SFBW18: Blockchain Engineering at Coinbase - Balaji Srinivasan (Coinbase)

All right, okay. So, you know, initially I had a much more technical engineering talk, but was told it was a broad audience. At the end I'll give an email and for those folks who want that technical engineering talk, just email me there and maybe we can do a smaller group. So, you know, just, you know, that's me. And prior to getting into blockchain, I also actually founded and sold a genomics company to Marriott and previously to that I taught at Stanford. I just want to give like one visual here, which is maybe the most important visual for how I and how we think about the space, which is that blockchain has turned payments into packets. And this over here is a screenshot of wireshark. And you can actually see, you know, TCP and ip and then on top of it, the Bitcoin protocol itself. And you can see a mine block. You can see that there's no reference to a we, Wells Fargo, there's no reference to any country. It is just pure packets that are being sent back and forth over the network. And the last time we had something like that was with the Internet where we took books and movies and music and videos and we turned them into packets. And that's the Internet revolution that we're running through right now. And now we're taking not just cash, but stocks, bonds, commodities, mortgages, derivatives, everything from video game potions to parcels of parcels of real estate and putting them into packets and then trading them on the blockchain. And this is, you know, how I think about what's going on. So today we're going to give 10, you know, broad concepts about blockchain, 10 things about Coinbase, and then maybe, maybe take some questions and I'll start really, really basic and then get to more maybe interesting things just to level set with the audience. So just the very basics here, motivation behind Bitcoin, concept of blockchain, rise of Ethereum, ico, boom. Okay, so the motivation behind Bitcoin, you know, you start with physical cash, right? And with physical cash it has this implicit scarcity where party A can transfer it to party B and the dollar bill actually moves, right, as we move from physical cash. And you try to take a dollar bill and you try to treat it as naive digital cash, well, the serial number on that dollar bill, if you go and email it to somebody and try to treat that as digital cash, well, you can email it to somebody else and there is no inherent scarcity. And this is the so called double spend problem, right? You could double spend that serial number. So until the invention of Bitcoin, the way that we dealt with digital cash, the motivation behind it was we did it with a centralized thing. We had a bank in the middle that would debit A and credit B. And that's where that, you know, fundamental scarcity in the system arose. And that central actor, that bank, was trusted to debit A and credit B until the invention of Bitcoin, at which point we had decentralized digital cash. And now you have a network of miners in the center that do the debits and credits, and no one of them can block the transaction because any one of them is probabilistically incentivized to approve the transaction. And so this is the kind of 1, 2, 3, 4 of how Bitcoin is invented and why it's kind of useful. Obviously, we took that concept underneath, underpinning Bitcoin, and abstracted out to the blockchain. And over the last few years, we've had the rise of Ethereum, which gives us a programming language that's easier to work with than Bitcoin's assembly. And then much more recently, the ICO boom over the last year, which I think of as the simultaneous disruption of venture capital, Swift, crowdfunding and cap tables. Right? Venture capital, because you can now raise online crowdfunding, because you go from $10 million being a large online crowdfund in 2015 to 100 million or a billion dollars, you know, today. Swift, because rather than doing international wires in two to three days, you can now do it within, you know, really minutes using. Using something like Ethereum and cap tables, because going from on the order of 100 people on a cap table, you can go to 10,000 or even 100,000 holders of a token. And so, you know, the fundamental innovation and financial infrastructure that's happened here is actually really dramatic. Even, even if many of the projects themselves may not work, the actual financing mechanism is a true major innovation across a lot of different frontiers simultaneously. So that brings us, you know, brief recap, brings us to the present day. And I want to talk about, you know, where we think blockchain is and maybe give, you know, an interesting vantage point on it. So we think of a blockchain as a database that's optimized for storing things of value. And why do we say that? Well, if you've got a database for storing things of value, you may not just trust any old person to update it. You may not want to have a centralized actor being able to update it. You, because if they could, they could award themselves a million dollars or a billion dollars. So for storing things of value, we may want a different kind of database, a decentralized database where the ability to award yourself a million dollars is computationally costly enough that it costs you more than a million dollars to do that. And once you can solve that, and we solve it with Bitcoin, you've got the basis for recording these debits and credits in a scarce way, and you can extend that, and we