On April 10th, 2019, Ari Paul was appointed as an advisor for Hedera Hashgraph. Please read the press release on Hedera’s blog for more information. Commenting on his appointment, Ari Paul said, “The Hedera Hashgraph platform is pushing the performance and security boundaries of distributed ledger technology, marking this an exciting moment to join as an advisor. Dr. Leemon Baird and Mance Harmon have built a remarkable team and developed a technology which represents a fundamental paradigm shift for the DLT space. I look forward to working with Hedera through the next phase of their development.”

The below is a transcription of Hedera’s Gossip about Gossip podcast, episode 14, “Macro trends & opportunities of distributed ledger technologies (DLTs)”.

Paul Madsen: Hi there, and welcome to Hedera Hashgraph “Gossip about Gossip”. We have a special episode today for two reasons. The first reason is that I’m joined as a co-host by my colleague at Hedera, Jordan Fried, who heads up Business Development. Hey Jordan. How’s it going?

Jordan Fried: Great. Thanks for having me Paul!

Paul Madsen: The second reason today is special is that our guest today is Ari Paul, CIO at BlockTower Capital. Welcome Ari. How are you?

Ari Paul: I’m alright. Thank you very much for having me.

Paul Madsen: Welcome Ari. I’ll confess off the start that I’ve prepared for this chat by mining your tweet history and looking through for things you’ve said that are either contentious or prophetic, and using that to some extent to guide the questions that I’ll ask.

I’ll start by noting that you haven’t really commented on the recent announcement from JPM, J.P. Morgan and Chase on their JPM coin. So two-part question:

• Is it legit to call that a coin?
• And secondly, does it matter? Does it matter what we call it? Is it good for the industry or not?

Ari Paul: To me, it wasn’t that interesting — just because it was so expected. The idea that you would have bank coins, and fairly soon sovereign crypto coins, (whatever you want to call them) at least things parading as cryptocurrencies coming out of States to me was a foregone conclusion four years ago. And the timing has also been pretty predictable. A lot of banks have publicly been working on this — there’s Japanese Bank has been talking about this for over a year. China has been talking about launching crypto Yuan for a couple years now. I viewed it as a kind of inevitable for a bunch of reasons.

So, why might the bank coin make sense for some use cases? Well, the odd kind of doesn’t work. So the US dollar literally shuts down on evenings and weekends which is pretty crazy when you think about it. If I wanted to transfer you $5 million on a Friday night, good luck. Swift is closed. ACH is closed. Your bank branch is closed. Unless I have a briefcase of cash that I can hand off to you, I literally have no way of sending you money. That’s pretty outrageous to think about in the modern world that our money literally turns off for about half of the time in a given week. If you’ve a banking holiday, you might have to wait four days before you’re able to literally transfer your money to someone else.

I mean, fiat is already mostly electronic. Most money is already electronic. The idea of having a structure in such a way that it would just function well, meaning less friction, less fees, fast transfer, instant settlement, all of that is such a clear value proposition that it’s very obvious it does solve problems. It is an improvement over current fiat systems.

Paul Madsen: The fact that most money is already digital to me suggests almost that it’s somewhat arbitrary that the banks shut down for weekends. They could keep those channels open 24/7 if they chose to.

Ari Paul: I think part of it comes down to the very arcane backbone of finance, which I think very few people understand, and I would not count myself as one of the people who really understands how Swift works and how actual settlement of money works. It’s insanely complex and very hard to find details, and they change over time. And the reason it’s hard to find details is because it is political.

Something I say that is very stylized, it’s not literally true, but Swift is the military wing of the US Treasury Department. Increasingly when we go to war with a place like Iran or North Korea, what we literally do is just cut them off from the world financial system. Swift is just the messaging system. Basically if you’re in Iran or North Korea and US doesn’t like you, we prevent you from settling monetary transactions.

That relies on central banks communicating with one another, fundamental double spend problem that Satoshi solved (or at least made an attempt to solve) with proof of work is this idea that without a trusted third party, how do they know that you’re not sending the same money twice. Banks can’t stay open unless the Fedwire system stays open you’re right, everything could stay open 24/7.

