hi everyone this is charles hoskinson broadcasting pre-recorded from warmth sunny colorado today's video has a very special audience it is made for the legendary nick zubo it's been in our space since before our space existed we knew of nick from his work on smart contracts i have an article right here smart contracts building blocks for digital markets copyright 1996. gives you a sense of how uh how long he's been doing these things he's the og of ogs recently uh there was some twitter confusion about the nature of cardano's governance system and how it relates and are we centralized are we not centralized and there's a lot to the story and you know if it was a normal twitter person i'd just be like but it's nick and i know nick i've talked to him many times throughout the years and i think that it'd be good to discuss some of the things we're thinking about i don't care if nick agrees or disagrees but he has earned the right to have a dialogue and for us to make videos explain who we are what we're thinking about what problems we're trying to solve above the social media phrase actually get into details so this one's going to be a long one hold on to your butts it's going to be a fun one though i'm going to enjoy it and hopefully nick you enjoy it too let me know what you think you know we uh write a lot of papers we do a lot of cool stuff you did a lot of cool stuff still do a lot of cool stuff web code dry code okay so let's talk a little bit about the transaction you know when we think about blockchains blockchains are these vehicles that live out in the cloud and they're either permissioned or permissionless and they're either public or private i but on the permission list public side which is what bitcoin is really there are three things that you tend to deal with you tend to deal with identity you tend to deal with value and you tend to deal with governance implicit or explicit uh so value is where we started in bitcoin land we created this notion of a bitcoin and you can just teleport it anywhere in the world as a push transaction uh and the identities were addresses inside the systems and so people would send something from one address to another in a very simple system one to one one to many many to one or many to many okay it supported all four of those transaction patterns but you only move one type of value and there's only one type of identity and there's no explicit governance system okay now when you build an application that deals with these types of things that application has this concept of trust now the social contract of bitcoin is bitcoin is the honey badger it does not care it does not change to accommodate the whims and wills of an individual so the better job you do at being resilient in the face of an adversary for your application space the higher the trust goes so you have this notion of an adversary and then you have this notion of resilience oops okay so the more resilience stronger the adversary trust goes up now the fundamental unit of operation of change the unit of change in these types of systems is the transaction and the transaction really deals with five things four direct one meta so first transactions deal with the movement of value so core to our space when we're in the blockchain industry whether you're public private permission permissionless you really think a lot about value representation in our industry we have things like commodities and that's what bitcoin has been termed as a digital commodity you have securities so for example security tokens you'll see stos these types of things you have non-fungible tokens you have utility tokens you have many different representations of value you can represent intellectual property you can do complex things like you can do an nft that also has a security component so you can have a pokemon card and have fractional ownership of that pokemon card so you issue a pokemon token and then for your pikachu you have 100 shares and each of them represents fractional ownership of it so you can layer these things together but in general there's the representation of value and then the ways you can move that value okay so bitcoin is a push only system alice sends to bob you also have poll payments for example like credit card subscriptions where bob polls funds from alice like you subscribe to a magazine or you subscribe to an app or something like that like the call map and every month it takes something out then you also have contingent okay so contingent movement of value is where you say something like if then you have some predicates and then if they are true then you execute so you have your predicates do stuff and these can be complex interactive puzzles for example let's say you want to donate some money to a foundation you say okay i'll only donate if you sign this particular donation deed so this is an interactive two-party transaction where you send a deed over they must sign it if they sign it then the transaction will settle okay so contingent supplement so you have push you have pull you have contingent and then you have different representations of value so that's the first property of a transaction the unit of change in the blockchain system the second is identity and identity is all about who is involved so as i said before you can do one to one one to many many to one or many to many these are four types that bitcoin supports but identity is basically uh it could be something like a did a decentralized identifier it can be an address it can be hard-coded entities you see this a lot in permission blockchains where they have a quorum of pre-selected actors and only those people can run the system and then they can be public all the way to private and that's a spectrum bitcoin is a pseudonymous system so it's not quite private it's not quite public you are representing an identity with a code and that code is the address but there are ways to link it if it's completely unlinkable using modern techniques that it's truly a private system but as your name it's public system if it's directly linked you've actually docked yourself okay then you also have metadata okay so the metadata is the story of the transaction the way i like describing this is you can have the very same identity the same type of transaction the same value but different