining this.  From complex systems design and merchant property is that this will actually drive demand for Bitcoin, other interesting assets or contracts that can be written against bitcoin.  We have had discussions with some very large financial institutions who are looking at volumes of transactions and contracts and derivatives, futures, options contracts, that are orders of magnitude larger than the entire bitcoin asset base.  Huge.  When you start looking at embrace or extend the functionality to include part of their asset base, encoding into blockchain technology, you can start to see the demand for bitcoin will far outpace the availability and will ultimately drive up the price of bitcoin.
• Once someone bring an open network for supporting smart contracts against other assets, that opens up a wider set of transaction types so you would expect the transaction throughput to go up, dollar transaction to go up.  Bitcoin is the neutral transactional currency, therefore the amount of bitcoin denominated transactions go up, which puts up the utility value of bitcoin.
• You can do different block intervals on a sidechain, counter intuitively, because when you are merged mining with say Namecoin that means some namecoin blocks are not bitcoin blocks. And vice versa so you can have a different target, smaller faster blocks it is possible.
• Two members of the team have figured out how to scale to hundreds of thousands of transactions per second while retaining all of the properties of retaining a blockchain security model.  And those innovations will have high frequency trading, very high speed liquid markets and exchanges that are using blockchain security model and blockchain trustless infrastructures, but meet the business requirements that are necessary to do high volume. And that is definitely our projects scope to make those platforms available for people who do have, someone who wants to compete with Visa but I can see myself hitting, 20, 30, 40, 50,000 transactions per second.  Where am I going to be able to process those and be able to get instantaneous transaction verification without having to wait for the limit of the blockchain.  We think it will be possible and trustless security model of the blockchain.
• Right now combing our hair, putting on our hats and wearing fancy ties but we are getting ready to announce more details to the project so that those interested can track the project and reveal it including announcing the name, who’s on the team: happening within the next 60-90 days.  So a very short term.  We are going to be releasing, one of the principles we will be releasing from the cypherpunk days is and one of the founding principles of the project is: “we speak in code.”  So we really want our products and our software to speak and so we will be releasing software very quickly that is necessary software that is needed for bootstrapping this type of ecosystem.  There are a couple different parts to the existing blockchain to the existing ecosystem that have huge gaping problems that we can deliver immediate value without needing to wait the 12, 18 or 24 months that it might take to get some of these changes to be adopted in Bitcoin core.  Some people are aware of these problems but we believe we can deliver immediate value based off that.  Get out there, release very useful open-source free-software, some software stacks that other people can adopt into the ecosystem to secure their users accounts, secure parts of the Bitcoin ecosystem that are operating on a trust-me model.  We think we can deliver a lot of value by helping them to move to more of a trustless infrastructure.  We are going to be investing very heavily in building a team of cryptographers, programmers, working to support some of the volunteers in the Bitcoin core community to provide them resources and allow them to really accelerate some of the things they know need to be done.  Most of these guys are volunteers, have day jobs, huge weight on their shoulders: do it because they love the technology and community.  Have not received a lot of support.  Supporting them, providing more tools, more testers, more documentation resources, travel vouchers so they can meet face to face – some of the things we will be doing.
• Some business models rely on the availability and reliability of the Bitcoin network, so following the Linux model they should hire – as they can afford – developers in the community to work on it.
• We are a “blockchain 2.0” company, although I personally care for the success of Bitcoin, it is important to distinguish between bitcoin the asset and the blockchain as a programmable distributed trust infrastructure.  And we are interested in blockchain 2.0 and blockchain 2.0 using bitcoin as a neutral transactional currency we believe is a great, offers great promise but I want to build a blockchain that could support a nation-state putting its national currency and phasing out paper dollars.  And there is a lot of reasons to do that: counterfeiting, utility value, conducting commerce in separate geographic distances.  Auditability, trust, whole bunch of potential to reinvent our financial infrastructure to better serve humankind and we have only begun that journey and I’m interested in a platform that is distributed, neutral, has all the principles of and properties of Bitcoin has embedded and imbued in it the principle that “it can’t be evil.”  And allows the world to migrate math-based assets and math-based currencies.  That is going to take time but we are interested in building that blockchain 2.0 and do that as an extension of the existing blockchain – not running off and building our own alt ecosystem and premining it and watching Adam and I get rich off having the first coins – that is not our intent.