These are just weirdly manual human processes right now. You literally have people at the Fed that use algorithms to raise red flags. But they get red flags every day. A human manually reviews when there’s a red flag between Goldman Sachs and Credit Suisse, and only then do they okay the transfer. And that’s the underpinnings of our global financial system. You could do that 24/7, but it’s unwieldy and it’s tough.

JPM coin isn’t a sovereign coin. It is a counter-party risk to one entity. I think of it as a database upgrade. It’s just like let’s have a much better back out to the global financial system as an incremental improvement over fiat. Now obviously that’s not why I’m in crypto. I’m a big believer in that that’s not enough. Basically what I’m saying, I’m not saying that JPM coin solves interesting problems or that it’s revolutionary. It’s not. It’s not competing with decentralized cryptocurrency. I’m just saying that it is an incremental improvement over what fiat users have today.

Jordan Fried: You have a lot of thought-provoking ideas on your Twitter, and I think one of the most widely talked about things now is this whole notion that the enterprises are coming. People talk about this from the perspective of institutional investors coming to invest in crypto. I’m more interested on your thoughts of when you think large enterprises will start to use public networks — literally writing transactions or building applications that leverage public network infrastructure. Also, what do you think’s stopping them from doing so today?

Ari Paul: Obviously a really critical question for the industry. I’ll offer some thoughts, but to be honest — I don’t think I have great insight here. First, my background is in institutional investing, but not in the enterprise. I’ve never been involved in enterprise sales or enterprise software. I’ve never worked at companies that were major customers of enterprise software. A lot of that is really not my expertise and also not the people I talk to day-to-day.

So, with that dying caveat there, the impression I get now is there’s a lot of very clear distributed ledger use cases — they’re pretty obvious to everyone, including enterprise. Supply chain management, assisting with AML/KYC, knowing the entire history of an asset that you want to track (whether it’s a work of art or a piece of food or a drug), or for both regulatory reasons of the provenance of an asset. There’s a ton of things like that where it’s really clear our current system is bad. It’s really clear that something like a distributed ledger would make it much better.

As always, it kind of doubles in the details and a lot of these things are about network effects and the question is: we all want to move from point A to point B, but how do we get there? A very rough analogy of that challenge might be something like electric cars. If everyone’s using an electric car today, it might be better than the present, but we don’t have electric car stations everywhere to refill and we don’t have enough cars on the road and we don’t have enough mechanics who are trained. Or similarly, with the backbone of the internet, things like TCP/IP, we might all want to change it, but how do you get from A to B when the switching costs are very high… usually you have to switch an entire network.

The way I try to think about things like this is usually it’s a little bit of like Peter Thiel’s “Zero to One” thinking. He suggests that new companies, even if your goal is to take over the world or disrupt the entire industry, should pick one small thing that acts as a wedge and serves as a proof of concept for yourself, your investors, your customers, and also your competitors.

So what is the low-hanging fruit? What is the most easily disruptable use case that might seem trivial and narrow today? I mean, Amazon got its start selling not even books, they only sold rare books because they didn’t want to compete head-to-head with Barnes & Noble. They started with rare books which was a niche they felt was riper for disruption, where the value proposition was the clearest — and then of course, they’ve gone on to do everything. I mean I buy toilet paper on Amazon instead of walking one block to a convenience store today.

I think you usually see things play out that way when you have to disrupt a huge ecosystem. Also, I think it’s very hard to predict. I love seeing experiments. I want to see a thousand different enterprise use cases all being pitched and explored. I don’t think we’re really going to be able to anticipate which one is the first grab on — but it could be something like supply chain management within a narrow area.

Maybe there’s a problem with diamonds, whether it’s blood diamonds or cubic zirconia, being passed off as diamonds, I don’t know that industry — but maybe it starts as one narrow thing like using blockchain to store the history of diamond transfers, or rare art for example that’s often forged. That one thing serves as a proof of concept. It funds the building out of a POC, a UI, it serves as successful experiments, it reduces the risk of follow-on use cases because you have something build out, you’ve some things that have now been tested and proven, and then it can expand very rapidly.