metadata have radically different interpretations of the nature and the legality of that transaction so for example imagine bob and i'll give you two scenarios for bob so scenario one is bob withdraws three hundred dollars of a stable coin which is translated to cash by the atm in front of an italian restaurant at noon you'd say oh he's getting some cash to pay his uh to take his friends out for lunch now let's say bob withdraws three hundred dollars at two a.m right next to a brothel you'd say okay he's paying for hooker okay same amount same person different time stamp different location that's metadata and metadata is the story of the transaction story around the transaction bitcoin only supports op return for this and satoshi made this highly limited in his initial design and rightfully so metadata can be very cumbersome and often times that is more important than the actual contents of the transaction these can be quite small they can be in the bytes metadata can be in the gigabytes are larger it can contain arbitrary amounts okay then the last of the explicit properties is the contractual relationship the contractual compart so basically why and the terms and conditions these are the things that you're looking at so this is what zabo you were the king of and inspired us with ethereum to think about what type of deterministic contractual relationships can we construct and when can they be non-deterministic and uh when do you need information within the system versus outside of the system it's a rich and deep field but basically it's you're not just sending money bob isn't just sending money for some reason he's withdrawing it to do something with it and if he's sending it to himself there's an implication he has the right to receive it if he's sending it to another it's for something it's a donation it's a gift it's a purchase it's a service contract whatever it may be now all four of these things live nested within a concept of regulation that's the fifth property and regulation it basically takes a look at the contract it takes a look at the metadata it takes a look at the identities of the actors and it takes a look at the value and it's nested within geographies this is a meta property of a transaction and basically in our systems it's entirely possible to build things where you are under the regulations of multiple jurisdictions in some cases contradictory ones bitcoin doesn't have a lot to say about contractual relationships it does have a scripting language that was based on a language called fourth and it's a stack based assembly and it's not very complex and i suppose it's turning complete but it might as well not be it's not very useful for complex contractual relationships especially when you deal with contingencies especially when you want to deal with off-chain data like oracle feeds and so forth so there's no batteries included here metadata there's the op return but there's not much more to say about that there's no native identity system for bitcoin outside of the address structure and on the value side bitcoin only represents one asset the commodity that is the bitcoin it has no provisions for a multi-asset ledger although there were attempts to add to send with projects like color coins and there are of course their successors master coin and color coins and so forth and for years people have been thinking about it but most of the token issuance has been replaced by ethereum and later projects because of the ease and liquidity and so forth okay so what does this have to do with governance governance is about managing complexity ultimately simple systems can either be self-governing as in the case of bitcoin or they can be governed with mild human interaction okay if all your neighbors are rich you all have 10 000 acres and you're all next to each other you mostly keep to each other and you know you're so far away you can't hear or see each other you don't really have a need for an hoa okay because whatever they paint the barn it's not going to bother you if they go out listen to loud rock music and weld all day long it's not going to bother you you can't see or hear it and that's an example of a simple relationship now if you're hyper urbanized and very dense and you have 50 000 people in a small area then suddenly you have a complex hoa it's highly regulated because small things that people do can have very big impacts so government is all about managing complexity and good governance gives you flexibility and adaptability that's really the goal of good governance you start with an attempt to you have values you have philosophy you have a notion of a social contract in a system even bitcoin has a social contract the monetary policy for example every person who owns bitcoin participates in bitcoin they kind of sign up for that social contract and they explicitly or implicitly validate that okay and governance basically encodes those types of things and then it says okay we're going to somehow manage the complexity that our system has now the reason why i bring up all this stuff about the unit of change of a system is the more that you want to do here the more useful if you can do all these things you can have a story about regulation you have a sophisticated contracting system you make provisions for metadata that's very sophisticated you have a lot of identity provisions that are very sophisticated and you have the ability to represent many different types of value and do many different types of transactions that system is very complicated okay and what that means is that you're not going to be able to have a simple governance system your protocol becomes very fat you're also going to have a constellation of services around it and then you're also going to require lots of maintenance and change maintenance because you have more than one protocol and lots of infrastructure change because the more complex the system the higher the probability is you're going to screw something up the problem is that every time you change you hurt trust if the change is done without consent so how do you solve this this is the problem of the third generation cryptocurrencies we want to give you everything we want to give you peer-to-peer lending we want to be a world financial operating system we want to be able to