are extending that to tokens, which are like a form of equity, and then to more digital assets like NFTs, and then also to things like identity. But in all of these cases, you're basically storing things of value. And this kind of tamper resistant database has many consequences. One of them is that as I mentioned earlier, we've turned payments into packets because you now have a binary representation of payments. Any machine can now hold and send money. This is actually a new thing. You can actually have an intelligent agent that is a program that earns on its own. It's got a wallet, it's got a Bitcoin or Ethereum address, it can send and receive, it can actually do everything for you if you program it well enough. And the first versions of these intelligent agents are just the trading bots that are doing arbitrage on different exchanges. But over time they may start to interact with the real world. For example, scripting a self driving car to go and pay for its own gas and to fill itself up, pay for its tire repairs, etc. You could actually have more autonomous agents that can actually pay for themselves. And we, we've already seen what can happen. Once you can have a computer that can do communication autonomously. That gave us drones, that gave us, you know, a lot of, you know, autonomous robotics. It's giving us self driving cars. Once it can actually transact autonomously, that'll be a pretty, pretty interesting and big deal, right? So the fact that machines can now hold and send money is, is one of the more interesting consequences of the, of the blockchain revolution. Another fact that I wanted to kind of underline is there's a lot of talk about blockchain's future and its potential and whatnot. But it's kind of useful to stress what has already occurred, right? The blockchain has already created at least three large classes of billion dollar entities. There's the people who have invented new coins and tokens, that's created billions of dollars in wealth. There's the folks who have mined them and built like kind of the hardware infrastructure. And then there's the exchanges, who have also done billions in revenue and volume collectively. And so that's kind of useful and interesting because a lot of people are prone to dismissing the blockchain space as all hype and all future stuff, but it's actually already created multiple different kinds of valuable, commercially valuable entities. Relatedly, blockchains have already 10x many underlying pieces of financial infrastructure. Okay, so, you know, we can start with gold, right? With bitcoin, it is 10x cheaper, faster, you know, to transport internationally. We can look to Swift and we can note that basically wire transfers with Swift are much, much faster to execute. With Ethereum than with Swift, you go from days to seconds or minutes. We look at Kickstarter and we say, hey, you know, Ethereum is actually a better Kickstarter. You've gone from $10 million to like more than $100 million. And we can think about even things like Delaware incorporation, where, you know, the time to incorporate in many countries is something that the World bank measures and it's doing business study. And we've taken that now from weeks or days down to really minutes. Right? Same thing with other kinds of things like setting up an address to receive money. And so the thing about this is, you know, even if you don't believe in the projects that are being funded, the financial infrastructure is getting improved with actual quantifiable 10x improvements. And that's a, that's a big deal. Fifth point. People talk a lot about crypto being trustless, but blockchain means you have a choice of who to trust, right? Before, you had to trust a bank. Now you trust an exchange or you can trust your own laptop. You actually have a choice. Sixth point, I mentioned this before, but it's worth elaborating. Blockchains enable Internet scale cap tables. So it used to be that you'd manage your cap table in excel with maybe 100 rows, and now with Ethereum, you have tens of thousands or even hundreds of thousands of quote rows on your coin table. And if you think about what built Silicon Valley, it was alignment. It was the fact that a lot of people together were equity aligned and could build something. And that lot was on the order of a few hundred. Now, we can align tens of thousands or hundreds of thousands of people behind the same objective on the Internet. That's a completely new phenomenon. And that's a really important consequence of blockchains. They allow us to scale cap tables internationally in a way that was never possible before. One thing we think about is that blockchain first is a new mobile First, I won't go through every example here, but there is, you know, there are different things that are happening in social networks and messaging and payments, in equity crowdfunding, but also in areas that you wouldn't normally think of as things that you could disrupt, like actual protocols, going after DNS with ens, going after browsers, going after things like aws. You know, in each case, you might not call the blockchain competitor a direct competitor. I think it'll be a long time before filecoin can, you know, have the throughput to compete with an S3. But it does do things that S3 can't do, which is, you know, public replicated, Amazon can take it down, et cetera. And we're going to see a lot of these kinds of things because when you build blockchain first, your users have balances. They can encrypt, there's new