I think we’re kind of waiting on that first use case on the enterprise side to achieve even minimal scale as proof of concept. Very confident we’ll get there in the next few years. I’m not sure what it’ll be. If I had to pick one, my guess would be supply chain.

Paul Madsen: What about on the consumer side? You talked about a wedge use case — what about micropayments? We’ve built out a proof of concept, a website on which testers of our network can view content and pay for it in hbars (our native coin). We see value and think micropayments could break the default model of monetization on the web, selling ads based on PII. What do you think about micropayments?

Ari Paul: I’m really excited for it — I think it’s going to be way more disruptive than people think, in ways that are very hard to articulate. In the early days of the internet, people had no idea how Yahoo was going to monetize. I mean Eduardo Saverin, Facebook Co-Founder, was going door to door trying to sell Facebook ads to local butchers. It took a long time for people to realize that the ability to monetize content for advertising was really transformative. Many of the world’s most successful businesses today monetize through advertising. There are now ten, and even hundred, million dollar businesses that exist only as YouTube channels with monetization paths as advertising through to intermediaries, and those are legitimate $100 million businesses earning $50 million a year in profit. Those are small businesses, but I’m just using it as an example where it’s a YouTube channel.

In the same way, that kind of algorithmic advertising is a way to monetize content so transformative to business models of the world, I think micropayments will be similarly disruptive. It’s hard to think this stuff through because the most obvious stuff tends to be the least interesting. So yeah, maybe I’ll buy a New York Times article one a piece for a tenth of a cent, but that’s kind of taking the way the world is today and adding an incremental technological improvement.

I think where things get really interesting is when programs pay programs. Actually, I’ll use an example from my world: I worked in trading and finance my whole career. So much of trading is now algorithmic. The majority of all capital that moves around the world today is directed by algorithms often in ways that no human understands. For example, you will have trading engines built on principal component analysis, which is a type of statistical analysis that removes all meaning. If you see the output of PCA, it has no fundamental meaning at all — there is no fundamental interpretation. So, you have huge amounts of capital, trillions of dollars flying across the globe, driven by algorithms that no human understands.

But that doesn’t quite touch the real world. Those algorithms can act on exchanges, but they actually cannot act in the real world even in limited ways — those algorithms generally don’t even direct bank account transfers. So what happens is within an exchange, you’ll have trillions in trading, but then a human back-office will actually wire the money to the exchange or take the money. Similarly, you’ll have algorithms trading Microsoft stock like crazy, but the actual business decisions end up having to be human. It’s a human who hires the people at Microsoft, a human who builds the relationship and signs the supply-chain contract. It’s a human who creates the marketing pitch and buys the advertising and does all of that.

Right now we have algorithms kind of running finance in the abstract trading sense, but basically not touching the real world. The algorithms are used to evaluate but not to act. Whereas in trading algorithms actually do the trades. What micropayments facilitates is programs doing commerce with programs, with very little friction; because, right now, if my computer code actually wants to send your computer code money, we have to do it through PayPal, or through ACH, or through Swift. We have to do it through a third party which requires integration, adds friction, adds complexity, and almost demands human oversight in case that third party changes anything. For example, if PayPal changes their API, some human needs to change the code. So there has to be this constant oversight.

Whereas, if we have a micropayment rail that’s just built into the internet, that is kind of a static accessible thing, then we can think about programs as almost autonomous businesses, in at least some limited cases. I lack the creativity or imagination to know what people will do with that, but I think it opens up a whole new world of commerce.

Paul Madsen: Admittedly a more powerful idea than paying to view a webpage for $0.01 cents or less.

Jordan Fried: You mentioned your background’s really institutional investing, and some of these macro trends. We’re seeing a lot of this in crypto right now, and everyone’s talking about PoS and tokenization. How real is that from your perspective? Where are you seeing the earliest opportunities here, and what does that mean for institutional money coming into the space?

Ari Paul: I think it’s going to be very slow in a very long time before it has a meaningful impact on the traditional world, but it could be meaningful in the crypto world. The scale is so different. For example, if people raise $5 billion via STO next year, that will look huge to crypto but it’ll be a rounding error of global financial markets. I think it’s going to be pretty slow because there’s very little natural demand.

