Today on the podcast, I sat down with Yuval Rooz and Eric Sarinki, the founders of Digital Asset. Digital Asset was founded in 2014 and has been a leading company in the institutional blockchain market building on the Canton network. In this conversation, we discuss the origins of Digital Asset, the age-old debate of permissionless versus permission blockchains, the importance of on-chain privacy, and what's ahead for the Canton network public blockchain. I think you'll enjoy this one. So without further ado, here is my conversation with Yuval and Eric.
Matt Walsh and Nick Carter are partners at Castle Island Ventures. All views expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only.
Brought down by bad mortgage investments. Lehman, which has 25,000 employees, will be liquidated.
The federal government loans American International Group AIG, $85 billion.
This is a different kind of mortgage, and the Fed is asleep.
The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis.
The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.
You print a couple trillion dollars and all of a sudden, people start to worry. So out of this worry we have something called a bitcoin.
Yuval and Eric, thanks so much for joining us today on the podcast. Excited to talk more about Digital Asset and Canton.
Yeah, great to have you, man.
I think a good place to start is just who are you, what are you guys building? And I think a lot of people have heard your names throughout the industry and would love to just get a little bit of the background.
Thanks, man. Thanks for having us. So I'm Eric, I'm one of the co-founders at Digital Asset. We've been at this coming up on 11 years in August. It's been quite a journey. Prior to that, I spent about a decade at DRW. I helped get Cumberland off the ground in '13 and I've been in the crypto space for a while. I'm really focused on making sure that our network go-to-market motion is a robust motion that it's pulling in people from TradFi and crypto native and finding really strong utility points and crossover opportunities for those participants.
Similar background to Eric, been close to a decade at DRW and Citadel before, and both Eric and I left DRW to start this company. My job here beyond just running the business is convincing the market why we have been consistently doing things different than the rest of public permissionless chains.
I love it. All right. And we're definitely going to get into that. Before we get into the private versus public and how that has all unfolded over the years, what was the original premise for the business? You guys were just super early to blockchains and crypto and what made it exciting enough to actually start a company here for you?
I think it's easy probably to say it 10 years after the fact. It all got better and better from a messaging perspective. But I think that if DeFi is an inspiration to anyone, I think that the reason why DeFi is so exciting is that you can process financial transactions at a marginal cost that effectively is zero in order to bring new products, new services. Where in TradFi doing that requires strategic partnerships, really a very well thought of business case. You need to calculate the costs and really doing these type of partnerships is very expensive and hard because of the costs associated with it. And the reason why I say that is the inspiration is because when we started Digital Asset, a recurring theme throughout the 10 years have been how can we bring commerce or financial transactions to all happen natively on chain. The thesis was not just that you could reduce a lot of costs that exist today in TradFi and as a result make businesses more profitable, is we believe, and we can talk about a few examples, that once you actually bring the books and records to be natively on chain, I think the marginal cost of creating new products and new business ideas effectively becomes financially feasible, which today is just not. So I would say that that really was the motivation to say that. I could say it as clearly as I'm saying it right now 10 years ago would not be true. But I would say that it is a recurring theme throughout the life of the company.
Bringing institutional processes and opportunities and new businesses into these public networks has been a motivation for us from the very beginning.
In the early days, it's so funny to think back on what this looked like in 2015 when you guys were getting going because you had a number of competitors that don't exist anymore that were selling private blockchains in the context of Bitcoin is not going to be around. It's not going to be a thing. And you have this choice between public or private and there just wasn't a lot of nuance in the conversation. You guys have always been really nuanced around the role of public, the role of privacy, the role of how these systems need to touch institutions. So maybe you could just talk a little bit about that and how you think about the narratives of privacy and private chains versus public chains.