allow an interplay with complex identities and zero knowledge crypto and lots of metadata we'd like to have very sophisticated contractual relationships both on chain and off chain and so forth and actually when you talk about scale if i am legitimate and say i want to have millions to billions of users you're going to have millions of bobs you're going to have billions of bob's analysis and every single one of them has opinions about how the system should work what the system should do the level of regulatory oversight the system should have the geographies the system is allowed to play in and not that social contract gets very dicey and the philosophy gets very dicey and the values get very dicey the bitcoin philosophy basically says that as your system scales in terms of users and value the rate of change slows down why because there's no coordination mechanism for it you have core developers you have miners but you have too many people to get into a room and discuss and do things okay so that means that the protocol gets more stable but static now if the protocol is just simply thinking about one thing saying we are a transaction system that's going to move a particular unit of value with a fixed identity space a fixed way of doing metadata and never support smart contracts the way our industry is doing and we're going to continue the same monetary policy the same data policy and the same design this is a feature it's a very strong compelling feature and it's something that builds trust and reliability but if the system desires to add new smart contracting models sidechain models new consensus models it desires to upgrade and update itself quickly then this would be a bug so it really depends on what you make it to be and if bitcoin wants to be this this is a completely legitimate way of doing things and who's to argue with the trillion dollar market cap it makes a lot of sense but this was never the result jetra of cardano cardano we wanted to build an on-chain government and so what we were thinking about is saying okay first we need an update system then second we need some sort of consent driven process then we need some way of representing the blueprints okay and then we need meaningful participation you need all of these things if you're actually going to succeed in some concept of a governance system and that governance system must be universal meaning that it has the capacity to change with enough participation over enough time the social contract the philosophy the values of the system and add dramatic new capabilities to the system so first off we had to construct a lot of theory to get to an update system for cryptocurrencies and we created something called the hard four combinator so basically what this does is it creates a superset every time you initialize it so you have the biringer then all of a sudden you go to the shelly era which is now larger and then you go to the gogen era and each time you do this you maintain support for the past but you gain new capabilities and features so you have backwards compatibility through and it's an easy way to sort all that out the theory behind how to do that changing consensus and other things like byron went from a static and federated system to shelly the dynamic and decentralized system with different consensus protocols is very complex we had to invent that we also had to invent a way of doing decentralized software updates so we wrote a paper about decentralized software updates through a european union project that we did called through the horizons 2020 program and this is called from the privilege consortium okay and we worked out with ibm and guard time and we were doing our part and they did their part so the science of an update system we thought about a lot and we got to a point where we feel pretty comfortable with how to do that but then there's this question of who's in control the problem is that you kind of need the rest of this stuff before that update system can be fully decentralized otherwise you have a committee that's where we're at now that are basically in charge of that process now it's easy to decentralize it naively you could just be like all right anybody who has ada can decide but then is that meaningful you know are is it consent does the community feel like enough people participated you know was there high enough voting thresholds and these types of things uh and also is it a good idea to open up such a voting system and allow people to change everything potentially or there are certain things that must be static and fixed and this is actually a really big experiment that we're conducting we're thinking about through catalyst so the very same thing that we're doing to give away money via grants through the treasury system is incentivizing people lots of people to have to participate so lots of people over ten thousand now okay and the very same thing that we're doing uh to get to the point of what is good for cardano asking when people submit grants and we check those grants and so forth well that becomes meaningful participation that's a kpi that we track a level of engagement that people have it's real good information good idea flow and so forth that stuff makes sense okay and eventually it'll be universal because it'll be able to cover all the system parameters and also sips cardinal improvement proposals that that actually will require an hfc event so the idea is that over time catalysts will evolve that we will have enough people enough checks and balances enough experts enough meaningful participation that the entire update system can be fully decentralized my belief is that that will be accomplished sometime either this year or next year and then the system will be resilient and stable but it will be able to scale this is the other thing that you have to think about works at scale i do not want a situation that as the users and value go up the rate of change goes down in the system because if that's the case we can't compete the other people are going to come and eat our lunch and then the fourth generation protocol will get us i want a situation where the system is self-evolving and keeps growing and so forth okay and there are many things we can do to bootstrap it but at the end of the day the system must be inevitably on the