Harnessing the Power of Bitcoin to Secure Other Chains

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1:36What's up, guys? It's Ash Bennington. Welcome to Real Vision Crypto Daily Briefing. Joining me today is Professor David Shea of Stanford University, founder of Babylon Chain. David, welcome to the show. Hi, Ash. So great to be here today. It's great to have you. Professor, first question. You've had an extremely distinguished career in computer science. You're named chair at Stanford University, PhD from MIT, postdoc at Bell Labs, National Academy of Engineering member, IEEE, Claude E. Shannon, award winner. You could have worked on any problem in engineering that interested you. My first question to you is why this crypto space that we are both so passionate about, though, to be fair, to be honest, has many detractors.

2:22What was it about the technical complexities of this space that first drew your attention? Yeah, so Ash, so just a little bit about my background. So I came from the Web2 world. So I was helping to build the wireless infrastructure that we all use now, starting from third generation, fourth generation, fifth generation. And so that's what I've been working for 10, 15 years. And at the point when it becomes 5G, then the technology becomes really mature. So I was looking for a new area where explosive infrastructure opportunities exist. And I was looking around and one day a friend of mine recommended me to read Nakamoto's Bitcoin white paper.

3:09And once I finished reading that paper, I was just completely hooked onto this concept of building large-scale, decentralized, permissionless network, all these complexities to deal with this kind of system. And from a technology point of view, it's a really fascinating problem. And that's how I started working in space. We should also say, talking about things that are relevant to this, that you are also the inventor of the proportional fair scheduling algorithm that is used in many billions of cellular phone networks all over the world. So thinking about very hard problems in network science is something that you've been doing for a very long time.

3:48Yeah, so I'm so glad that everybody gets to use one's technology. and these kind of things don't happen often, but they've happened to me before. So I was really fortunate. And when you read the Bitcoin white paper, did you think about that as a, in your mind, was it a transitional moment, a transformational moment in the same way, for example, that wireless technology, which has become so widespread is? Yeah, I think so. So wireless is the transformational technology because it allows people to communicate anywhere, anytime. And so the key here is to communicate, which is really a very basic human needs.

4:31But Bitcoin, the technology, is in some sense going at even more fundamental human needs, which is this notion of being able to cooperate, but without a central authority. And cooperation has been sort of the linchpin of human survival, human existence, cooperation. And cooperation has always been done through very centralized authority. And I think Bitcoin is like the first time that demonstrates that large scale decentralized systems can be built. Talk a little bit about what you feel the significance of that decentralization is, the move away from centralized authorities, trusted third parties, to a decentralized network of trust.

5:23Yeah, so Web 2, which I contribute towards building, is about building the internet, right? So the internet, the wireless internet, the wired internet. and that allows us allow people to communicate and however although the original idea of internet was a decentralized system at the end at the end the system we built is still rather centralized it's controlled by a very relatively small number of entity and so I think the significance of Bitcoin is to sort of restore back the initial promise of the internet to be able to build a network where everyone can participate in an equal fashion. So I think that to me, to be able to build the technology that supports that promise is really fascinating.

6:17Yeah. Let's talk a little bit about where we are in the development of the Web3 ecosystem. What's your perception of the current state of play of Web3 today? yeah so it's really interesting i think currently the web3 development is a little bit like maybe the development of the auto industry car industry a hundred plus years ago where there are many competing players many many different uh car companies all promoting or building their own technology, doing research in different directions, development in different directions. And I see that there is a sort of a diversity of approaches in building this Web3 technology.

7:12So I think that's really fascinating because you don't know how it'll play out. Let's talk a little bit about DeFi, which I think of as a proper subset of Web3. Talk a little bit about the state of play in the DeFi space, how you define that space, where you see its current status is, and what you think the potential for DeFi in Web3 is. Yeah, so maybe I should say a few words about sort of my expertise, because, you know, the thing is Web3, although in the early stage, is still rather complex. So DeFi is certainly one of the main applications of Web3, Web3 application. But my own research and my own building is focused on the consensus layer, the consensus layer, which is sort of underpinning all the applications that goes on Web3.

8:09So I'm not really an expert on DeFi and many people are more expert than I am. but that is certainly something that makes the web3 space interesting and actually one interesting thing about DeFi is that there's actually a very interesting interplay between the web the DeFi applications and the underpinning consensus infrastructure that drives the web3 which is through this notion of staking. So I think staking, on the one hand, provides security to the consensus layer, which is the underpinning foundation. But at the same time, it is also, in some sense, a financial product, a DeFi financial product.