First of all, this whole public versus private is a bit silly because even chains that others would consider to be fully public permissionless are not truly fully permissionless in the sense that you need to get agreement from the foundation to become a validator. In some of the chains, you need to be a multi-millionaire to be a validator. What are the lines that blur between fully public permissionless to private? And really the way I think about it is when this technology was introduced and people got excited about it, if you wanted to bring institutional players to it, they had some concerns about are they going to be participating in illicit activity or an activity that they have no control of, which generally speaking, even if it's not illicit activity, is very challenging. In my opinion, it made sense in the early days. No different than the internet in the early days where you actually could share your information. You started with intranets and you had a much more controlled environment in which you said even if I leaked information I'm not necessarily okay but it wouldn't be a disaster if it happened within this closed network. I think that some of the large-scale enterprises were more comfortable testing the technology within something that is akin to a private network. And again, that private network doesn't necessarily mean that you even have privacy. If you use Besu today, which is a private ledger, you still don't have privacy within a Besu network. And I still think that banks are more comfortable using Besu because at least they know we are participating with a group of peers that we do business with on a day-to-day basis. So I think the early days were much more about controlling the environment, not necessarily having a strict definition of what is public permissionless versus private. It was more about working only with peers that you had control of defining that. For us, this is why I gave this example of Besu. Again, I go to the previous topic of how do you have books and records on chain. For us, it didn't really matter. Are you in a private network, a public network, if you want large scale institutions to participate at scale, privacy to us was a must-have and it wasn't something that we could give up. We worked on the technology from the ground up where we said rather than having just a ledger that has one privacy model and you need to figure out how you work within that one privacy model, we should give the application creators the flexibility to define what are the privacy boundaries, what are the control boundaries and what are the access boundaries as you would have in most applications on the internet and then be able to deploy it on the same network as everyone else. We started with a much more controlled environment. So in 2020 the first version of Canton was introduced and you could deploy it really more as a private network and as we were developing the technology and getting more and more comfortable that we'll be able to have some of security privacy control have all the requirements needed in order to develop it or launch it as a fully public permissionless network. We just went towards that and middle of last year we had the first version of fully public Canton launch.
I like to ask in the nuance category here. What's the most successful public permissionless network in the world?
It may be a trick question. Your mind goes to Bitcoin, but I guess you would say Linux or something. How would you answer that?
I like to point to the internet. Some good answers I've heard are like the US dollar. I think that that's a really nice answer, too. The scale of the internet dwarfs what we've been able to achieve in the Bitcoin ETH ecosystems. And I think it has all the characteristics of what you've all just said, which is it's a public permissionless ecosystem, but if you're a participant in it, you determine the terms under which you participate. Am I running an app? I can be wide open and everything's accessible or I can have really strong gates. Am I providing some services? I can have it available to anybody or I can determine who I interact with. In the end, there wasn't one model that won everything on the internet. We have a super heterogeneous ecosystem. So to pretend that everything is going to be fully public, fully decentralized and that's the only way that you'll be able to succeed, I think it just closes the door on a whole area of experimentation and use cases that clearly don't benefit from that. And even the things that have been runaway successes in these public networks like stable coins, you have decentralized validation of an asset that the issuer can take back at any time. It's almost a contradiction in the tools versus the outcome. And so just acknowledging these contradictions and dropping the pretense and the religion about what it means to use public network really opens up the design space of the types of things and the tools you can give to the people that would join the network to find that sweet spot that works for them. Because ultimately if it's not value for them and it's not value for their investors or their counterparties or their customers, none of this is going to grow. It just kind of becomes an echo chamber. We wanted to make sure that we gave everybody the tools to figure out the right level of all those different levers for them to solve a problem and achieve an outcome.
This was brought to life for me and really where I started to understand what you guys are doing at a more granular level is when you started to tell me about some of the use cases around collateral management and how your customers were using the network. So maybe you could talk a little bit about that use case around collateral and why this setup is optimal for that use case.
What's really interesting about collateral is today it's a very low velocity project. It's the backbone of why you can trade. You're leveraging assets. It's what gives you your margin ability. It's what allows you to settle. It's what allows you to derisk your counterparty risk. But then we really only have the facilities to move them efficiently maybe once a day during business days. And markets are increasingly 24/7. Markets are increasingly international. They're interconnected. And the limiting factor today is really balance sheet and collateral efficiency. There's somewhere in the neighborhood of $230 trillion of eligible collateral in the world. I think we use barely 10% of it in the workflows that we have today. People are balance sheet constrained and simultaneously significantly underutilizing the collateral that is available, not using it at a velocity that's going to actually derisk the process. You know, if I have collateral on a Friday, someone goes bankrupt on a Sunday and I walk in Monday, I'm walking into fire sale risk. So, just being able to take these things and say, great, I want to do a variation margin cycle with my counterparty every two hours. You're taking massive amounts of risk off the table. And in order to do that, you have to have a ledger that allows you to move these assets in a safe and secure way with high velocity, with high certainty, but also with privacy. Because when you're thinking about a derivative, that variation margin is giving away a lot of information about well maybe I'm short deltas or I'm short volatility and that's why I'm net delivering on this movement. And you can start to learn a lot about someone's position by just watching the money movements. And then that can turn into market manipulation problems. That can turn into market interference problems. And ultimately what that means is that I think that the whole crypto ecosystem is undersized because when you start to get into those transactions big enough that people would want to take advantage of that information, you're going off-chain. You're going bilateral. You're going away from these automated systems and you're effectively just entering back into the very low velocity, high counterparty risk environment that we had before. Without privacy, without the mobility of these assets, you can't really fundamentally change the backbone of markets, which is how you settle and manage this risk. Canton's really designed from the ground up to support those types of capabilities. So whether it's treasuries or euro bonds or gilt or money market funds or wrapped crypto or stable coins, all those things move with the same velocity and getting the liquidity figured out between them and being able to post all of them and substitute all of them and find the cheapest thing to deliver is a killer use case for blockchain. And then without privacy, you'll just never get to the level of scale and adoption to break out of the casino. That's what we're really excited about is just to demonstrate how we can do this crossover. We can solve problems in crypto but just as equally if not more importantly can solve problems in TradFi that have the same characteristics.
