Bitcoin made use of that technology to implement a cryptocurrency and ethereum has expanded on that. It implements digital assets like cryptocurrencies, but it also brings the same sort of bottom-up trust to the operation of any sort of application that you can think of.
Eyers: Non-fungible tokens have taken off since the difficult period, the crypto winter of 2019, when everything went quiet for a couple of years. What lessons did you take from the initial interest of 2017-2018?
Lubin: Moving from centralised systems to decentralised systems is one of the most profound paradigm shifts that humanity has experienced or is undergoing. It doesn’t move on straight lines. So it’s certainly going to be volatile because there are a lot of vested interests, and it requires a lot of understanding and a lot of building of fundamental new constructs.
And bitcoin was a fundamental new construct. It was applied to a narrow use case of that technology. Tokenisation was sort of more general. Tokenisation was a new construct that ethereum enabled and people realise that, hey, you could potentially build the decentralised venture capital with that. And so there was an irrationally exuberant rush to fund a lot of projects and, surprisingly, a lot of those projects, a good number, have actually survived and become really important.
Subsequent constructs involved things like decentralised finance. We’ve had DeFi 1.0. We’ve had another wave of DeFi 2.0. We’ve seen non-fungible tokens cross the chasm into mainstream adoption and really be impactful in culture. We’re seeing decentralised organisations in the form of DAOs (decentralised autonomous organisations) become a very important new construct for either forming capital or governing protocols. Or creating plugs. We’re seeing bridges and a wide variety of other technologies that are essentially using ethereum as the central hub.
Eyers: There are billions of US dollars locked up in decentralised finance, which is for effectively replicating banking, like lending and borrowing functions, outside the existing financial system on networks like ethereum. That amount is still pretty small – like it’s roughly, let’s say, a fifth of the deposits in the Commonwealth Bank, our largest bank. Do you reckon the DeFi protocols are going to have a real disruptive effect on the traditional banking system? Do you think the transparency that comes from these protocols will actually create better models for allocating credit?
Lubin: Absolutely, and we certainly know lots of bankers who agree with that thesis, and many others that are entrenched and want to continue to perpetuate things as they are. And that makes a tonne of sense for lots of cohorts that rely on the traditional financial system. And so the paradigm shift will take time.
Eyers: How is it going to be better than what we’ve got now?
Lubin: Decentralised finance is protocols for lending and borrowing. It’s protocols for staking, which is essentially providing security bonds in order to participate in systems that involve creating equities or bonds or derivatives, insurance.
It is essentially more transparent. It represents the democratisation of finance, sort of in the same way the World Wide Web protocol represented the democratisation of access to information, the ability to publish, etc. These systems are open. They’re usually based on open source. People can go in and fix things when there’s an issue and people can afford them, and the velocity of permissionless innovation in the DeFi space is astonishing.
Eyers: What about NFTs (non-fungible tokens)? Are we going to get beyond the Cryptokitties and all this digital art? It really looks like an area that’s full of hype. But where do you see NFTs heading in a more serious way?
Lubin: NFTs are a profound new construct in computer science. The way I see the decentralised future is we’re building a decentralised trust foundation, with decentralised protocols like ethereum that enable decentralised finance. The new trust foundation enables lots of different systems that we currently live by to re-architect themselves so the user is centric. The user is not exploited in a sort of traditional corporate-consumer model. Or in a web-to-consumer model.
And NFTs represent one of the first-use cases built on these two enabling layers that are bringing creators, content owners, essentially resource providers, into direct contact with their consumers. They’re basically disintermediating their industries to the benefit of the consumer, to the benefit of the artist or content owner.
We’re going to see disintermediation spread throughout the economy. Wherever you have intermediaries that extract too much value, you will see somebody come along and try to turn that into a mechanism that is less expensive. Intermediation is very valuable, but it generally captures too much information.
Eyers: You worked at Goldman Sachs way back in the day. And obviously bitcoin was birthed out of the Global Financial Crisis. Fast-forward 13 years and we’re not exactly in a financial crisis right at the moment, but we are seeing the unwinding begin for what has really been an extraordinary period of monetary policy amid a melt-up in markets. We see central banks trying to normalise rates. There’s a lot of talk about whether inflation could be used as a tool to reduce large piles of government debt. We often hear bitcoin, to a lesser extent ethereum, talked about as an inflation hedge. It looks like the global economy is about to see some inflation. How do you think the current economic conditions play into demand for bitcoin and ethereum?
