Hi, this is Charles Hoskinson broadcasting live from warm, sunny Colorado. Always warm, always sunny, sometimes Colorado. Today is November 26, and it's a double header—second video today.
I'm making a video to talk about something that's unfinished business with Cardano, and recent events have kind of precipitated a conversation where we might want to actually look into it and think about it a little bit more.
First off, though, anytime I see a really interesting, novel thing that’s new and brings a new conversation to the table, I always give credit where credit is due. A paper crossed my desk recently, written by my good friend Andrew Miller from the University of Illinois at Urbana-Champaign and Ethan Buckman. Ethan was part of Cosmos; before that, he was one of the guys I hired when I was the CEO of Ethereum.
Cycles protocol is pretty interesting—a peer-to-peer electronic clearing system. For centuries, financial institutions have responded to liquidity challenges by forming closed, centralized clearing clubs with strict rules and membership that allows them to collaborate on using the least money to discharge the most debt. As closed clubs, most of the general public has been excluded from participation. However, the vast majority of private sector actors consist of micro and small firms that are vulnerable to late payments and generally ineligible for bank loans. This low liquidity environment often results in gridlock and leads to insolvency, disproportionately impacting small enterprises.
On the other hand, blockchain communities have developed open decentralized settlement systems, along with the proliferation of store-of-value assets and new lending protocols, allowing anyone to permissionlessly transact and access credit. However, these protocols remain used primarily for speculative purposes and have so far fallen short of the large-scale positive impact on the real economy prophesized by their promoters.
We address these challenges by introducing Cycles, an open decentralized clearing, settlement, and issuance protocol. Cycles are designed to enable firms to overcome payment inefficiencies, reduce their working capital costs, and leverage diverse assets and liquidity sources, including cryptocurrency, stablecoins, and lending protocols, in service of clearing more debt with less money. Cycles solve real-world liquidity challenges through a privacy-preserving multilateral settlement platform based on a graph optimization algorithm. The design is based on the core insight that liquidity resides within cycles in the payment network structure and can be accessed via settlement flows optimized to reduce debt.
It's a really cool paper. Kiles Hill is trusted hardware, but it starts looking like quantum money, and it's a really nifty design. So kudos to Andrew and his co-authors for this. We're going to read it deeply and gain a better understanding, given that there are some cool things we're doing in Midnight that will involve a proof layer for outsourcing proofs. It would be fun to see if we can get something like this working because that would also add Midnight's capability to this. But guys, you need to get off of SGX; there’s better trusted hardware for that.
Now, let’s talk a little bit about real-world assets for Cardano. Recent events, you know, this whole Wyoming stable thing, assert we don’t have a feature, and the feature was freeze and seize. So, we’ll call it FNS.
When you think about this feature, it really comes into play when you have a central issuer in a regulated market. That central issuer in a regulated marketplace is basically subject to oversight or can recall assets. Imagine you’re issuing a security token, and you’re going to call this token Alpha. Then the issuer says, “Okay, I’m actually going to change the class of stock, and I’m going to go from ST1 to ST2.” Well, that issuer is where all the value comes from, and it’s a regulated marketplace, so you’d need a feature or capability to basically say, “Lock these and replace with this.” That’s a standard pattern.
Typically, because you have broker-dealers and custodians, it’s never a case of a peer-to-peer event where that occurs, but rather an owner-custodian-issuer relationship.
What else can security tokens do? They usually pay dividends or rewards. Think of a bond; it has a coupon or these types of things, and there may be complex logic for movement. Complex logic for movement could be something like, “Okay, Alice wants to send to Bob that security, but can only do so if a certain set of criteria are met.” There we go—a certain set of criteria are met. So, a contingency, or maybe Bob has to give permission. That’s a contingent flow, so Alice can only send to Bob if Bob gives permission.
So, we have royalties, we have a freeze and seize capability, we have complex logic for movement, and all of these things can probably be replicated as a smart contract. It’s a lot of code; it’s a lot of work, but you can write a smart contract for these things.
Cardano has a hybrid issuance system. Instead of treating assets as ADA plus smart contracts, which is what Ethereum does, we have this concept of a Cardano native asset or Cardano native token. Forget the parentheses; I could have sworn Pina's paper was asset, but now I see everybody calling them tokens. I like asset more—CNA or CNT. You have this concept of a native unit of value inside the system, and CNTs are basically treated the same way as ADA inside the system. We got this idea from color coins way back in the day in the Bitcoin space.
There are two flavors of them: the non-fungible token standard and the fungible token standard. We always had this idea of a third option—a security token or a real-world asset, for lack of a better term, because that is broader. You could think of real estate, royalty-bearing instruments, or complex financial assets. We thought that after we finished the NFT standard, people would do a lot of issuance that came out in 2021, and then we’d see a lot of cool stuff in smart contracts. Then we’d come back to the CNT world and build this asset.