I think for those who have participated in crypto till the year of 2014, if you wanted to trade on multiple crypto exchanges you had to over-collateralize all of your accounts because you couldn't capture the opportunity fast enough by wiring money from one exchange to another. And then Ethereum showed up and then Tether showed up and voila, suddenly the efficiency in crypto just blew up. And I think you could actually see that in markets from volumes that suddenly I could actually manage my capital much more efficiently because now I can move US dollars all over the world 24/7. Now in crypto they accepted that that happens without privacy. That was just a given. I actually think that the same phenomena exists in TradFi markets but at 100x the size of the markets. So imagine if a similar phenomena were to happen in TradFi by mobilizing collateral 24/7 to what you saw in crypto when stable coins were introduced. That to me is what gets me excited is I just see that paradigm shift and that definitely can exist. I mean just recently you start seeing exchanges talking about 24/5 or 24/7. Well, how are they going to do that? Currently, the solution is over-collateralize all of your accounts. But that's not capital efficient. If you think about interest rates where they are massive movements in the market right now, you cannot capture all of these opportunities unless you have the balance sheet to do that. I think the opportunity here is dramatic. And I will add that the point about privacy. I don't think that TradFi organizations would accept to do that on their TradFi activity without privacy. In crypto, they kind of accept it. The interesting thing is since we introduced Canton, it's now even the crypto native players that are coming and saying, 'Hey, how do we move these assets with privacy?' Because we don't enjoy people front running us because they keep on watching all of our wallets and all of these non-privacy chains and people do front run them. So it's interesting to see that even now the institutional crypto players are very focused on privacy and figuring out how they can obfuscate their activity.
It's interesting because in crypto it was almost just that the technology for privacy didn't exist in the early days and so there's a path dependency here whereas if you could have done this out of the gate if Bitcoin had some privacy layer on top of it very well could have been the way that that market evolved. But it's just kind of interesting that it didn't have privacy out of the gate and so people just sort of adapted to it. But later entrepreneurs like yourselves come across and make it better. So it's interesting to watch from the outside in.
I really like how Zooko talks about this. In the early days he used to always talk with Satoshi about how the transparency was a major bug and a major flaw and that it was very hard for them to achieve their ideal without it. Then somewhere in like '14 through '18, transparency became the selling point. The bug became the feature and I think people are coming back to realization that the transparency is a major flaw in design but the thing is it's going to be very difficult for people to pivot out of that because so much of the design of what they've built relies upon the full transparency of the system. Everybody built their integration assuming they have access to all the data. Everybody built everything that they do in these ecosystems, the DApps, everything is more than just let's try to bolt on some privacy preservation and it really leads to a fundamental rethink about what it means to be connected to these ecosystems and how you interact with them.
Another point that you're seeing as very popular now is the conflation between zero knowledge and privacy. Maybe that's an important thing to distinguish is that we don't consider zero knowledge as a privacy solution. It's an anonymity solution. It's a way to obfuscate the inputs from everyone involved in the transaction. And again if you bring it back to I give this example imagine you had a zero knowledge algorithm called Sam Bankman-Fried which you just give it collateral and Sam Bankman-Fried tells you great we have the collateral it's here it's with us until you have the market meltdown and you need to call on that collateral and then you find out that there was a bug in the zero knowledge and the collateral is actually never there. To us that is not privacy, that if anything opens the door for systemic risk within the system because we know there's always bugs. I think one of the critical things that we've been thinking about is privacy is how do you make sure that only the stakeholders to the transaction have full visibility into what's on the ledger where those that are not stakeholders to the transactions just actually don't know said activity have happened on the ledger. And I think that that's a very big difference. And I think the reason why ZKPs are now being pushed as a privacy solution is because it's a nice bolt-on on ledgers that haven't thought of privacy from first principles as like an anchor tenant in their design and it's much more comfortable now to add zero knowledge as an afterthought.
So to bring this to life maybe on how this would work on the chain itself. Say I am moving treasury collateral over to you guys. What would the public see on the blockchain itself when I'm making that collateral movement?
