tBTC – Bringing Trustless Bitcoin to Ethereum • Epicenter

Sebastien: Matt, thanks for joining us. Tell us a bit about yourself and how you got involved in the crypto space.

Matt: Thanks for having me. I first got into crypto because I was buying and selling gift cards as a side hustle, working on another startup. It turns out that there was a period of time where people had tons and tons of Starbucks cards, and I realized that you could buy them for like 50 or 60 cents on the dollar. You could resell them, make a nice tidy profit.

That’s what helped fund my first startup was schemes like that. Eventually I tried to scale that into a startup. When I launched it, the idea was you could go to the site, you could put in your gift card info, we’d pay you in PayPal. PayPal didn’t like that. At the time, I didn’t know much about gray finance and all these new instruments, but apparently, buying and selling gift cards were against PayPal’s terms of service.

My introduction to Bitcoin was just looking for censorship resistance and some sort of alternative to PayPal. I relaunched the site cardforcoin.com and this was the end of 2013, early 2014. In the first week it did $50,000 in sales, which was more than I had in my bank account. I was having to hustle to Keep the Bitcoin going in circles, money orders, all sorts of early Coinbase shenanigans. Yeah, that was my introduction.

Friederike: And you started a Bitcoin cashback company pretty soon after that. Right?

Matt: Originally we had all these gift cards and we started actually understanding crypto a little bit more and getting more into Bitcoin. That’s what led to Full. At the time it was straight up a payments product. All the things we used to laugh about when the block size debates, can you buy your coffee with Bitcoin, but as the market started to move and it became clear actually, block space is scarce and we probably shouldn’t use it for every coffee purchase.

That’s when Fold pivoted to this rewards model. Now if you want to get Bitcoin back on every purchase, you can go to foldapp.com and you can check out their card. Their growth has been incredible, frankly. The new CEO, Will, is just a much better consumer CEO than I think I’ll ever be. I’m sort of jealous when I see the numbers they pull. Check it out, people seem to love it.

Friederike: Fold was being folded into this portfolio company Thesis. I mean the one that’s still around today. But it actually predated Thesis.

Matt: We were running a production studio, but that wasn’t the plan. The plan was just to launch a startup and, I don’t know what is the plan, after that to profit. I guess we were growing this thing. I think when we started, we were really focused on application layer work. Let’s help you buy, spend, use Bitcoin. Then as I got deeper and deeper into the space and more engaged on the tech side that eventually led to us starting a new project, which was Keep and tBTC.

We knew full was a great idea. I had a strong team and it needed a little bit longer to really get to market. That’s when we decided to launch as a studio. Yeah, photos on its own independent entity now Keep, and tBTC have their own team. We actually have another project called saddle, which launched in January as well. A few more that we’ll be launching, hopefully I’ll share with you guys later this quarter.

Friederike: Good. Tell us about Keep. What does Keep set out to do? The basics.

Matt: Because I came from Bitcoin when I started playing with the Ethereum stuff, I was surprised by a lot of things. You’ll hear I get all up in arms about things that I think a lot of Ethereum developers consider basic I’m surprised by. But one of the ones when I first got that got into just solidity dev was where does all the private data go?

Obviously I understood how the chain worked, but I just thought with my own background that there would be a lot of options for developers who wanted to Keep data off chain. The reason I thought that is because there’s a lot of cryptographic tricks to do that. We have all sorts of provable mechanisms where you can Keep data off chain. I went after the problem using multi-party computation.

The idea was that if you wanted to Keep your social and you actually wanted that to be tied to some on chain information, but obviously you don’t want to put your social security number or another personally identifying piece of information directly on Ethereum. You could use this tech. If you think of MPC as a generalized Shamir split.

Choose a computation. Now imagine you could do it over a threshold of parties and that’s the basic idea behind multiparty computation. Anyway, we dug in and we started working on this. We launched a random beacon. We launched the random beacon on ETH One that’s BLS based. Then we started saying, okay we have this very general purpose technique.

At this point, late 2018, early 2019, we’re wondering where all the developers and one of the things that became clear to me is if you went from JavaScript to solidity, you probably don’t even understand the problem we’re trying to solve.

Instead of attracting devs, we said, let’s build it ourselves. The first application built on top of Keep is tBTC. The idea is that the private information that you’re trying to custody is a Bitcoin key pair, and that you’re using MPC instead of the usual Bitcoin multisig to custody the coins.

Friederike: What the Keep network does for tBTC in a nutshell, is that it gives you a trustless representation of Bitcoin on Ethereum?

Matt: I’d say, what Keep does is the decentralized custody component. tBTC still needs SPV proofs and some other cross chain stuff to actually make the experience for users reasonable, but the part where you need a whole bunch of key material that’s not on the Ethereum chain. Absolutely. That’s key.

Friederike: We’ll go into how that works in a bit. Tell us why you would want that first, where you would want to have wrapped Bitcoin on Ethereum.

Matt: I mean, everyone has their own reasons, but for me, I went to buy a house and so I have two kids and when we hit kid 2, we realized we should probably leave California. Before that became super trendy, right. It’s just a little too hard to do the Bay area with two kids. We went back to Atlanta and when I went to buy a house, I looked at our finances and I said, most of our personal wealth is crypto. I’m sure we’ll find a lender. Who will accept it? This was 2018, 2019. This was before blockfi had become what it is now. I wasn’t immediately going to say, Oh, retail lender, let’s go to blockfi, like a lot of people would today.