update side fully decentralized so then there's a question of well why should edo holders decide that well the problem with the proof of work versus proof of stake system is that if you hold a bitcoin you have no say bitcoin is controlled by different constituencies it's controlled by miners who are exogenous they're outside of the system and they're not connected to the ownership of bitcoin you have developers who are outside of the system not compensated by the system and they may have incentives for the system or otherwise who knows it's entirely possible that a group of developers can be co-opted and work for the government and their goal is to slow down or destroy the currency call that a gold finger attack okay then you have the infrastructure so these are the coin bases of the world and the wallet providers and other such people and they have a huge amount of control over the cryptocurrency because what they can do is say we're only going to support a or b if there's a fork we're going to support this fork over this fork for like for example bitcoin versus bitcoin cash okay and there's a balance of power between these but the holders have no say so michael saylor went and put a billion dollars or whatever in the bitcoin and elon musk put a lot of money into bitcoin he has really no say at all in the governance at all of the system proof of stake has a very different philosophy the operators of the system operate with the blessing of the holders through delegation so those who hold the asset actually have a say now there are still developers but the developers if catalyst works correctly will be financed by the network which means they work for the blockchain they work for the government or anybody else and the infrastructure players still do actually have some power and you have to carefully think about the infrastructure players uh if you're going to do things properly like for example you have to figure out ways to make sure that exchanges can't vote with the tokens and exchanges can't stake or they're staking on behalf the will of holders and so forth so it makes a lot of sense when you're talking about the operation of the system being at the discretion of the holders to also say the holders should have a more significant say in the governance of the system because ultimately they're the ones who are keeping things aligned you know the miners keep the developers and the infrastructure people somewhat in checks and balance you don't have those social dynamics with proof of stake you have to have a different type of social dynamic so with a pos system you know you have to do things a little differently and that's okay what's really interesting is that because governance can be based upon tokens over time what you can do is actually create more tokens not the underlying asset but rather governance tokens that are connected to things that people value within the system maybe growth and adoption or being a developer or so forth and then you can weight governance this way we call this kind of like a proof of merit kind of idea and this is something that we're actively researching and looking at and there's a lot of things like what happened with git coin and so forth uh or open source development contributions and so forth that are really interesting and i think there's some cool things over the next five years that we can start chasing which means that you move from a plutocratic system to a meritocratic system which is the ultimate notion of fairness in representative democracies okay and also this allows governments to form because operators operate at the consent of the governed those holders can also delegate their votes to experts and inevitably you'll have the notion of a crypto congressman or a crypto senator uh who can come in and re represents a lot of value so he personally does not control a lot but has access to a lot of value and power and so forth okay now representing the blueprints this is something bitcoin does not have bitcoin is not aware of its own design and this is a pet peeve of mine uh and something that hates those people and and our people we actually agree on um we do formal methods and iohk and that's not just a buzzword formal methods is a software development process and basically what you do is you go and write a specification and then you go through a process with that specification like model checking so forth to match the semantical intent once that's done you have a design then you can write the code for the system and then you can certify the code okay little green check mark saying that the code is correct by construction this is a very expensive very time consuming and very difficult thing to do but it makes sense for a certain class of code aerospace software medical software cryptographic code code you intend on reusing for years to decades there were correctness matters a lot well it is entirely possible at a 10 to 20 year time horizon that you can construct a cryptocurrency that is aware of its own design what's really cool about that then is that your update system would no longer update clients like daedalus and uroy and these types of things rather the update system would update a series of blueprints that live on chain okay so you would have version cardano one and then you'd update to cardano two then what you can do is construct a protocol or clients are certified so the client developer has to produce a proof that their client follows the blueprint and it's self-certifying so they actually produce the proof and then you can verify the proof against some sort of very low-level blueprint verification language okay so maybe check x and why is this relevant it means that uh basically when you're voting you're voting on the design of the system the canonical protocol but then people are free to build whatever clients they want they can diverge a bit but the core comparts of the client must be certified against that this is another area of active research that we're doing and we're slowly but surely looking at proof caring code and all kinds of crazy techniques in the programming language space to try to figure out how to do this and it's something that we're going to first introduce with dapps uh because it's so important to get those protocols right or else they blow up and