Cardano founder Charles Hoskinson explains Ethereum’s and Bitcoin’s flaws

We actually look at Bitcoin, the payment system and the financial stack. There really isn't a lot of great activity there. Ethereum, it's the Hotel California of cryptocurrencies. You can check in, but you can't check out.

This is Charles Hoskinson, the founder of Cardano, a proof of stake protocol that aims at improving on the shortcomings of Bitcoin and Ethereum. Hoskinson recently criticized Ethereum developers for how they carried out the merge upgrade. He also sparked outrage among bitcoiners by calling for an end to Bitcoin mining. We try to answer these and more questions by sitting down with Hoskinson in our latest Cointelegraph interview. Before we start, don't forget to like the video and subscribe to our channel. I'm Giovanni, your host. Let's get into it. So you recently had an argument on Twitter with some Ethereum core developers about how the Ethereum merge was conducted. You expressed some ideas about how you would have done it differently. So what's exactly that you don't like about the post merge Ethereum and what would have you done differently?

Well, I mean there's a lot to that, but concisely I think the first issue is that Ethereum, it's the Hotel California of cryptocurrencies. You can check in, but you can't check out. You have a situation where you have to lock your funds for an indeterminate amount of time and if bad things happen, you lose your funds. There's a slashing mechanism. It's completely unnecessary to have a slashing mechanism. It's not an opinion. You have years of operating evidence from Cardano operating and like systems operating. And you have a lot of academic papers actually showing clearly what the security model is. They've chosen to go to a bizarre model that doesn't really have a lot of security, it has a lot of operational overhead and ultimately it's created a situation that it's going to drain liquidity from their system. As funds get locked to participate in consensus, you'll have less and less ether trading in the marketplace. And then what will ultimately happen is you'll have a liquidity crisis where a lot of volatility comes in, so you get big price spikes, but big price declines. And all of this is incumbent the design of their consensus protocol. And again, it will only perhaps get equivalent security to what we've done. No more additional security, no additional performance. And it's also dubious how they're going to use this to bootstrap all of their scaling plans, which are ever changing. So it's a bizarre roadmap and it is what it is. My big issue is that it's contaminating the entire conversation of proof of stake. Already Jack Dorsey has tweeted, oh well, this is proof of stake pointing to Casper and to Ethereum, not realizing that that's just one flavor. And the problem is those design decisions are now going to become kind of the canonical notion of proof of stake from a regulatory viewpoint, from a brand and marketing viewpoint, when people don't realize that you have many different ways you can do it.

There is definitely a lot of concern around the security aspect of the Ethereum post merge, specifically because of this very high concentration of staked eth in the hands of a few entities. While Cardano, as far as I understood, has a system in place which kind of disincentivized excessive centralization and concentration of staked ada, which is the token running on Cardano. And if a staking pool owns too much ada, then the rewards start decreasing. Is that correct?

That's correct. And that model was actually developed in research collaboration with professors at Oxford. So it's a well studied model. And in practice we have over 3,000 stake pools and 74% of the supply is not only delegated to them, but also liquidity, meaning at any time you can move your funds. You can't do that with Ethereum.

Right? On the other hand, talking to many Ethereum developers and experts, as far as I understand, the staked ETH that now is locked on the blockchain, it will be possible to withdraw it in a few months. So it's not that it's there forever.

That's not true. They have to do a hard fork to unlock and who knows when that's coming? I mean, there's actual tweets from Ethereum core developers saying we don't care. So they say it's a few months, but then announce a date and then tell us the technical mechanism that the unlock is going to occur. But my understanding is they require another hard fork to enable the unlocking of funds. Because there's no clock on it, what epoch does it occur at? What block height do your funds unlock at? It should be a deterministic process, right?

Okay, so now I would like to touch upon an interesting theory that you put out recently. In a video you said that Bitcoin should better abandon the proof of work mining system and start operating on a different blockchain. So why do you think that this transition is necessary for Bitcoin and How would you see it happening?