I talked to some local mortgage lenders and my favorite conversation was the one where they said, Oh yeah, we love Bitcoin. It’s so great that you’re involved! Sell your Bitcoin, come back to us in 30 days, we’ll pretend like we didn’t have this conversation and we’ll lend to you. I dunno, that really bugged me.

The whole reason I’m interested in Bitcoin, the whole reason I got involved was to avoid, in my case, PayPal and centralized payment processors, but really the entire, why am I talking to anyone? If I’m good for this mortgage, why do I have to talk to anyone to get permission? That really bugged me. What got me into tBTC was really that I wanted to use my Bitcoin as collateral to buy a house.

This was all before DeFi summer. Right? Since then the use cases have exploded. I think that in a lot of ways, collateral is King and some people talk on the Bitcoin side, people say, Bitcoin is super liquid. Well, it’s super liquid if you make it super liquid, right? It’s super illiquid, if you hook it up to everything else. That’s kinda what we’re trying to do with tBTC.

Friederike: There’s a bunch of different ways of getting Bitcoin to Ethereum. Basically there’s different trustless alternatives like RunBTC, but then there’s also trusted alternatives like wrapped Bitcoin backed by a consortium of Coinbase and Bitco and others. Why do you think the trustless route is interesting and necessary?

Matt: That’s a two-part question. why do I think it’s interesting? What’s my evidence that the market cares? Because if I found anything in this space, it’s just because something is interesting or even ideologically satisfying doesn’t necessarily mean the market will care about it. Why I think it’s interesting is I don’t want to ask permission.

By the way, I’m going to sound super negative about WBTC. But actually, I think what they’ve done for the space has been great. There’s the preface. But if I use something like wBTC and I say, okay, I’m going to put my Bitcoin down as collateral. Let’s say I’m finished with that. I go to withdraw. wBTC can block my withdrawal back to Bitcoin.

It’s good marketing that you think it’s a consortium, but it’s just Bitco. Bitco is the sole custodian. Even though there’s this idea of a community multisig and they have partnership coming, the only people holding the Bitcoin ultimately are Bitco.

I don’t think the Bitcoin tomorrow is going to target Matt Lavango, but I think Bitco tomorrow might target anyone who’s been in a particular jurisdiction that threatens their business. I don’t blame them for it. They’re a regulated business, but that does mean that I’m pretty uncomfortable putting most of my personal wealth in a system like that.

Sebastien: Let’s maybe turn the question around then. What are some of the caveats or to using a trustless system, as opposed to using something like wrapped Bitcoin, let’s say wrapped Bitcoin had better multisig and maybe a better key?

Matt: First. It’s hard to call anything trustless. The way that the Bitcoin L-One works, it was not built for interoperability with other chains. There were no other chains to inter-operate with when Bitcoin was designed. When you look at Bitcoin’s L one, you realize it’s very easy to prove what’s happening on Bitcoins L-one to other chains, but it’s very difficult to prove what’s happening on other chains to Bitcoin’s L one.

Most of the opcodes and script that you would need for that. There’s a whole slew of different ways to do it, but most of them are politically unsavory. It’s the same reason why aren’t there more trust minimized side-chains on Bitcoin and it’s well, because we, as a community, Bitcoin hasn’t decided that it’s worth the risk to actually make the change.

If you look into the history of things like drive chain and some of Paul’s storks work, you’ll see, goes right to the debate on the Bitcoin side. But that means that anything that claims it’s trustless or trust minimized that’s bringing Bitcoin to Ethereum, has to be making a compromise because there is not a technical way to do this perfectly.

In the case of tBTC the compromise tBTC V1, the compromise that we’re making is in capital efficiency. The idea is that, okay, Bitcoin cannot validate Ethereum consensus and I don’t ever expect that’ll change. What we do instead is say, if we want to ensure that your Bitcoin is safe and you want to be able to use it from Ethereum L one, we ask that each custodian on Ethereum’s L one put down Ether.

Then basically there are fraud proofs, where if you go to withdraw your Bitcoin from tBTC back to your keys, or back to Bitcoin L one, and you don’t get your money back, you can prove it. Then you get the backend collateral on Ether, it’s sort of the best you can do. I wish we could say we could do better than that. It would be fantastic if we could say, no, the Bitcoin chain will somehow slash these people and you’ll get your money back. That’s just outside of the technology today.

Friederike: Maybe let’s go into a little bit more detail here just to make this more tangible. Basically say I have Bitcoin and I want them to have them on the Ethereum chain. Basically I want to turn them into tBTC. How would I?

Matt: What you would do is you would let the Ethereum chain know. You just say, Hey, I want to mint a 10 tBTC. For example, I guess that number sounds bigger and bigger. It used to be a perfectly reasonable demo number, but we’ll stick with that. You say, look, I want to mint 10 tBTC. On the Ethereum side, what happens is a random beacon chooses three custodians.

They come together and they set up a three of three threshold ECDS, a set up, which is like a somewhat fancier Bitcoin multisig. They say, okay, cool, here’s this three of Three. Here’s the address? We have required Ether from each of these three custodians that is worth, I believe the current government says 200% of the Bitcoin they’re going to put down. Then once that happens, you say, fantastic. I’m going to send my Bitcoin.