capabilities in the same way that a mobile phone gave your users a camera, they gave them video, they gave them things they couldn't do on the desktop. Eighth point, we think of blockchains as a very powerful tool that can break network effects. So with something like Facebook, with a large social network, the larger the social network is, the more value there is. But with. And that was considered something impregnable until relatively recently with the blockchain with a token, though, you can actually issue a token and you can offset that network effect such that an early adopter of your network can actually get utility. And now they actually are like an angel investor, an angel investor who invests in Snapchat. And the a has more upside than an angel investor who invest in Snapchat in the sea or a venture investor rather. And that kind of same thing can now be applied not to investors, but to your users. You can incentivize them to take a flyer on your new network and you can bootstrap a network effect in a completely new way. I think this will be a powerful tool to attack network effects of all kinds. Ninth point, blockchains transform social networks. So, you know, for the last decade and a half, we've all been liking and poking and tweeting at each other. But hey, you know, now we've had 10 years of making friends, time to start making money. Ha ha. And so on the edges of these new social networks, we think that there's going to actually be cryptocurrency. So you would be able to, you know, earn as easily as you can tweet, you can pay as easily as you can like, and you actually start Turning these social networks into more useful things, into digital economies where people are on there and they're not accumulating followers or accumulating money. And that's actually, you know, useful in a more fundamental way. You can actually transport it off the system, you can use it. Whereas followers, likes, etc are inherent to a system and they're not directly, you know, monetizable. Tenth point, we think of blockchain as a partial move away from the cloud towards privacy. The fact that there's more than a million hardware wallets sold just by ledger indicates that lots and lots of people are kind of rediscovering the need for at least partial local storage. And one possible way this may all work out is folks would have their private keys locally, but their data in the cloud would be encrypted by those private keys. And you know, we may eventually figure out things with like homomorphic encryption where you could actually do computation on that remote data without actually allowing anybody to view it. I think this is an important medium to long term trend that folks should be aware of. So those are 10 things about blockchain. Let me briefly go through 10 things about Coinbase. So Coinbase, we think of it as like the interface between fiat and crypto. You know, we have the retail interface where you can just go and buy bitcoin and we have the professional interface. On the fiat side we're building like a Wall Street 2.0 with analogs of custody, index, fund, commerce, et cetera. And on the crypto side we're doing blockchain first apps, things like our wallet which allow you to browse and interact with dapps or earn, which allow you to earn cryptocurrency for doing things. We do work closely with regulators because we're the interface between this fiat and crypto world and we have to have aspects of both in order to maintain and keep that bridge open. The bridge between fiat and crypto. Our long term mission, you know, we want to create this more open financial system for the world. And that's something which, you know, sounds maybe trite or what have you, but it means something that's less closed than the New York based financial system of this time. And you know, we think that that has both upside and downside. You know, the upside of course is that you can move millions of dollars in a few seconds. The downside is those millions of dollars can be moved off of your computer, which wouldn't be as good. And we do think that you can mitigate those downsides with things like multisig we are bridging from the investment to the utility phase. And one of our most important concepts, I think, is that like speculation was installation. That is to say, the speculative phase of the last 8, 10 years installed something in people's brains which said, hey, crypto is actually valuable. It has a market value, I can exchange it for US Dollars. And that was actually a prerequisite for building any apps. Without the investment phase. I don't think you get the utility phase because people would think it's all funny money. It's only because lots of folks understand, hey, this stuff could be worth millions, is worth millions, is worth billions, that folks can actually use it as a payment rail. They have to actually value it on both sides. So I think the investment phase was a critical prerequisite. Coinbase is named after where the blockchain starts, named after the Coinbase transaction in a bitcoin block. And fittingly, we think of it as where the blockchain starts for users. Just like you start using Windows with the start button or Google with the search box, Facebook with a login and so on. We think of co. Coinbase is where you, you know, you buy bitcoin and you get started and we've been making headlines. So, you know, I've, I've got much more for you all. I've got a short talk today. If you want to hear more, just get in touch. BS/SFPW coinbase.com thank you.