Lubin: I think they are driving demand quite significantly, essentially, for the last couple of decades. We’re witnessing the end of trust in current systems, centralised systems. COVID has certainly exacerbated and accelerated that.
I think we’re moving towards the end of life for monetary systems anyway, and that is supercharged, essentially due to runaway debt. So even if the Fed in the US and other central banks raise rates significantly, due to the very high inflation we’re seeing globally, we’re still going to see negative real interest rates for quite some time. So I do anticipate we’ll have QE forever until there’s potentially some new monetary regime. Essentially, politicians and central bankers don’t have the stomach for a major prolonged recession which would be required to clean things up.
There are solutions, but a global war would be very painful. And COVID and loss of trust and the end of life of monetary systems set the perfect context for a new trust foundation and a new way to think about money and finance.
Eyers: How do you think the central banks are going to react to crypto? We’re already seeing a lot of discussion about the formation of central bank digital currencies. Your company Consensus has been working with Reserve Bank of Australia and a couple of our major banks on some pilots in this space. Do you see digital cash playing a role in the system that you’re creating? Do you see new forms of private money competing with fiat currencies? And if governments do try to get involved in this space, what lessons do they need to keep in mind as they weigh in?
Lubin: So absolutely, CBDCs (central bank digital currencies) are interesting to different central banks, and there are lots of experiments going on. Most of them are quite early stage. We’ve worked on quite a number of those projects. Some of them are retail, some of them are wholesale.
Bottom line is it’s going to take quite a bit of time in Western liberal democracies to implement these sorts of things profoundly because they really need to maintain stability
in money systems – at least, the mechanisms of money – and so they need to be careful and prudent.
Our ecosystem moves incredibly fast. It’s permissionless innovation, it’s all open source, you build layer after layer.
And it’s all run by entrepreneurs and technologists, not politicians and regulators, etc. So the best-case scenario, in my opinion, is that nation states recognise the pace of innovation is going to be too fast and there should be focus on interoperability, where CBDCs work just fine on public permissionless networks and even are built potentially on public permissionless networks. Probably the way the systems will get going is in a carefully circumscribed context that is either private, or permissioned and public, and gradually opens up. If you want to be competitive, you want to invite businesses onto your network, or at least make your currency available to businesses on public permissionless networks like ethereum. And so the winner will be fluidly interoperable or admit smart contracts onto their network.
Eyers: Another area that governments are looking at is consumer protection. There’s a lot of scams and there’s a lot of fraud. How’s the community dealing with these sorts of scams and frauds? Regulators are trying to get their head around it. What do you make of it? Do you think it’s satisfactory to have that level of fraud out there in the DeFi ecosystem?
Lubin: It is not satisfactory. We do a lot of work to build secure systems and identify hacks and fraud. Such things were not invented recently in the decentralised protocol ecosystem. There’s certainly more of that out in the traditional economy than in our economy.
We see less economically viable use cases on networks other than ethereum. Ethereum is a more secure, more robust and more expensive network to use and the less economically viable use cases that are flashy and sort of quick rug pulls or fraud tend to run on other networks that are less secure and more centralised, and which draw a more naive crowd.
But it’s absolutely a big problem. It’s a problem that will benefit from hardening these systems over years. It’s early days and we’re building layer upon layer and we’re hardening the lower layers. We’ll build robust systems just like the monetary systems have evolved over the last few hundred years, where stage coaches and safes were beaten regularly by hackers and they extracted their consulting fees. So we’re facing the same sort of builder-breaker dynamic.
Eyers: A few other problems on the network. You mentioned cost. Transaction fees on ethereum were really high last year, like $70 per transaction. That has come down quite a lot today, but still looks very expensive to a traditional banker. What are you doing about that? Also, the issue of high-energy usage of the network. What are you doing this year to make it better in terms of energy consumption?
Lubin: We’ve been working to increase scalability and cost for a very long time. We have started to see real breakthroughs in scalability. That’s the number of transactions per second throughput. We started to see that improve in the last year.
We are essentially replacing the energy consumptive proof of work system in the execution chain with this new 99.9 per cent more efficient mechanism that keeps everything in sync.