The supply is companies want to raise money however they can raise it, and they’re pretty happy to do it in any form. It might take a little bit of convincing to get them to do an STO, but if they think the bid is there, they’ll do it. The challenge is why do I, as a real estate investor, want to buy a real estate STO instead of a real estate equity or any of the other traditional structure? And there are a lot of answers to that. There are very real value propositions I’ll get into in a second, but there’s a lot of friction too.

You’re asking me not only to do my work as an investor and evaluate the investment, you’re also asking me to evaluate both the technology and the legality and the regulatory infrastructure — a brand new thing — and all of those things are outside the circle of competence of the investors. You’re introducing a massive amount of friction to do an investment from the perspective of the person trying to do due diligence. You will see people participating, buying, but I think it’s a pretty limited pool of people because the people who invest in real estate are not the same people who evaluate new technology and are willing to kind of beta test a STO platform.

With all of that said, I’m extremely convinced all securities will be programmable; I would say probably within 20 years, maybe sooner. Here’s a prediction: I think it’s likely than in 20 years, regulators will legally require all security issuance to be programmable in the form of something like an STO. And the reason is just overwhelmingly obvious, that an STO is a regulator’s holy grail because it gives them real-time transparency — it lets them programmatically build regulation into the security itself.

Right now the SEC tells us what to do and what not to do, and the only way they can enforce it is go after the people who break the rule two years later. Imagine if the SEC rules were built into the code of the security. Your enforcement goes from like 2% to close to 100% — I’m sure there’s always some people who’ll figure out ways around it, but massive increases in the ability for regulators to announce their regulation: a massive improvement in transparency. Eventually I think they’ll require it.

But these things tend to take a long time and I don’t see the natural economic forces that would make this happen quickly. I’ll use an analogy: Self-driving cars — the minute you have one trucking company that goes self-driving, they all have to, because that one company will triple its profit margins. They’ll pass some of those cost savings on the consumers, and they’ll be undercutting all of their competitors on price.

When Walmart hires a trucking company, they don’t care who the drivers are; they just care about price. So very quickly, if you’re in the trucking industry, the minute one major trucking company goes driverless, they all have to very soon thereafter.

Once Mitsubishi does a bond offering using an STO, does that force their competitors to do so? I don’t think so. I think this is going to play out slowly and gradually. Usually tech adoption, you get the early adopters from the tech industry, who see the value. But getting the traditional players to experiment with tech when that’s not the field they’re in, and that’s not what they do, that usually takes a generation. So I think it’ll be slow.

Jordan Fried: Just to follow on, coming from the institutional side: When you see these funds and they’re probably sitting on large portfolios of traditional equity based investments which don’t have liquidity, do you think those are going to be tokenized?

Ari Paul: It’s an interesting question. The only reason an STO would provide more liquidity than traditional markets is as a regulatory arbitrage short-term. Long-term, it potentially it solves a lot of problems. Right now a weird thing in capital markets is they’re very fragmented. If I own equity in a company and that equity is listed on the New York Stock Exchange, it’s also listed in London and it’s also listed in Shanghai. It’s actually not easy to arbitrage that. It’s not easy to move equity ownership across borders. Each of those exchanges have different rules, each of those countries have different regulations, and there’s just major burdens transferring assets cross-border that are operationally and practically difficult.

Until fairly recently, even 20 years ago, stock traders were actually moving physical stock certificates. You, as an individual or your broker via a clearing firm, but they were literally bussing physical stock certificates back and forth behind the scenes. They don’t do that anymore, but stuff like that can just be like weirdly arduous to coordinate on a global level.

Short-term STOs have less liquidity. You take Microsoft stock, tokenize it. Is there going to be more liquidity on the New York Stock Exchange or on an alternative trading system? The answer is clear. Long-term will be more liquidity on the ATSs because you have a single global market that’s open 24/7 that settles instantly, which is so much better. I’m a huge believer on the space. The question is just how long does it take to get from A to B and what needs to be done.