Then you send with your Bitcoin, you send a proof once you’ve got enough work. Once you’ve had around six confirmations and that proof goes to the Ethereum, Janet says, look, I sent Bitcoin. I sent it where he told me to give me my tBTC. There are a lot of other little options and fiddly things you can do at this point, but most people just take their tBTC and are free to use it in DeFi or wherever. Then they can turn that tBTC into their exact same UTXO that they put in the first place or some other Bitcoin that’ll come out the other side.

Friederike: It’s a bearer asset. Right? The tBTC. Basically if I give it to someone else, they can redeem the Bitcoin on the other side by just specifying a payout address that the three trusted community members send the Bitcoin to?

Matt: That’s right, and to be clear, that three of three is chosen from currently, we have 200 separate stakers and more working on 10xing that number

Friederike: What’s the benefit of being a Staker? What’s in it for them?

Matt: Right? Obviously there’s a bunch of economic activity that Bitcoiners would love to take advantage of Ethereum right now. You know, it’s not just 2017’s latest shitcoin, it’s also let’s lend and take Eth BTC positions and do some pretty complicated financial maneuvering. Moving your Bitcoin over has value.

Right now tBTC speeds are cranked all the way down by governance. Instead stakers are earning primarily a subsidy in the backend token Keep. The idea is that 3 BIP fee right now can be cranked up to between 30 and 60 bips and start to really generate some revenue.

Friederike: And that’s another thing that I was interested about in the mechanics of how it actually works. As I understand, there’s actually two separate tokens. There’s the fungible ERC Twenty tBTC token, but then there’s also a non fungible token. The ERC 721 TBT. What’s that? What do I do with them? The TBT token?

Matt: Most people don’t know they exist and do nothing with them, frankly. But some very fancy users do some cool stuff. The idea is that when you deposit your Bitcoin, you’re actually getting this non fungible bearer asset for your particular deposit. If you want, you can turn that in for fungible tBTC and it will be minted.

If there’s a reason that you want to hold on to your particular UTXO and make sure that you can redeem just that one, then you hold onto that NFT and you can trade it, you can loan against it. There’s a lot of interesting things, depending on your belief around all of the taxes of this situation, where some people really want to say, no, I never disposed. In fact, this is the exact same Bitcoin, with air quotes that I put in.

Then there’s also some really advanced interop stuff you can do where when you get UTXO a level control that you can really get wild. What we’ve seen since tBTC V one launching is, a few of us take advantage of that sort of stuff. But the actual infrastructure for NFTs on Ethereum right now is very much focused on dancing cats and not really on the financial use cases that we’ve been considering.

For example, discussing NFTs with Maker, it’s been a long time, they’ve talked about bringing in NFTs into basically the collateral class that maker accepts for loans, but at the end of the day, they need a price feed and who’s going to provide that price feed? Even though we love the UTXO NFT idea, and I personally play with it a lot, most users have just found that it doesn’t really mesh with the rest of the Ethereum yet.

Friederike: You can just pretend that you will never left. You always retain control of your Bitcoin, so there is no taxable event.

Matt: Yeah. That’s the idea. That’s the idea is if you’re taking a loan directly against a particular UTXO. A lot of people would take that argument at all, moving Bitcoin into tBTC and say, I’m wrapping. I haven’t disposed of it. I’m not an accountant, but it’s obviously a really complicated topic.

Friederike: Yeah. I think also depending on the jurisdiction and when taxable events occur.

Matt: Germany does not screw around with any of this stuff. The US is a little bit more flexible around some of it.

Sebastien: In France, for instance a crypto to crypto is not a taxable event.

Matt: That sounds nice

Sebastien: In the documentation, I was reading that it was 150% collateral and you mentioned 200% collateral. I believe that is one of the parameters where the team currently has control over?

Matt: It’s not the team anymore. It’s been given over to a community multisig that was community elected. Eventually I expect that’ll get replaced by a DAO.

Sebastien: Okay. Yeah. We can maybe talk a little bit more about those parameters and which one of those parameters that may be given authority by DAO, but why 150%? Why 200% who decides this number and why is relevant?

Matt: It’s a great question. There’s a short term and a long term answer here. Which is how do you feel about the Ether tBTC price? I think, everyone has a different thought, oh, it’s under performing, or, no, this is where it should be. You know, there’s lots of discussion to be had.

When you build a system like this. What we’re guaranteeing to users that we do, is that stakers have to hold your Bitcoin, and they have to give it back to you when you ask. The only way that we can guarantee that is by holding stakers Ether in escrow. Now, if the value of their Ether goes down too much, it can’t possibly safely back Bitcoin anymore. A key part of tBTC V1 is this price feed, which is a Maker price feed.

I probably say, this is the most centralized part of tBTC one, there’s this maker price feed that gives us the EBTC price. What it says is if the BTC drops too far, some of these particular deposits might have to be liquidated. There’s a time window where stake risk and return funds and can avoid any negative liquidation stuff.

It’s pretty unfortunate, frankly, because I’m a staker myself. It sucks to actually enter into this awkward tBTC position where on the one hand, maybe you’re backing tBTC because you’re a Bitcoin bull. But on the other hand, you’re getting punished if Bitcoin does too well relative to Ether. There’s this option that you’re opening up. What the community has decided to do while we add a little bit more tooling is they’ve actually increased that 150 starting collateral to 200%, which is very high.

They’ve done that because a lot of the stakeholders are tired of managing a tBTC position. We have an upgrade mechanism. tBTC V1 is absolutely immutable to the point where we’re constantly struggling with our past selves. It’s difficult to work with sometimes ideologically satisfying, but difficult.