• There is no altcoin race with this, using bitcoin purely as a transactional currency.  Systemic risk issues: if more of business starts to move their accounting and B2B payments into bitcoin and cryptocurrency issued assets and denominated national currencies, you get the benefits of the zero trust, immediate auditability features so if you are receiving insurance contract from an insurance policy and there are about to exceed their reinsurance limit that would mean your insurance policy would be immediately failing audit and that would mean your policy is invalid.  You can start to remove systemic risk from the system and avoid Enron-like situations.  Even in the long turn there would need to be iterations of smart contracting before we get those kinds of things.  But even in the long run you get a national currency issued where they would have  smart contract like an issuance contract that would specify their monetary policy, no more than 2% cost of easing or maybe subject to market metrics and that applies to them.  Even if they have the key to issue more coins and some redundant hardware air-gapped key manager, they would be physically unable to bypass the monetary policy rules because the monetary rules are bound into the genesis of the coin and all recipients of the the coin would reject them if they tried to exceed their own monetary policy.  So I think if we get to a system like that we have can have real time auditing and agree to societal rules and enforce them a priori rather than finding out 6 months later that somebody has hundreds of billions or trillions of undisclosed assets and then you have an AIG or all of these kinds of cascading failures in the system.
• History of Zero Knowledge is not archived, Youtube did not exist.  At the time we were very thumb our nose in the face of authority, we were fighting the Edward Snowden type of battles.  The NSA and CIA tried to shut us down, we were on 60 Minutes advocating crypto for all and tear down the system.  That may not be the best way to interact with these guys: is I’m coming for you, I’m going to burn down your system.  The financial services industry, the people we have talked to, have real problems themselves.  We talked to a very large buy-side financial institution who literally has hundreds of billions if not trillions of dollars’ worth of assets under management and they said from a pure compliance point of view we don’t understand our risk.  We have entire teams holding binders and contracts and asset systems and we are trying to figure out what we own and the risk is and what the underlying asset is, so if we can digitize this and have it be encoded in a way that we can actually we can make representations for compliance reasons for our own risk management, we would welcome you in.  Show both governments and financial institutions this is not about wiping them out or destroying their business, this technology is about imbuing the entire ecosystem with verifiability, trust based off distribution and math.  And some real good foundation levels where they can reinvent their business and yes, we can drive some competition in the industry.  And hopefully some more efficiencies.  Just how media companies are adapting to the internet and rebuild their businesses, we want to encourage these people to look for efficiencies.  And those that do will be much more like the Netflix of the future versus the Blockbusters of the future.  We want to help them rebuild their businesses like Netflix, not like Blockbuster and if they don’t want to adapt they face extinction
• Public auditability, typical objection to commercial basis – companies do not want their business model to be public knowledge (profit margin, volume of trade, market movements, if someone is selling a large amount of stock, they like to keep that to themselves and not have that readily to the market) and that tends to present a barrier to public audibility.  We have to preserve commercial confidentiality.  Homomorphically encrypted values, have the blockchain validate the inputs add up to the outputs without disclosing the values involved, they are encrypted in such a way that addition still works on them.  Includes zero knowledge range proof that encrypted value A is less than encrypted value B and use it to prove leverage ratios and things like that.  Can do a lot of things to preserve commercial confidentiality but allow for public auditability.  So this merely a scope that can preserve that traditional and necessary fragile privacy for individuals and commercial sensitivity for companies but all allowing public audibility
• I can see that two parties engaged in a currency swap or whatever instrument, their identities are not apparent to me at the blockchain level but they will have business records saying who they bought it from.  There are two networks involved in a transaction, the blockchain broadcast P2P network (byte minimized, scarce resource), you don’t send to that more than you need to insure the correct interpretation of the transaction.  Invoice and receipt go to the payment protocol level which is point to point communication between buyer and seller and if one of them is a business they will be keeping records or if you’re an individual they will be keeping their receipts for taxation purposes.  I think there will be identity but will keep the parties not broadcast to the peer to peer network.  Why is financial privacy wanted?  Because some people are paid their salary in bitcoin, so you can figure who this guy is because he bought a pizza in the shop or he paid you back and you see an address – it shouldn’t be reusing addresses.  If he was paid a salary and that amount of salary was encrypted, you wouldn’t know how much he was paid and he if paid you personally $10 you wouldn’t know his salary just that he hasn’t exceeded the value of the transaction.
• We will be launching a website, with job postings.  If people keep track of us on Twitter – @austinhill and @adam3us – keep watch we will be announcing the name of the website and project in the coming month.  There will be at least a place holder site with more details and jobs available.