people lose all their money but inevitably i want to pull that into the system itself the reason being is that the developers on both sides are not decentralized okay this is an invitation only club in bitcoin i can't be a member of it you know and maybe one day if i know the right people you know it's just very hard to actually be in that set and you know who has get access now who actually gets to play around with these things and there's going to be a million people that say oh charles is talking out of his ass i really don't care i've had this fight for 10 years but we can all agree that the source code for the foundations of the system the things you need for the reference client in the design should be unchained or validated through something on chain such as a hash representing it why because then that means that no one gets to decide how to update the systems code you only get to update that through some sort of process with consent of the actors in the system okay and this is something we're looking at i would love to integrate in cardona 25 2025 uh something like get and get access using prism i can actually store all this source code for the reference client of cardano on chain and actually the blueprints i would love to represent the language like agda or idris because they do code generation as well and they can create a reference client that people can certify against and do all of these things on chain and then who has access to these things and can actually update these things would be a consent based process where there is voting involved so the decentralization of developers is a very difficult thing and it's something we have to think a lot about now it's for infrastructure that infrastructure this is what defy is about that can be decentralized you know you don't like exchanges there's peer-to-peer exchanges and so forth so the d5 revolution is giving us infrastructural decentralization and that's great operator decentralization is achieved by having economic incentives and encourage you to have more operators not less operators and we've achieved that with cardinal as well whereas bitcoin has the opposite relationship so it's a very complex topic and there's a lot of moving pieces and the reality is that you can solve the topic with a straw man solution the naive solution you know the discrete topology solution by basically saying stable but static so if you go up here and say i'm only going to do a small set of these things value identity metadata and contractual relationships and i don't care about regulation it is very easy to build a simple protocol and as we've seen with bitcoin that protocol has achieved billions now trillions of dollars of value that's good nick good work congratulations but with cardano we're a whole different animal first we don't have miners to keep us in check and balance we have operators and those operators are already given consent by a process and then we said it makes no sense to stop there those holders should have some process where they can meaningfully participate and have a discussion over where the system should go we invented this hard four combinator we invented a centralized update system and this has allowed us to upgrade things very easily as supersets and right now we're operating that in a federated mode because it takes time to build the social dynamics to get to a point to make that decentralized and there's a clear scope of work that people expect already they expect genesis they expect hydra they expect smart contracts and multi-asset there's already a social contract for the delivery of those features cardona 2025 there's a new social contract that means there's a different notion of how to update the type of system catalyst will get us there because it keeps growing but then we have to really think about some foundational things and these are big research topics of how do you get your foundations and your code on chain and how do you get the access to that and then curation of that through a consent driven process catalyst will give us that d5 will decentralize our infrastructure and there we go and we'll get many many many developers and then the blueprint certification process using formal methods which we've already started will inevitably allow anyone to write a client and those clients to have the same level of trust and assurance and security as the clients that i build okay so you've decentralized competition in that respect a lot of moving pieces and this is why cardo is so ambitious and this is why we had to write 100 damn papers and this is why it takes a lot of time to really wrap your mind around the things that we're doing if you want to abandon simplicity and you want to embrace complexity the complexity requires you to be flexible and adaptable complexity is very hard to maintain and complexity requires you to change a lot and we wish to do so without trust decay and that's ultimately what these systems are about is trust so anyway nick that's the beginning of the dialogue i'd love to hear uh what you have to say about a blog post or video or just tweet or something doesn't matter you're an og you've earned the right to do whatever the hell you want to do and you've earned the right to get a video anytime you want to uh you're in this uh for life there are the patron saints of the church uh and uh the church of satoshi nixabo is definitely one of them so thank you so much for playing we appreciate it and watch our progress might not like it today but as we continue to decentralize and we continue to make progress on this i do have a belief that these things could be imminently useful for bitcoin if anything the formal methods process can allow explicit encoding of the original intent of the system and maybe that'll make it a little easier to ensure that you keep staying in feature land and if you ever do want to start changing the system and adding things we're a first mover showing how to do that properly and if you guys are interested nick wrote a lot of really cool things and we would not exist without him so i'd highly recommend that you actually start looking through those cool things and perhaps they'll be of equivalent value to you as they were to me and that as paul harvey would say is the rest of the story thanks for listening