What we’ve done is we’ve started looking at how can we make this easier on stakers? Basically, we’re, we’re bringing outside capital into a system called coverage pools to actually allow that collateral ratio to go a lot lower. But until then the community has decided let’s Keep it at 200. Let’s get coverage pulls out, and then we can drop it to more 130 and what coverage pools perform here. Yeah.

The basic idea is there a backstop? Right now, if you go into liquidation as a Staker, so as a user, this is what’s interesting is none of this matters to you. You just float along and you have this great experience, but that’s on the backs of these stakers. What the coverage pool does is if you go into liquidation, the coverage pool will always be the buyer of last resort and will always act as a backstop for auctions.

You can just put a whole bunch of collateral in it, but what’s great is that it’s a fund that’s socialized across all of these deposits. Instead of asking a particular Staker to put down more and more Ether, you can say, okay, there’s a whole passive bunch of capitalists who are going to put down capital and back your deposits. Then they’re going to earn fees on that.

It’s insurance, it’s a backstop. There are a lot of different ways to look at it. But yeah, the idea is it allows passive capital to be passive and active capital and not have to put down quite so much and manage quite so tightly.

Sebastien: These coverage pools are sort of separate from the system. They come up organically as a way to mitigate?

Matt: It’s funny that you say organic, because it’s not organic where we’re writing it, but actually yes, people have basically built their own in-house coverage pools. Staking services and whatnot are already having to do this and having to manage these collateral ratios in a socialized way. Cause it’s more capital efficient. We’re launching a way to be that on chain where anyone can participate rather than working with a particular staking provider.

Friederike: Let’s talk about the capital efficiency inefficiency. For people to actually use their Bitcoin on Ethereum and yield farm with it, or whatever other people actually have to deposit their Ether into these contracts and basically incur the opportunity costs that come with that. Is there a plan of alleviating that burden on stakers?

Matt: When we first designed the system, there wasn’t a lot of yield to be had on Ether. Now, I mean, it’s still one of the lower yielding assets in DeFi, but now, people are talking about 20 to a hundred percent everywhere and it’s crazy to have to compete with returns like that. It’s really important to us that we find a way to really minimize the use of additional collateral outside Bitcoin.

There are a few ways to do that. There’s, if you look at the space today, one, there’s just sort of the Yolo trusted way. If you look at liquid, for example, by Blockstream you say, look, you guys know us. We’re good guys. You know, don’t worry about it. You can Sue us if something goes wrong and there’s this rough consortium. If you look at something like wBTC, it’s both better and worse.

On the one hand, it’s worse because it’s just BitGo as a custodian versus these, I believe it’s 15 in Liquid, but on the flip side, it’s BitGo and they’re professional custodians. There’s some comfort you can get to that. When it’s just this trusted Yolo, everything will be fine. That’s where you have given up on a technical solution a little bit.

Another way to go after it would be to say something like, we’re still decentralized, but instead of requiring people to put down capital, we’ll require them to use trusted hardware. I mean, if you talk to a cryptographer, trusted hardware, it’s a joke in the sense that you’ve given up on cryptography and you’re instead going to rely on someone else’s supply chain being strong.

If we assumed, instead of using Shaw and Bitcoin, let’s just have everyone use super secret hardware that has an attestation key. We’ll just trust that key is good. It’s really disappointing to me as a system designer to see when people go that route. There are two approaches that can improve capital efficiency, both of which are pretty distasteful.

Another way to do it, which leans a little bit more into the math is to say, there’s also the DeFi, which I’ll touch on at the end, but you can also say, okay, if you have enough people, say a 1000, 2000 people, and you make your wallets large enough, you can start to see that, okay, how many people have to be malicious for this Bitcoin to actually be at risk? If you’re going to custody.

There’s a reason we launched tBTC we went first with Ether and it was really the steel man this entire idea of putting Bitcoin on Ethereum in the first place. But if you really want to get capital efficiency, you have to remove the Ether. If you want to remove the Ether and you want to do that without falling back on a small consortium or trusted hardware, you have to make all the other numbers go up.

Our plan for tBTC V2, which will be a separate token, as I said, we want it immutable. We don’t have any cool upgrade buttons or anything. We’ll be picking from over 2000 nodes. Each wallet will be a hundred plus signers. I expect it will probably land somewhere between 55 and 75 have a hundred signers required to move your Bitcoin. The idea is, okay, what percent of stakers do we think are malicious?

If we believe that the number is less than a majority, then we can remove the additional collateral and instead move to an explicit insurance mechanism in case something goes wrong. You’ll notice the coverage pool, that’s the piece that we’re taking from V1 and also using a V2. It’s pretty out there. It makes many of us uncomfortable.

If you do the math and you say, (I’m just gonna throw it out in case anyone wants to Wiki real quick), for every wallet that you open the chance of picking a malicious wallet, it basically follows the hypergeometric distribution. You say, okay, if two thirds that I’m picking from are honest, and I’m now picking a wallet and you know, 60 of a hundred needs to be honest, what’s the likelihood?

It turns out that if you do that 52 times a year, the likelihood of getting a malicious wallet is vanishingly small. I would be uncomfortable saying all the zeros on this podcast, if you lower it to 51 on 100, the likelihood is 0.04%. That would happen in a given year. I think, you start leaning into the probability you say, okay, how can I make sure that we have as many honest players as possible? Then how can I make sure that we require as many signers as possible? Suddenly it’s a tech problem, networking, and pure cryptography, and you can get the numbers to do what you want.