Now that regulatory arbitrage is very real, and regulatory arbitrage does drive the world, I’ll tell you how it influences our thinking as investors in the space. If I invest in a traditional company, where the equity probably won’t get listed anywhere, or their plan, what they tell me is, “Yeah, we hope to IPO eventually.” In my head I say, “Okay, I’ve got 10 years to wait for liquidity,” because this company’s first test against the kind of stage where they can seriously consider a IPO, then they have to go through it and that’s a two-year process or at least a year, and it is massive overhead.

Instead, I’ll give it as an example: We actually invested on a project that is tokenized equity. It is equity legally, Delaware LLC, but it’s tokenized, and I think we may get liquidity in 18 months because the hope is that that tokenized equity will be listed on an ATS. And the cost and regulatory requirements of doing that are so much lower that it’s very, very attractive. I do expect more liquidity in the time sense in that you can get something listed on an ATS much, much faster than on an exchange.

Paul Madsen: Ari, I read a Forbes interview you did where the question posed to you was what is the biggest problem to overcome to reach mainstream, and you answered UX and specifically key abstraction within that. The default answer to that question seems to be scale, but you place UX ahead of scalability?

Ari Paul: Yeah, I actually don’t think scalability is a major obstacle right now. I know that’s a weird thing to say. It’s not that it isn’t an obstacle. It’s not that it isn’t real. It absolutely will be critical. But I don’t think that’s the thing preventing broader adoption.

A key thing to appreciate with that statement is (I get into this debate constantly in the crypto world) we don’t all need to drive a tank, we don’t all need a billion dollars of insurance on every transaction. The challenge Bitcoin has faced is trying to optimize for two very different things that are kind of directly incompatible given the technology that existed in the past. So you could not be both globally decentralized — being able to run a full node on a Raspberry Pi — and support high throughput. You couldn’t do both using existing technology as a couple of years ago.

Technology does kind of change the set of trade-offs. Five years ago it was impossible to have both 100 transactions per second and be able to run on a Raspberry Pi on an average bandwidth that a retail user might have. I’m not even sure it’s true today, but it probably won’t be true in five years because better data compression, better things like pruning and light nodes. I’m not sure what the right solutions are, but it’s all under direct trade-off. We actually kind of raised the bar.

The point I’m really trying to make though is that most things in life don’t need Bitcoin level security and Bitcoin level decentralization, and people don’t want that. If two banks are transacting with each other or if two US companies are transacting with each other, they don’t care about anonymity (they know who one another are), they don’t care about decentralization or central resistance (they have a legal contract probably backing that arrangement anyway)… what they want is fast and cheap.

I think a mistake a lot of people in crypto made was thinking there has to be one solution, and “my solution’s the right one and there’s only going to be one solution”. That’s just not how the world works. We don’t have one type of transportation. We have motorcycles and cars and limos and airplanes, and it’s not like the world’s going to converge on motorcycles. You have different solutions for different use cases. There are very strong network effects as is true with transportation, but there is a plenty of room for differentiation by optimizing for different things.

Right now they’re in very few cases where scalability was empirically a problem. In late 2017, Bitcoin transaction fees skyrocketed and that maybe was briefly an issue — please feel free to disagree with me. You guys are in the weeds in terms of talking to enterprises every day. I think it comes up as hypothetical. An enterprise might say, well, in 10 years if everyone is using your system for supply chain and we’re trying to do a million transactions a second, maybe we won’t be able to do it. We’re so far from that, that I think the limitation right now is trusting the underlying system.

There aren’t that many people in the world who understand “gossip about gossip” or who understand “SHA256”. There never will be. It’s not that people will understand them, it’s that this is how all of life works. It’s not that we gain understanding, it’s that we gain trust through empirical data. Most Americans don’t know how banks work, but they just know they’ve been around forever and they seem to work, and so you trust them.

I would say the same is true about protocols. The average person who owns cryptocurrency today, if you ask them why do you trust a network, it’s not because they read every line of code themselves or they can walk you through the exact math, it’s because it’s worked for a while. Bitcoin protocol has been relatively stable for a long time, seems to work reasonably well at some things. We trust that it will continue doing those things.