The reason you want to do this is that Cardano is becoming a complex multi-chain, multi-actor network. You have real-world assets, and we have things like Midnight coming down the horizon, which is giving us private smart contracts. You have Bitcoin over here, and Bitcoin could end up being a control layer for Cardano smart contracts and assets. For example, when you send Bitcoin to Cardano under the scheme that’s being developed, you’re going to create a Cardano-wrapped Bitcoin. The Bitcoin network should never lose control or sight of that, so you need some special provision in how this asset is accounted for beyond the standard private key encumbrances.
That’s how we normally handle private keys, so this is almost like a foreign control. They need some sort of notion of that, and similarly, Midnight could act as that because it’s handling the regulation policy for this. Maybe the KYC and AML are being automated, and Midnight is acting this way, or there’s an identity component to it.
Stablecoins fall under this use case; you want Circle-style stuff, freeze and seize. You’re probably also going to want a compliance schema for OFAC compliance, and you may actually want some information about the users for certain domains, like the Japan regulations of stablecoins falling under the JFSA when they’re talking about these types of assets.
What if you have two flavors of a stablecoin? If you go through compliance, you can get a yield because we can pass the treasury yield to you. If you don’t go through compliance, it’s a bearer instrument, just like standard stablecoins. These are the kinds of control flows that can be developed.
It’s the same for real estate. When you talk about the deeds of real estate, that would be a combination of an NFT, but there would be some complex logic behind that NFT. Sorry, my Wacom tablet does this from time to time; it goes really far. That’s okay; there are no mistakes, only happy accidents.
There are dozens of other things, especially when we talk about royalty flows and dividends. A lot of people in the NFT space like the idea that when an NFT is issued, every time it’s purchased—let’s say Bob buys it from Alice—the author, the IP originator, basically gets a royalty for that. You can do this with a smart contract. The disadvantage is it’s complex, it’s going to be fragmented, meaning there are going to be many different ways of doing it, and it may actually be insecure, plus potentially expensive to do these types of things depending upon the complexity of your royalty scheme or the nature of your freeze and seize capabilities, the nature of your transactional contingencies, and all that type of stuff.
So, we always intended, after NFTs and fungible tokens were done, to update the native asset standard to include a real-world asset standard. I think this recent debate settles it because we’re going to write a smart contract to demonstrate those capabilities to say, “Okay, you guys are wrong.” But it should be an easy capability inside the system, built into the system for people who want to issue these things—not to make the state happy, but because you can see there’s an enormous amount of utility in having this capability.
There are estimated by Bridgewater and BlackRock to be $20 trillion over the next 10 years of real-world assets that could be tokenized. Midnight gives us the ability to do that in an intelligent way because you can put a disclosure and compliance regime on it. Because it’s a real-world asset, it’s bound to a particular set of laws in geography. It has an issuer; value comes from that issuer. It’s not cryptocurrency; it’s an RWA running on a cryptocurrency.
This doesn’t compromise or impact Cardano. Cardano always stays in that world that has a crypto ethos, but Cardano enables these assets to live and coexist. That’s the point of having an asset issuance standard.
We know there’s quite a bit of money floating out there, and with Midnight in Cardano and now Bitcoin DeFi opening that entire marketplace up, we could get the vast majority of that market because it’s the single best place to do all of it.
Here’s what we do at IO now. We have an innovation division, and as you guys know, we took Babel fees and turned it into nested transactions. They did that in about two Pi cycles. We’re going to start a working group, and anybody who’s interested in this topic, go ahead and reach out to Sam Leathers. Sam is a product manager on the Cardano side, and you know him; he does a lot of really cool stuff. Sam can talk to you guys.
I’d like to put a working group together and have that working group go into our innovation process for our next quarter to do exactly what we did with Babel fees, where we wrote a SIP for nested transactions, to write a SIP to augment our native assets standard to include a real-world asset standard. There’s a whole list of features that can come in, and the business requirements are going to be determined not just by this brief whiteboard but by a lot of real-life use cases and conversations about foreign ledger control, like Bitcoin controlling its variant, Midnight controlling a variant, identity embedding, freeze and seize capabilities, dividend capabilities, and things to make real estate easier too, especially for how you handle your metadata embedding inside the system.
Again, you can do this with a smart contract in Cardano already, but depending upon the complexity of this, it can be complex, fragmented, insecure, and expensive to implement and run, and time-consuming. You don’t want to do that. You want to take a look at some of these design patterns, especially the royalty pattern, the stablecoin pattern, the real estate pattern, and other things, and make a special-purpose accommodation because we’ve already done it for our native assets and fungible tokens.
So, that’s what I want to do, and I think the time has come for something like that. Anytime something happens, it’s annoying and frustrating. I’ve been there; I’ve mentioned before that I’ve been in the industry a long time, and I’ve seen everything. Eventually, we get stuff solved, and we push our way through, and it’s fine. But it’s also an opportunity for growth. Not everything is unilaterally 100% somebody else’s issue. We know there’s a demand and need, and we know that Cardano is becoming a universal ledger for the entire cryptocurrency space.