Friederike: At least that’s the hope

Sebastien: V Two will no longer be so capital intensive, but will therefore rely more on insurance. What’s that transition going to look like is going to be sort of hard-coded into the V2 or is this something that is where the construction of the V2 allows for that transition to happen?

Matt: With V1 we went governance minimized because governance is an attack surface. I wish that I were more progressive on this because it would make my life easier. But the idea is that the V1 will continue running as long as people want to use it. V2 is going to exist, not in a vacuum, but with V1 next to it, we’re launching this coverage pool on V1.

Part of the reason that we’re doing that obviously is to backstop V1. But the other reason is we’re building up TVL so we can apply it to V2. As V2 launches, there will be a governing body that can basically say, okay, how much insurance do we have? Is it 40%? Is it 10%? Is it 1%? What are we comfortable with relative to the stakers that we have? Then it can actually divert fees from stakers to insurance and back and forth until it finds a balance that it’s happy with.

Friederike: Matt, are you familiar with the arguments surrounding Dark DAOs and vote buying and so on because I feel this would be applicable here.

Matt: Yeah. Very familiar. Actually zooming back way back to talking about Keep. One of the things that you find in multiparty computation is that every single MPC setup that you ever use has a corresponding dark DAO that can break it 100% and you hit this point where this problem is intractable.

If you believe this problem is mathematically intractable, there will always be a dark DAO that can break it and then practice that hasn’t happened. Right? I expect we’ll get there eventually and we’ll get really fancy and the numbers will have to get pushed higher and higher. Okay. Now it takes a thousand signers. Are there a thousand?

This is where the Keep token gets involved. We need a Sybil resistance mechanism. If you have a work token and the work token, there’s only so much of it to go around and there’s a main stake. You have this built in Sybil resistance. If it takes a thousand stakes for a dark DAO to attack the system, you start doing some math and it’s Oh, it costs you $60 million to do this. It starts to become more and more difficult, but there will always be a cryptographic way to break an honesty threshold.

Friederike: I find it interesting to talk about this. I mean, not because I want it to happen, but just because, it’s really fascinating. Yeah.

Matt: It’s fascinating. This is the sort of stuff that really kept me up at night, especially with a lot of our V1 work with Keep. What I’ve realized is that you can take advantage of the fact that what all of us sort of sickly want as cypherpunks to see happen. You can sort of take advantage of the fact that the Delta between this apocalypse that we all want to see, and then reality is not zero.

Whatever that Delta is, that’s what the system has to take advantage of. That was a pretty big mindset shift for me. I think some people are going to see this new design and they’re going to be like “oh Matt trusts people, now.” I don’t, I don’t at all. What I trust is that a whole bunch of people are sort of just disinterested participants.

Most people are not actively looking for the best way to destroy a system. If you make it really easy for them, they might click. Yes, but they’re not going to design a novel dark DAO. That’s the balance that we’re trying to strike with this system. Design is as long as there are levers, governance can actually respond to any dark DAO situation.

The way that they do it, and this gets really gross, but I’ll say it out loud, the way that they do it is they say, okay, if we assume that two thirds was honest at the beginning as more and more stakers come online, we can actually increase these thresholds higher and higher.

Now the systems live in this will suffer, but the trade off is that if there’s a whole slew of new nodes coming in and you suspect that they’re part of an attacking force, you can actually have some resilience, but if enough people with enough money want to break it that’s the case with tBTC V2 or V1. It’s just the scale of money that you put in. It’s scary and also really exciting.

Sebastien: Keep network is merging with NewCypher. Can you talk about this? What’s the rationale behind this and how will it improve the system as a whole?

Matt: This is weird because I don’t think this has been done before. If we were to look at two chains rather than two projects on the Ethereum, this looks like a hard double spoon. You’re taking state from these two projects, and you’re trying to shove it in into one new project. It’s an opt-in. It’s not a hard fork in the sense that you’re not forced to do anything, or you’re not gonna lose money if you don’t.

But probably you want to be on the new system rather than the old, over the long term, because that’s where most of the people and integrations are gonna happen. But here’s the idea. NewCypher is another threshold cryptography project that we have gone back and forth between competing with and collaborating with over the years. They’re great cryptographers, and they’re attacking a pretty different use case.

They’re really focused on being able to actually move files privately. The tech they use is called proxy re-encryption and behind the scenes, some of our community members pointed out to both of us that the NewCypher team was considering maybe they would do a Bitcoin pack. They were experimenting. They got us on a call and we started talking about it, roadmaps and roadmaps just looked remarkably similar.

The idea here was why rewrite each other’s work when we can just combine into one network. We propose this to the community and this was actually suspect. I’m uncomfortable to even say this. There was a unanimous vote from both of stakers to merge. I believe that was two or 330 stakers across both. We have way fewer stakers than they do. They have around 2200 and we have around 200.

So the community is really about it, but the actual difficulty of course, of the details. The community likes the idea of merging. Yeah. How does it work? I mean, everyone’s favorite question is, is there a new token? Probably there will probably end up being a new token, but first how do the networks even do anything together?

We’ve started a spec for a shared staking contract where stakers on either side can opt in to this new network, which is code named Keanu, because I swear to God, we are not going to stick with that name forever, definitely code name, but this new network you can stay, Keep, or you can stick NewCypher and then you’ll be able to participate in tBTC V2 and earn fees from it. The idea is a 50/50 stake weight split.