9:04So I think staking is sort of one very interesting thing that connects the two together. David, how do you define staking and how do you assess its significance in the DeFi ecosystem? Yeah, so maybe we should go back a little bit of history, which is that the original blockchain, which is Nakamoto's Bitcoin, is done through a consensus mechanism called proof of work. That means that miners have to show that they've done a certain amount of work to be able to participate in the consensus. Now over the years, this proof of work model has evolved to a very sizable alternative model, which is the proof of stake model.

9:51The proof of stake model is that everyone to participate in consensus, they should have a certain fraction of the stake of the network. And so staking is sort of a fundamental thing that drives the consensus process. And staking is really a way for a token holder to provide collateral that to secure the underlying network. Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

10:30Talk a little bit about the role of staking today in the Ethereum ecosystem and what it provides for end users. Yeah, so, okay. So first of all, a blockchain is useless if it's not secure. Right. That is the basic concept of security. What does it mean by security? It means that, well, when you have a transaction and the transaction is confirmed, you're guaranteed that that transaction will not become de-confirmed and your money is no longer there. So that is, from the end user point of view, the most important public property you want to get from the blockchain you operate on, in this case, Ethereum that we're talking about, is that it's secure.

11:20And so I think from the end user point of view, the security is the most important thing. And now staking, therefore, it sort of provides a two-sided gain from the user point of view. On the other hand, on the one hand, it provides security, which is a very basic property the user wants. On the other hand, it also provides a yield opportunity for the user to obtain yield. So I can see that there's a dual implication of staking to the end user of the crypto space. Yeah. Talking of security in the DeFi space, I wanted to show a clip. Jim Bianco had a really interesting take yesterday on the Real Vision Daily briefing where he spoke about what has happened in the wake of the Curve hack.

12:01Let's take a listen. You know, as I've often said, crypto, the killer in crypto is still going to be hacks. Anybody gets hacked that has got credibility like Curve, and it really just casts a pull over the entire space right now. And so that's where I think that the crypto space is really struggling with right now. Because, you know, I'll say this to any crypto devs that are following. This is not gaming. You cannot put out a buggy 1.0 and people just have a bad game experience and the game crashes. You put a buggy 1.0 DeFi and people lose their life savings. You cannot ever, ever, ever have a hack.

12:43And what do crypto have all the time? Hacks. And that's why it's just never going to get ready for prime time if this continues. And now that you've had a hack, although minor, in one of the more important primitives in curve finance, it just really casts, I think, a big pall over the entire space. So that's my little diatribe about what's going on with crypto. David, exactly what you were just talking about there. I saw you nodding while Jim was speaking. Important to point out for people who aren't familiar with Jim Bianco's work, Jim Bianco is no hater of DeFi. He was one of the first financial analysts, first financial researchers I know of to really be interested in the DeFi space, to go into the ecosystem and start playing around with it very early on in the game.

13:31And yet, to his point here, listen, DeFi is not gaming. A buggy 1.0 experience means you lose everything that you have on a protocol. David, I'm curious to hear your reaction. Yeah, I fully agree with that line. Although I was not able to hear the second part of his comments. The first part I did hear about his rightful emphasis on security. That when you design a protocol, it's really important. It's really important that you don't lose people's money. So in my own work, it's the same thing. So I do security protocols. I do security protocols based on staking. The main goal of our work is really to enable people to trustlessly stick so that they don't lose their money when they stick.

14:22So that's sort of completely agreement on that one. So let's talk a little bit about your work. Let's talk about Babylon Chain, of which you are the founder. Talk a little bit about the uses of it. I think one of the most interesting things is that it uses Bitcoin as the staked token. Talk a little bit about that. Yeah, so that's right. So the project we're building is Babylon. So the vision of this project is the following. Bitcoin is an asset. It's the biggest asset in the crypto space. However, the use cases of Bitcoin has always been rather limited. And perhaps by design, perhaps by design, mainly a store of value.

15:05Now, what we've discovered is that Bitcoin actually can have a very interesting use case, a very interesting use case. And this use case is to use Bitcoin as an asset to secure proof of stick chains. Now, if you think about this, this sounds a bit paradoxical because proof-of-stake chain was built in some sense to try to replace Bitcoin, to try to replace Bitcoin, converting proof of, evolving proof-of-work to proof-of-stake. But what we've shown in our work is that actually proof-of-stake protocol presents an opportunity for Bitcoin to add a very important use case. so maybe i can say a few words about why this use case for bitcoin is very interesting please and to to to say that first i have to give a little bit context why bitcoin has very little use case outside the bitcoin chain the main reason is because bitcoin is a chain with very limited programmability basically by design very limited programmability so no smart contract as a result it's very hard to build secure protocol, like secure bridges, for Bitcoin to interact with the rest of the ecosystem, like with Ethereum or with other blockchains.