Well, the point of the video was a thought experiment and really it's separating two concerns. So there's Bitcoin, the mining operation, and there is Bitcoin, the payment system and the financial stack. These are two very different things. So Bitcoin, the mining operation nobody in the world could argue is not successful. It's gone from a single user, the inventor, in 13 years to a situation where people are building multi hundred million dollar mining operations next to flare gas wells, natural gas wells, and using flare gas. So that's incredible. It's absolutely incredible. No one has ever done that in any other industry. So quickly and literally billions of dollars have been spent building these operations. Well, the point is to extract Bitcoin because they're valuable. Now just so happens that at the same time that subsidizes the existence of Bitcoin, the payment system, Bitcoin, the financial stack. And when we actually look at bitcoin, the payment system and the financial stack, there really isn't a lot of great activity there. Why? Because Bitcoin can only process seven transactions per second. It has a very slow settlement time, about 60 minutes for finality, give or take. And you can't issue your assets, you can't do complex transactions. So my whole commentary was that we should focus on the fact that Bitcoin's done something great, which is it's created digital gold, an asset that is really valuable because it costs a lot to make. But that asset doesn't need to live on the bitcoin network in order for it to be useful in a financial context. It could be moved as a wrapped asset to another network and that other network could use it for stablecoins, it could use it for defi lending and it could use it for payments, anything you want. Just like I can take a gold bar from the mine and I can go and send Tel Aviv, or I can send it to Rome, or I can send it to New York City or something like that. And as evidence, there's I think $4.5 billion worth of Bitcoin that's been moved out of the network and it's now wrapped. Bitcoin, living on Ethereum and then the question is, do you still need to run the network to actually preserve that store of value and continue consuming more energy than the country of Ecuador or Switzerland? Doesn't make a lot of sense. It's like saying we're no longer getting any gold out of the mine, but we need to keep all the miners employed and keep the lights on and keep all the heavy equipment operating and so forth. You're like, well, the gold mine's over, you know, why don't we just shut it down and sell all the gold and you know, have other people use it for things?

Okay, that's a very interesting thought experiment. Although it created a lot of outrage among bitcoin maximalists and bitcoiners who see proof of work as a fundamental aspect of Bitcoin and one of the core elements that provides with decentralization and security to the network. We had Corey Clipston, the CEO of Swan Bitcoin not long ago in our channel and he said that in order to create something of value, you need to consume energy. So wouldn't you agree with this argument?

But I agree with that statement. It's necessary to create a digital gold because there's a predictable cost of value there and it's not connected to use and utility. There's an intrinsic value to that. It looks a lot like a natural resource in that respect, and that's fine. But the question is, do you have to keep mining in order for that sunk cost that you've put in to continue? The answer is no. The further mining operations, all that's doing for you is it's giving you a payment system that nobody wants to use and it's giving you a financial stack that is vastly inferior to every single cryptocurrency on market because it's the prototype, it's the first mover in that respect. And it's never been upgraded to match the capabilities of Cardano, Ethereum, Avalanche and Algorand and other systems. They can't say, well we have lightning and we have elements and we have all these other things. I say, well you're literally locking your bitcoin and using a different network to get your utility. So is there any material difference between that and what I'm saying about wrapped bitcoin on other systems? You just moving it a little further away. But at the end of the day a different protocol is managing that bitcoin at the end of the rainbow.

Now I would like to ask you one last question, Charles. So Cardano is well known for its slow paced, long term looking and cautious approach to its development. Although there are a lot of critics who say that in order to become really competitive, Cardano needs to start moving faster and break things. So how would you respond to those sort of criticism?

Sure, I mean, how fast would you like us to move? Like at Luna speed? Was that fast enough? I mean, it's kind of preposterous when you're talking about a system that is in charge of tens of billions, if not hundreds of billions of dollars of other people's money. And at the end of the day, if they fail, they could even result in death. Like a privacy coin. If a person gets doxed, they could be killed by their government or arrested. That you would say, oh well, the only thing that matters is getting as many customers as quickly as possible. What they're really saying is we'd like token price to go up a 10x or 100x so we can sell and make money. If you're really concerned about government adoption, company adoption and real use and utility and billions of customers, the protocol should be around for 10 years or 20 years, or 30 years or 40 years, like TCP IP for example, with the Internet. So you have plenty of time to think about these things. What really matters is your growth curve. Cardano keeps getting more capable every year. And what have we lost? We now have smart contracts, we have blockchain based governance, we have the best in class consensus protocol, we have a strong stable community. We've always been a top 10 cryptocurrency and it looks like we're going to fare very well in the next bull market, especially given that there's a lot of great dapps that are in our ecosystem. Meanwhile, we haven't had $35 billion of DeFi hacks, we haven't had catastrophic protocol failure, we haven't had 99% reduction in token value overnight because of a flawed economic model. And we have an understandable system that everybody can connect to and understand.

Thanks a lot, Charles. It was a pleasure to have you on our show.

Thank you so much, Giovanni. This was a lot of fun.