Half of the work will go to the Keep network and half of the work we’ve got a NewCypher. What the new network benefits from here is if we were just doing this on tape, we only have 200 stakers and giving to a thousand or 2000 is a pretty heavy lift. It’s hard to get a whole bunch of new stakers, fairly technically involved on NewCypher’s side. They have 2000 stakers. They’ve got better distribution on the staking side and we have better distribution on the app side.

We’re trying to take both those things and put them together and say, okay, this is basically the best outcome that we could get for tBTC V2, which was a ton of economically independent stakers. Both sides are going to have to give up half of the pie as far as fees. But the idea is that we think that by putting networks together, we’ll make more in the long run.

Sebastien: What about the teams?

Mark: Oh yeah. We’re definitely staying independent. The companies are not involved. In fact, we do not have a single signed piece of paperwork between any participants. As far as I know, unless someone said something, I haven’t been involved with.

Friederike: Is it like a DAO merger?

Matt: Yeah, basically. The expectation is that there will be a new DAO on this new network and it’s a DAO merger where one side only has a community multisig the other side has a DAO. Technically this is the funny thing. Neither community needs to agree. If both communities said they didn’t want to do this, any developer could put this together. What’s interesting is exploring the social consensus aspect here where neither team wanted to build it, if the community wasn’t behind it, but no one can stop us from writing code we want to write. Weird space.

Sebastien: Maybe just stepping back a little bit. Currently, the only sort of killer app on the Keep network is tBTC. I’m not super familiar with going on the NewCypher side, but what other types of applications will this sort of merger allow and what things are you anticipating to come about on this Keanu network? Post-merger?

Matt: A lot of our original plans for Keep are also already things that NewCypher first started work on. What NewCypher can do today, you can do decentralized key management. You can do sort of file sharing and file marketplaces. I know at least one project called master file is working on an NFT Basically the idea is you can buy the NFT and then there’s actually an offline master file that you can also get access to if you’re the NFT holder.

What this will eventually let us do is actually open up the network to all financial cryptography. Right now Keep does BLS, which is the random beacon and ECDS for tBTC a new cypher does pre proxy. Re-encryption what we’d like to do is RSA, BLS on different curves, AS and DS the whole gamut of symmetric and asymmetric crypto, but threshold, we have the infrastructure.

I think if we can bring all of us together, we should be able to ship the thing. But what’s funny about that is, it’s not an obvious killer app you’re still waiting. Is the killer app going to be encrypted files on file coin, where we’ve got all of the interop components and we have the file encryption component. Our DAO is going to start sending around secret files. I don’t know it’s going to be interesting, but I do know that right now, there’s a really clear interop use case. Let’s run with it.

Friederike: How strong do you think the network effect is? If there’s a killer use case, how easy would it be to just copy it? I mean, your technology.

Matt: I mean, this is right at the heart of a lot of the debates. I think we’re seeing crop up right now around licensing and stuff where Uniswap, for example, just announced V3 and it doesn’t actually become a free and open source license for two years, Until then, it’s a business license. We can look at this a couple different ways.

One, brand becomes much more important where everything is open source, and this is backwards, but brand trust becomes much more important in a trustless world. You know the brand of Bitcoin, for example, is the strongest brand in the space. That’s why something like Bitcoin cash is such an affront. You can’t dilute Bitcoin the brand. I can speak to maybe five or six different chains that are inactive discussions about porting tBTC over to the chain.

Most of them would much prefer to just work with us and keep one set of custodians across these chains rather than splinter. But yeah, anyone can copy anything. I got to say if you can do it’s good for the market. It’s good for consumers to see all of these choices pop up. But I think that as a consumer, you have to be really, the hard thing is just figuring out, is this legitimate?

We recently had another token with the name tBTC pop up on Binance smart chain. It is not associated with us, but I’m currently stuck doing support for it in our discord, I guess. Yeah, so this sort of stuff happens because we’re not all using trademarks against each other. We’re all in different jurisdictions and we’re all just sort of falling back to the chain.

If you want to be the sushi swap of tBTC, I welcome you, please do maybe push your stuff upstream too, if you fix any bugs. but ultimately I think that the team that moves the fastest and gives the market what they want.

Sebastien: I want to bring this conversation back to the broader context of DeFi. I want to ask you what you think is the interplay between tBTC on Ethereum and some of the projects that have aimed to bring DeFi to Bitcoin. We’ve had Stacks on the show recently, we’re releasing an episode with RSK soon. Is there any interplay there? If so, what is it? Because I’m not necessarily seeing it.

Matt: I have a lot of respect for folks who are trying to be Bitcoin native. I think the label is maybe wrong, but a lot of them want it to be the label. You want to be like Satoshi’s son, or whatever, you want to be blessed. When you look at something like RSK, they are following a similar or worse security model to what we’re following today with Ethereum.

What’s interesting to me though, about RSK, is that the mindset is a Bitcoin mindset. I think that’s really important. Even though the tech stack has both similar and different rates, so they have an EVM fork, that part is very similar, but the way that it is secured is different.

Sebastien: Yeah. They rely on hardware to some extent.

Matt: And to be clear, for me, that’s anathema if you rely on trusted hardware, I feel like you built a castle on sand. A lot of people use it as a step toward a more robust solution, which I’m sympathetic to. Especially since we arrogantly launched an immutable project, thinking everything would be fine. Actually it’s really hard. I understand people who are doing this as a step in the middle, but I would say RSK stacks, we’re all working together.