16:28And so therefore, there's very little use case of Bitcoin. So what we showed is that for this particular use case of staking, however, you can do it without bridging the Bitcoin asset away from the Bitcoin chain. And then we can do it in a trustless, self-custodial manner. So that's why we're so excited. And I think that brings back to the point of the clip, which is security is kind of our primary concern. And in this case, security for the Bitcoin holders. Nobody wants to lose the Bitcoin. Yeah. David, can you explain a little bit at a high level how the protocol works and what the use cases are that you envision for Babylon Chain?

17:11Yeah. So imagine you're a Bitcoin holder. You have a Bitcoin in your wallet. And right now you're earning, most Bitcoins are earning very little yield because it's just in the wallet, no activity. So what our protocol allows the user to do is to put this Bitcoin in a staking contract on the Bitcoin chain. The staking contract can be written by the Bitcoin script. and once it's on the contract you can use that to provide security to your favorite proof of stake chain so there are many many proof of stake chain but in the longer term when a protocol is built up you can stick it on a proof of stake chain in such a way that your bitcoin can be a collateral to secure the chain and the main point being a collateral which is the main technological innovation, a protocol, is to be able to so-called slash this asset, slash this asset, in case there's any bad behavior, so that there is no bad behavior.

18:20So I think that's sort of the main property of this protocol. And slashing, for those who may not know, is the act of removing the staked coin from people who violate the terms of the chain. That's right. Violate the term of the protocol yes so each chain has a protocol and the protocol has certain rules and just like you know you go and stay at airbnb you will put a deposit down the deposit and show you have good behavior while you're in the airbnb so similar thing here you participate in validating for chain you should follow the behavior of the protocol and the slashing is a mechanism that is meant to never happen.

19:05The reason why it should never happen is because it would like to ensure that you have good behavior, just like you should never lose your deposit when you stay at an Airbnb. Yeah. By the way, viewers, put down your questions in the chat. We're asking the best ones on the air. Remember, Real Vision members take priority. If you're not a member yet, go to realvision.com forward slash crypto. That's realvision.com forward slash crypto to sign up. It's free. It's where new episodes of Raoul Pal's Adventures in Crypto premiere every Friday. With that said, Professor, we've got some questions coming into us from YouTube right now.

19:44First one comes to us from Kevin Lim. Why would the miners allow this when they benefit off high fees? I believe he's talking about the Bitcoin network. oh so um this protocol is actually uh completely beneficial to the miners actually because for example oh well who generate new bitcoins is the miners so this staking protocol actually allows the miners themselves to actually stick the bitcoin and earn yield in fact our initial set of customers that we've been talking to people who are willing to put stake the bitcoin when our network launched are precisely the miners so and number one number two is that this protocol is increasing a use case is adding a new use case to the bitcoin and therefore this should lead to if this use case proved to be very useful this should lead to increase in the value of bitcoin And that is, again, beneficial to the miners because the miners' incentive to mine is because of the value of Bitcoin.

20:52The higher the value, the higher the incentive for them to mine. So I think it's completely in alignment with the miners' incentive. Hey, everyone. We're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

21:11okay next question comes to us from sas finance also from youtube is babylon similar to stacks sas wants to know uh no it's not similar to stacks stacks is a layer two project it's a smart contract project built on bitcoin uh it bridges Bitcoin to the Stacks network and create an economy there based on smart contract. Babylon is the protocol focuses on providing security to proof of stake chain. It gives an additional use case, it gives a new use case to Bitcoin for staking. So it's a rather different project. However, both of us are trying to add new use cases to Bitcoin. Here's a question from Naughty Jackal.

22:01any plans for a Babylon token?

22:06So Babylon chain has two roles. First, it will provide Bitcoin staking. So in Babylon, we built protocols. So the Babylon chain will become a middle layer that would help coordinate the staking of Bitcoin on all the other proof-of-stake chains in the world. So to run this chain to provide appropriate incentive Yes, we do envision one day to have a token on the Babylon chain. Correct. David, how would you characterize the current state of Babylon chain in terms of its deployment and its functionality? Where are you in your roadmap? Yeah, so very good question. So we have built our first testnet, which provides the basic infrastructure that supports this Bitcoin state chain.