The reality is, if Cardano becomes the DeFi layer of Bitcoin, Cardano is likely going to be the interface upon which Bitcoin talks to all of the other cryptocurrencies across the space. When Bitcoin wants to talk to Ethereum or Solana, it won’t directly bridge but rather simply go through Cardano because it has everything it needs to do that in a very secure way. It has everything they need to do that without trusting a third-party bridge that’s multisig or has some bizarre trust model, which could result in lost wrapped Bitcoin.
This is a really good opportunity for us to reinvent the wheel and understand that it can become the best place for real-world assets to exist and live. There are already a lot of people thinking about and doing real-world assets, and there are a ton of people within the Cardano ecosystem who have been thinking about this a lot. It would be nice to bring those people in.
My hands are going everywhere; I just knocked over my water. I should put a lid on that. That’s okay; I’ll clean it up later. Basically, we need to get those people and start talking about it. Just talk to Sam; it’s informal. It doesn’t have to be intersect or anything like that. It’s just a casual conversation about business requirements and how you would use a real-world asset standard.
As I said, we can then put a group together at Input Output through our innovation division to write a SIP like we did for nested transactions. Through the SIP process, people can get involved, engage with the community as a whole, and then we can figure out a way to get it into the roadmap and hopefully get it in for next year. At the very least, we can aim for 2026 for the next major upgrade after that hard fork, depending on whether we have one or two hard forks in 2025. I’d hope for two and have a Christmas miracle, but we’ll see.
There’s already a lot going into Plutus 4. Seba is reading some really cool SIPs, and we also have some optimizations for the zero-knowledge stuff that are going to come in. There are a few other cleanups that are really going to improve the developer experience for Cardano. It would be really cool to augment the ledger logic in this direction; it just depends on how quickly we can converge on all that.
I think it’s going to help us out a lot and also settle the debate once and for all. Being a libertarian and creating an open protocol is a balancing act because you have beliefs and ideas, but you shouldn’t inflict those beliefs and ideas on other people. I’m a little bit of a conservative person, but I don’t particularly care what your beliefs are and how you want to use Cardano. I’ve always felt that the ledger should be open for everyone to use, regardless of their use case.
The reality is we live in a world where there are decentralized and centralized behaviors. Just because I’d like to decentralize as much as possible, there are always going to be centralized actors. No matter what, your wallet is owned only by you. For example, would you feel more comfortable if you just split all your money up and gave it to 45 people to take care of? Centralized—it’s just you; it’s an N of one for it.
So, no matter what, there’s always some degree of centralization in the system. It just depends on how you look at it. When you talk about business and commerce, people start businesses, people own land, and people issue intellectual property. Intellectual property oftentimes has an owner or owners, but they’re finite and not changing all the time. When they do, they change under logic. Royalties are paid; this is real life.
There are three dimensions to this. You have to have an identity dimension—the “who.” Look at a beautiful castle; say, “Who owns that castle?” There is the connection point for royalties and payments and all these other things that are associated with the commerce and issuance of these types of things. Then there’s the privacy side of it. We have the privacy side, and we have the DID side; we have the identity side, thanks to Midnight coming to Cardano and basically giving that to all the Cardano assets.
We haven’t really built a good standard for how we want to handle all that cream filling in the middle—the freeze and seize, the royalty management system, and all of these other things. We might as well just put it on the 2025 agenda and get it solved. That means everybody who’s playing in these ponds now has a turnkey and very easy way to handle that. If there’s anything that is unorthodox, then use a smart contract on top of it as the policy behind the token.
That smart contract basically gives you the ability to have unlimited variations of programmability. But if you do it as a base feature of the ledger, then what you get is high security, low transaction costs, and ease of issuance. In many cases, it massively simplifies a lot of workflows that people have.
Do I agree with freeze and seize by a government? Of course not. I think civil asset forfeiture is one of the great evils of our time. But freeze and seize doesn’t just mean it’s a use case that a state actor has decided to freeze and seize something. Freeze and seize can mean you have an out-of-date version of a license, software key, or NFT, and you’re upgrading to a new version of it. You need to remove the old things from circulation and put the new things into circulation.
Recalls, for example—pretty simple. Identity: you shouldn’t have multiple copies of your identity. What if I issued 14 driver’s licenses and just started handing them out? Then 14 people can pretend to be you, especially if they look like you. Typically, when the state issues you a new driver’s license, they revoke the old one, so they freeze it and seize it and issue something new.
It’s not necessarily an adversarial pattern. The point is that that is not a capability that gets put onto ADA; that is a capability for a user-issued asset. So why should I, as a libertarian, tell a user what they’re allowed to do with Cardano? Why should you, who believe in freedom and liberty, say, “Well, I believe in freedom and liberty, but you can only do the things I like, or I agree with, and you can’t do the things I dislike and disagree with”? That doesn’t make any sense at all.
Either you’re open or not open. Either it’s an open protocol that’s censorship-resistant, allowing people to do the things they know and love, or
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