I’ve talked about those teams about literally about bringing tBTC to both RSK and stacks, but I don’t really think that’s probably, maybe that’s not really the question our relationship with tBTC to these sort of Bitcoin native projects is going to be positive because at the end of the day, we’re all going to be writing code that’s very similar, even though the underlying layer is different. We have lots of tips that we can share and mutual respect and whatnot. But I think what’s really interesting is will there be users on their chain? I don’t claim to know you guys might.

Sebastien: That’s an accurate representation of what’s at stake here. Will RSK or stacks, or some of these other chains bring in a significant amount of users and build a DeFi ecosystem there. I think what I find really interesting there is the potential for those platforms to become areas where innovation can occur. That’s sort of natively on Bitcoin.

As someone who’s been in Bitcoin since 2013 I would really like to see that happen for the broader ecosystem. I’m also perfectly fine with Bitcoin funding projects and funding, liquidity and infrastructure and consumer projects on Ethereum. But there’s so much capital in Bitcoin. That’s just sitting there not doing very much. I don’t care what it does. I don’t care where it happens. But as long as it happens somewhere or in places, I think that’s a net gain for the ecosystem. How important do you think Bitcoin plays in providing funding and liquidity and for crypto as a whole, whether that’s on a Ethereum or any other chain or on Bitcoin.

Matt: If this is a side thing, both sides don’t like me. The best way to get a bunch of Bitcoin first technologists mad is to talk about the brain drain. The top end, there are things built in the Ethereum space right now that don’t have good analogs anymore in the Bitcoin space. It’s because there are new ideas that are genuinely, they genuinely cropped up in Ethereum. I know that sounds obvious. Okay, people go different places and they come with different ideas.

If you say this to a lot of the technologists who have stayed Bitcoin only, it makes them pretty mad because they’d be like, no, this ZK-Rollup roll-up is actually this thing we talked about on Bitcoin talk in 2013. It’s just repackaged. No, it’s actually not. It’s genuinely a new thing. As far as where users go, and where innovation happens, there is a serious catching up.

If you are trying to be a Bitcoin native technology, which really means if you were trying to not build on the Ethereum with Bitcoin, you have to find a way to catch up. It’s not just to have mind share because there are plenty of dumb devs. You know, it’s not just are there developers here, but is the new stuff happening?

How do we catch up our ecosystem? That’s that is the hurdle that for example, Stacks is going to run against, or anyone, even someone like Tesla, who’s not Bitcoin native they’ve run into how can we possibly get over this mode of the ecosystem, but setting aside the mode for a second, I want Bitcoin to remain the collateral in the space.

I want Bitcoin to remain the collateral in the world. For me, I think that there’s always going to be an argument on something like Ethereum for the native asset. That pisses me off because they don’t like the native asset. It doesn’t follow. It bothers me because what I like about Bitcoin is the certainty, and it’s the certainty of the emission schedule. It’s the certainty that even if the tech breaks, the social consensus is so strong that we’ll get back on track.

I’m told things like Ether, ultrasound money, and like that’s not what it was last year. Clearly it’s not, you can’t both tell me that this is our new meme, and also tell me that this new meme means that we’re never going to change because you just anyway. I think for me, what I want to do is I want to make sure that we can Bitcoin get Bitcoin as close to a native asset on these other channels as possible.

That it’s not constantly at a disadvantage relative to the native asset, because I think the strength of Bitcoin is the certainty. That’s what I want for my life savings. You know, okay, maybe if I’m aping in on the next thing in DeFi, that’s not what I want, but if I want collateral, that’s going to back my house or longer term wealth than I’d rather be Bitcoin. I guess all that to say, it’s going to be Bitcoin. We’re going to make sure it is.

Friederike: Matt, how do you see the long term security guarantees of Bitcoin then?

Matt: I’m one of those people who’s like, yeah, it might not work. To catch up listeners with this particular debate. I got in a lot of trouble with Bitcoin friends for saying out loud that maybe we would need to eventually have a tail emission. There’s a security idea where there’s a security budget. This is mostly an Ethereum idea, but the budget is how much are you paying the people who are securing the network?

In Bitcoin, you’re paying people who secure the network through a block subsidy. Often it’s called a reward, but in this context, you want to call it a subsidy. You’re also paying them through transaction fees. As time goes on and the block reward goes down, the idea is that transaction fees have to go up.

It is core to the design to continue to maintain security of the chain. But what’s interesting about that is there are actually some assumptions in there that we need to maintain the security of the chain. Once you hit a certain point in Bitcoin where maybe if let’s say transaction fees, aren’t high enough to cover security that doesn’t make the security of past transactions less. It means the security of future transactions is less.

Friederike: Yeah, that’s true, right.

Matt: Again, not for you guys, but for everyone else. Right? If that’s the case you get to this point where people theorize will, maybe there will not be enough mining power backing Bitcoin anymore to actually securely transaction. It won’t be six confirmations. It’ll be 300 confirmations if you want to move money on Bitcoin.

Now what you have is you have a system that can’t clear the amount that Bitcoin can clear safely and quickly today. However, the supply guarantees have been maintained, which I think is really an interesting idea. I am not saying this will happen.

A lot of people take the counter and they’ll say, actually, and sometimes they won’t even tell you how much, but they’ll basically claim that Bitcoin will go up so much that it doesn’t matter, which that might be true, or that there’s going to be so much demand for block space, regardless that it won’t matter.