22:59So in this testnet, we have integrated Bitcoin with the Cosmos ecosystem, with the Cosmos ecosystem. One of the oldest proof-of-stake ecosystem was the most mature proof-of-stake technology. So we've integrated with them to build this infrastructure. Right now, we are adding the Bitcoin staking protocol on top of this infrastructure. And we plan to emerge, roll out the testnet in the fall of this year. And our goal is to get to the mainnet next year, hopefully before the halving. Talk a little bit about security from a culture standpoint. I believe this is open source technology. Talk a little bit about how you guys attempt to find bugs in that.

23:48Do you have bounties? Do you have a program? Talk a little bit about that aspect. Yeah, so our technology is open source. And indeed, we provide bounties for people to find bugs. We will also engage auditors to audit the security of the protocol. And yes, we treat security very seriously because we are a protocol that provides security. So let's talk a little bit about the extension of functionality. Obviously, we've been talking about staking. Is there a plan to develop a smart contract mechanism for this, a way to essentially do a Turing-complete ecosystem for processing on this chain in the future?

24:34You mean on Babylon? Yes. Or on Bitcoin? Okay. Yes. So Babylon right now actually has a smart contract on Babylon itself, not on Bitcoin. Bitcoin has no smart contract. So the smart contract is for essentially managing the security layer.

24:56So currently, as I mentioned, the distinction between Stacks and Babylon is that we are leveraging off the economies of the proof of stake world to increase the economy, the use case for Bitcoin. I think that is sort of our philosophical approach to this problem of increasing use cases for Bitcoin. So the smart contract, there is a smart contract, but that is for managing security. And the interoperability, the power really comes from the smart contract on the proof of stake chains that benefit from the Bitcoin staking security. But they have their own economies. talk a little bit about in layman's terms what some of the functionality might be uh in your vision for the roadmap as we get out one three five years in the future what types of things would you like to see done on babylon chain other than obviously yield and security yeah so that's a really good question um so the roadmap going forward is the following So, number one, so I'm trying to minimize the technical jargon here to describe the roadmap.

26:14Yeah, so currently Babylon Chain is a chain that facilitates the staking. Another important benefit that we want to put in the roadmap one year from now is called data availability. So this is a very technical term, but really what it means from a user point of view is to provide a censorship resistance layer. So one important thing in addition to staking is censorship. So if there is, as we all know, among all the blockchains, Bitcoin is the most censorship resistant chain across all chains. Other chains can be censored. So one way is to use Babylon to provide censorship resistance to these proof-of-stake chains with the help of Bitcoin.

27:08So that's one thing we want to build going forward in the roadmap. So in the longer term, there's actually a very challenging research project that we want to work on. And that is the following. If you think about it, what we provided currently in terms of staking is the following. We are saying that even though Bitcoin is not Turing complete, the Bitcoin language is not Turing completely, we can actually still do a very important trustless use case from Bitcoin. okay so this the essentially the way we achieve it is to use cryptography to emulate the smart contract capability which does not exist in bitcoin so an interesting question is whether or not in addition to providing security you can use this method to also collateralize bitcoin to provide liquidity without bridging the Bitcoin away from the Bitcoin chain.

28:16So that is a very interesting problem. And that is a longer term problem that we would like to work on. David, I know you're a computer scientist and an engineer and not a lawyer, but I'm curious, when you hear the term censorship resistance, when you talk about that, phrases like censorship resistance, credible neutrality, How do you think this might jibe at some point in the future with, for example, things like AML, KYC laws, anti-money laundering, know-your-customer laws here in the United States and abroad? Is that a challenge that you've thought about? Yeah, as you said in the beginning of this question, that I'm not a lawyer.

28:57but I do know there is a concept called the what is this, Second Amendment or Fifth Amendment which means I should not self-incriminate myself so I think I will take that

29:15David, really great conversation fascinating stuff obviously you have a long and distinguished history in engineering and developing this technology it's a pleasure to have you with us talking about these ideas. Final thoughts, key takeaways that you'd like to leave our listeners and viewers with from this conversation. Yeah, so if you have a Bitcoin and one more use case for it, think about Babylon. Sure and sweet. David, thank you so much for joining us. We really enjoyed this conversation and I'm sure our viewers did too. Thank you, Ash. So great to talk to you here. That's it for today. Make sure to check out our website.

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