Enterprises work very much the same way. You know the old saying: You never got fired for hiring IBM. This is very true in finance. Why does every company that wants to go public use one of three investment banks? Why does everyone pay outrageous amounts of money for Goldman’s to take them public? Why does everyone use the same two law firms, the same accounting firms? It’s because it’s so hard to actually do deep diligence on every aspect that we rely on these trusted intermediaries. We say, “Well, we trust that Goldman is hopefully doing things right,” or at least better than some no-name firm we’ve never heard of. We hope that the accounting firm is doing things right. We hope that the NYSE is preventing manipulation. We know they’re not perfect. We know they may even be bad. But we trust them more than things we haven’t heard of or haven’t seen work before.

Trust builds over time, but certainly there are key milestones. Like I mentioned, the idea of having a small proof of concept. That builds a lot of trust. If one tiny industry, maybe it’s a billion-dollar industry or maybe, I’ll give an example, cheese. Every once in a while, there’s an article about how the government of France and Italy tries to crack down on criminal cheese enterprises. There’s apparently a large criminal syndicate producing fake Reggiano Parmigiano, which is apparently a thriving criminal enterprise where people make basically that same cheese, but they make it outside of the right province and don’t pay the right fees to the Italian regulators and they sell it with that trademark on it, and that’s apparently costing a lot of business to Italian cheese makers and the Italian government has promised those cheese makers they will step in and fix it.

Let’s say the cheese industry, this is hypothetical, started using a blockchain to have validation and trust on where did that cheese come from and is it being properly regulated, and that works for two years. Well, that’s a really powerful proof of concept for far bigger industries.

I’ll finish the thought on the scaling. The scaling for ultra secure, fully decentralized, transactions is not a solved problem — but scaling for the transactions that enterprises want to do, I think is mostly solved, at least at the scale it needs to be for the next few years. So the obstacle is trust, regulatory clarity (which is not even about regulation), and then UI or UX is so, so important.

Jordan Fried: I’ve got one final question: I think it’s a question that everyone wants to know — this crypto winter has been going on for a while. What ends it?

Ari Paul: I think the two most likely thing in my mind is a global macro theme on wanting to get out of fiat. Some of the best global macro hedge fund managers have now been very public and vocal, such as Ray Dalio of Bridgewater (arguably the most successful investor of all time, super well-respected, manages something like $150 billion) he’s on CNBC whenever he wants to be. He’s been saying that he thinks in 2020, there’s going to be a mass exodus out of the dollar and other fiat over fears that global debt has been accumulating, money printing has been accumulating since the financial crisis, the threat of trade wars, the threat of the Federal Reserve losing the independence. They think Federal Reserve should be less independent.

All of those things have not really been reflected in the market yet, and they haven’t because that idea, that you want to get out of fiat, just hasn’t worked as a trade theme ever. For the last 30 years, we’ve kind of had a dollar bull market. So there have been a lot of reasons to make this argument in the past, and none of them worked, and so everyone is kind of gun-shy to put on the bet. But now you have people like Ray Dalio publicly saying it.

I don’t know what triggers it. Dalio thinks this whole thing starts unfolding in the next 12 to 18 months. That feels pretty plausible to me, and he has a lot of logic backing that up. I don’t know if the timing is right, but something small could trigger it, where for example, a Wall Street Journal headline about tariffs on the US on China and China threatening to dump some of their holdings.

What will happen is you get a few maybe small global macro funds making the bet, buying cryptocurrency to hedge against people leaving fiat (because cryptocurrency can’t be depreciated by central banks). And then suddenly what happens is it becomes very self-fulfilling very quickly, because suddenly those traders’ activity get reflected in prices, Bitcoin starts acting like a hedge to the dollar and maybe to global equities. Then the quants, the statisticians, the machine learning algorithms, they pick it up in the data. They don’t need to believe it fundamentally it’s statistically true, and they start piling on to the trade and it becomes more and more clear statistically until six months later banks are writing sell-side research reports about how this is quantitatively the right hedge for fiat.