It might be true. I don’t know. But for me, I do know that in the bad security case, or in the good security case, my existing Bitcoin is still really strong collateral, which I think is interesting. I don’t need the Bitcoin L-one to be the best settlement network to still get the same collateral requirements out of my Bitcoin.

I’m happy if this happens on another network and Bitcoin is just the thing that we hold on. I’m perfectly happy with all that. Now, obviously there’s going to be a counter, which is do you really think Bitcoin is going to hold its value? If the network stops working? Yes. Because we saw that happen. We’ve seen that happen multiple times.

Every time there’s a fee event that we weren’t prepared for. Has Bitcoin gone down? No, that’s not been the things so far. For me, I just, I challenged the idea that this is ultimately going to impact price.

Sebastien: Yeah. But that’s different because, I mean, we’re talking about specific events that are constrained in time. But if the long-term prognosis is that Bitcoin is no longer a settlement layer, that’d be a fairly different proposition. I agree with what you’re saying here, but I think that it’s not so obvious that Bitcoin would continue to be valuable.

Matt: For me. I didn’t think it would continue to be valuable when it wasn’t useful for coffee anymore. Seriously. That’s why I got in the space originally. It took me a long time to understand the store of value argument. I guess I’m just saying, I don’t know how long worse is better might continue.

Friederike: By virtue of all that. You’re saying that you could actually see the future of Bitcoin in a tokenized form on Ethereum, instead of as ETH. Basically you think that the value proposition of Bitcoin is the 21 million meme. That’s basically what it is. It doesn’t matter whether it works on the Bitcoin blockchain or whether it’s actually a spoon to anywhere else.

Matt: I’ll actually go stronger and say that. Yeah, I believe that the Bitcoin blockchain is a broken vessel, but I don’t think that matters. If the thing inside is precious, you can get a new vessel. Maybe it’s a spoon to somewhere else. Maybe it’s a whole group of people coming together and saying, okay, now that we’ve seen all of the altcoins to do all the research for us, we are going to switch to this perfect new succinct 22 kilobyte blockchain design.

There’s a lot of ways I could see it going. I do. Here’s one thing though that I will say that the Dan Held’s of the world won’t agree with. I do think that there will, at one point, need to be serious action on the Bitcoin L-one to address security concerns. I think that it might be at the latter end of my career.

I do think it’s going to be a while, but I do think there will eventually need to be a strong response. Personally. I don’t think that it’s just a hard spoon to Ethereum. The reason is, I still don’t trust Ethereum. I like it a lot. I work with it a lot, but I have had our nodes get hit by a surprise chain split due to what I believe was an irresponsible decision on the gEth side.

The gEth team lead blocked me actually, when I shared how I really felt about the decisions they’ve made around that. The chance for significant consensus bugs is not gone. It’s never gone in a sense, but we’re moving pretty fast and this stuff still happens.

I don’t think that we’re going to see a spoon to Ethereum tomorrow or anything. But I do think that it’s perfectly fine to replace Bitcoin L one, as long as there’s continuity and consensus. Now, if that’s possible, separate.

Sebastien: We were talking about this earlier, before the show, I think you said it’s important for Bitcoin to be as close as a first class asset on other chains as possible. Currently, you need all these kinds of technical loopholes to make that happen. tBTC is taking one approach. Other protocols like Ren are taking other approaches, but essentially you set it up very well in the beginning is that Bitcoin can’t validate other chains and Bitcoin can’t validate transactions.

Some of the chains now supposing an unlikely event where Bitcoin can parse other chains. I’m not saying it would be able to parse the EVM directly, but you were talking earlier about ZK-proofs, something like that do all these wrapped Bitcoin protocols then become obsolete. Then what does that look like? Then how has Bitcoin represented that on the chains? Because I’m not sure I visualize what that looks like.

Matt: I think I blindly said yes, they’re all obsolete, but it’s actually a little bit more complicated. Right? Let’s set it up though. Knowing the Bitcoin devs, I do not expect that a big breaking change that is specific to Ethereum would ever be introduced in Bitcoin code. What I thought was really interesting is when Z cash launched, that was the first time I’d ever seen a launch where Bitcoin devs were’t like, why didn’t you just use Bitcoin?

At least you’re adding something that maybe we could one day think is reasonable in 10 years. I think probably the most likely would be adding some sort of more general purpose prover op code, the audit of snark, et cetera. I think that it’s good that we don’t have it in Bitcoin yet because already we’ve moved from basic Snarks to recursive Snarks to all sorts of, we’re still changing curves.

It’s very good none of that’s made it into Bitcoin, but if it did so Bitcoin can now validate other chains and their consensus, the question will then become where is the economic activity happening? If people use that to basically create a smart contract, expressive roll ups, then it’s a race because the Ethereum and other chains will have had these things happening for years.

You have to ask, has the market moved on from using Bitcoin as the settlement for those activities versus primarily as the asset? I think the theme we Keep seeing is asset versus tech. I’m very much a Bitcoin maximalist around the asset. The tech is in a rough spot. If you want to compete on technological innovation, that’s an anathema to the chain.

I guess what I’m saying is it depends. I suspect that most economic activity, at least at the beginning, would be on these other chains. In which case the wrappers still have a long fruitful life. If the economic activity moves back to just Bitcoin, L-one with some sort of really clever roll up or roll up of roll-ups, then it could hurt this chain.