That’s a theme by the way that is very hard to do if you’re a hedge fund. If you’re a hedge fund, you want to hedge fiat. There aren’t good trades. You can buy gold, but maybe that doesn’t work great. That quickly put on really complex derivative trades that haven’t worked great. That could very quickly become a self-fulfilling prophecy I think would be led by sophisticated macro investors, but then they go on CNBC and they tell retail and retail piles into it.

And that’s a theme that might start with global macro, but then you have people in Argentina, average people in India, they care about this more than you and I, because they don’t have the US dollar that has been pretty stable. They actually have to worry about preserving their wealth and their fiat not serving them.

So you very quickly have average people, even very poor people in emerging markets, kind of jump on this theme. That would probably first be Bitcoin led, but it would be a rising tide that lifts all boats. It would be a massive infusion of capital and energy… that’s number one. I’ll be very brief on the second.

A challenge in cryptocurrency is we don’t really have applications yet. We don’t have any use cases for cryptocurrency that are being used beyond speculation or money transfer. A lot of great very cool Dapp ideas — none of them have any usage. They don’t have any usage because, until very recently, you didn’t have a stack. Scaling for example, Augur is currently built directly on Ethereum which makes it almost impossible to use. Literally if I create a market in Augur, it takes up something like half of an Ethereum block, to make one market, it’s not scalable. When I say it’s not scalable, it’s not scalable now. If 10,000 people want to use Augur, they can’t.

But that’s solved in the sense that you could run on Ethereum sidechain, you could run on something that’s a little bit less secure. So, different parts of the stack have been getting solved. I think the scaling one for things like crypto games is fully solved. If someone wants to run Fortnite on crypto, they can today. They can’t run Fortnite on Ethereum, but they could run critical pieces of it. This is the key — with a lot of crypto, you’re going to get hybrid solutions where the important pieces that you want decentralized will be decentralized. So, ownership: If I play Fortnite and I have $10,000 invested in the game (and that sounds outrageous, but there’s actually a lot of people who have spent $1,000 on Fortnite on whatever items you can buy in the game or character progression) and your ownership record would be decentralized, and exist on an Ethereum sidechain. The graphics processing can stay on an Amazon server; you don’t really care that that’s centralized.

For a while we didn’t have the stack to support this. Now we do, for some pieces, but we still lack the developer toolkit. We lack the expertise. There aren’t many gaming studios that know how build on a smart contract platform. That’s changing right now. We’re starting to see collaboration between crypto developers, who know what they’re doing, and game studios who know what they’re doing, to produce crypto native games that are actually fun to play.

I think in the next probably 12 months, we’re going to see the first killer Dapp in crypto. My best guess is that it’ll be a game. And it won’t have 100 million users, it won’t put Fortnite out of business. But if it has a million active users, and the company that launches it monetizes each user at double the rate of Blizzard, that becomes an incredibly powerful proof of concept that VCs will rush to throw money at.

And the marketing is there — so companies like BlockOne are sitting on $3 billion, the Ripple company is sitting on money, Stellar, Lightyear (the company behind Stellar) is sitting on cash. You have a lot of entities in crypto, that are sitting on piles of cash. Block one is $3 billion and a Superbowl ad is 8 million. With $100 million Block one could buy 12 Superbowl ads.

If you have a game in the iPhone App Store, even a bad one, and you spend $20 million marketing it, you will create users, and that will be a very powerful proof of concept. Those entities are mostly waiting to have a Dapp they think is worth marketing, before they do it. I think they’ll probably find that Dapp in the next 6 to 12 months and then they’ll throw a bunch of money marketing it to drive usage and adoption, and I think they’ll succeed.

Paul Madsen: We’re psyched about games as well Ari. Coincidentally, we’ve got a blog post up about a month ago that explored that very same hybrid architecture — gameplay on a private ledger, and then tracking ownership of a scarce item of said game on a public ledger, for trust and security. So that’s good to hear. Thank you very much for sharing your thoughts with us.

Ari Paul: Happy to be associated with you guys. You guys are building a killer platform and it’ll be interesting to see what the first application of it is.