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This is a bit different than the usual bitbanter article…my parents were visiting, and I decided it would be fun to try to explain what I’m doing with my life to my father. I did not succeed, but it was still a fun talk. Might be better to listen to the audio, but a transcript follows for those who prefer attempting to parse this nonsense via text.

Me: Hello again, everyone. It’s me, your host of Bitbanter and occasional author, Josh Cincinnati. I am here joined by a very special guest. This is a different format than what you’re used to. I’m actually doing an interview today. And this special guest happened to be in town because he wanted to see his grandchildren…my dad.

Dad: Ciao everyone I think you told me that it was going to be done in Italian, or was I mistaken.

Me: You were definitely mistaken. Dementia is already getting to you because I don’t speak Italian, but anyway—

Dad: That’s the best interview - when you don’t even know what’s going on.

Me: …off to a great start, off to a great start. So my dad is here today and he is graciously humoring me because I thought it would be really fun for all of you out there to hear me try — and maybe fail — to explain what I’m doing with my life and my career with Penumbra and with cryptocurrencies as a whole.

Dad: And I’m here to actually see what my multi-million dollar investment over 30 plus years of having raised my child…and what the ROI is on it? And right now it’s looking a little weak.

Me: Yeah, if you thought you’ve been rug pulled out there in the crypto world, you don’t even know what my dad’s been through. So we’re going to talk, little bit about the broader crypto world what penumbra is and why I’m working on it but you know I think we should start actually start with what your basis of knowledge is on this. So, you know, tell me about like where, what you know about, you know, Bitcoin and cryptocurrency because you’ve obviously had to ignore my ravings about it for a very long time.

Dad: That’s right.

Me: And some of that came through.

Dad: That’s right. I’m still getting over the advice you gave years ago to invest in Amazon.

Me: Yeah, yeah.

Dad: Still feeling the pain. And the reason I thought we might do it in Italian is because, of course, Penumbra “umbra” means “shadow” in Italian.

Me: It does, yeah.

Dad: So I thought that might be an interesting way to… And “numerise” is a word that means something else in English, too. But anyway, my knowledge of Bitcoin is rudimentary at best. The only real world experience that I have with it is through my cash app and instead of getting two drinks of Starbucks at my local Starbucks, I basically invest $15 a week. And typically it is invested when Bitcoin is high. But lately it’s been a real pleasure because I am actually buying low, hoping that I won’t be selling low.

Me: Jack Dorsey appreciates that…that you use his application.

Dad: Yes. So I have a rudimentary — yeah, rudimentary understanding. I mean, I certainly know the theory behind it and how it’s supposed to work.

Me: Great.

Dad: But that’s about it, actually.

Me: Okay, so you know, Bitcoin, and you know that, then, you also know that when you buy it through Cash App, that you’re relying on Square to custody that Bitcoin for you, right? So you have…

Dad: And of course that’s not for free.

Me: Well no, it actually, it is technically for free, but they make money on the exchange rate.

Dad: Ah, I guess that’s true.

Me: So the promise of Bitcoin was like, here’s this network where you can join with consumer hardware, with a computer, and that you can send value over the internet without a trusted intermediary. But you know that when you’re doing it through Cash App, you’re letting them handle all that and you’re just getting Bitcoin exposure, but you’re not actually like, custodying that Bitcoin yourself.

Dad:: Right.

Me: Sort of like, it’s the same thing as putting dollars in a bank, in a centralized bank, right?

Dad:: That’s right. Yeah, I’m counting on someone else to do all the work. Yeah, I just sit back and use it or lose it.

Me: Yeah, yeah, and you can you can potentially lose it if Square goes bankrupt or something, but I think that you wanted to do it because you got tired of me trying to tell you to get into it at some point.

Dad: That’s correct.

Me: And you’re just like: if I spend $15 a week, maybe it’ll shut up Josh…so that might be worth two cups of coffee.

Dad: Absolutely.

Me: So yeah, I think it’s fair to say that you grasp what the idea of Bitcoin is and why it’s important. What’s interesting, I think, in the development of Bitcoin as a whole is early on, people just assumed that it was anonymous money, right? But you know, also, correct me if I’m putting words into your mouth here, but you know that it’s not actually that anonymous and that people that are watching the network can actually do a pretty good job of tracing all of the inputs and outputs because it’s all on a public ledger that anyone can download.

Dad: Mm-hmm, I do get that.

Me: Yeah, yeah. So, here’s the premise.

Dad: Yes, so how are we going to segue to Penumbra?

Me: Yeah, how are we gonna do it? This is the awkward segue into this.

Dad: What the heck is it? Sure, here’s your segue.

Me: Okay, well actually before explaining that, I guess we should should sort of explain what happened after Bitcoin emerged, right? So Bitcoin happened, and then after Bitcoin, all these people realized that, oh, we can use this underlying concept, these blockchains, to actually come to consensus, not just about money and the state of money, like who has this amount of Bitcoin in this account, but you can actually generalize that and you can come to consensus about state. So state being like the state of a computer system, for example. That’s actually what led to the development of something like Ethereum. And Ethereum, what people decided to do with that power is that they said, “Oh, we’re gonna make our own tokens with our own rules on top of Ethereum.” Does that make sense?

Dad: Yeah.

Me: Sort of?

Dad: Sort of.

Me: …you’re staring at me pretty blankly.

Dad: (laughing) I’m trying to figure out I guess just generally speaking…what is the difference between Ethereum and Bitcoin okay? I assume that Ethereum is not what a dentist gives you sitting in a chair.

Me: I mean maybe that’s what the people behind dentacoin — the coin for dentists — envisioned Ethereum would be used for, but that’s another story. No, no, that is not what it is, but yeah, I guess that’s part of the leap here in understanding, and understanding the Penumbra story is understanding that. So Bitcoin was a way for people to come to agreement around the state of how much Bitcoin someone owned in this ledger, right?

Dad: Right.

Me: So Ethereum, the sort of next evolution of these concepts was like, well let’s say it’s not just the amount of Bitcoin that you own, but let’s say it’s the current state of a program. So where you might have multiple different variables in a program, and those variables could be like, this We agree that this, I don’t know, what should we use here? I agree that, man, actually I’m blanking on an example. I’m gonna have to edit this part ‘cause this is feeling like pretty–

Dad: Is that my fault?

Me: No, it’s not your fault. It’s a good question. Maybe I’m gonna keep this in, you know? Really keep it raw. No, I just– In Bitcoin, the way that Bitcoin works is that you come to agreement on the ledger about how much Bitcoin one person owns, right? And that person is just any large enough random number that represents a hash of a public key, but all that matters is that there’s this ledger with a bunch of different randomized addresses, and Bitcoin comes to consensus about the state of that ledger. Well, in the Ethereum case, it’s sort of like, imagine if you could generalize that ledger, so not just talk about how much Bitcoin someone owns, but someone could create a computer program that has little bits of storage in it, and you can come to consensus about the state of that computer program, right?

Dad: …okay.

Me: Does that make sense?

Dad: Yeah, I think so.

Me: Okay, so what people wound up doing, you have an expressive way to describe things that you can come to consensus on. But what people wound up doing is that, yeah, they actually made more tokens on top of Ethereum. And some of those tokens, you know, they had various different features. Some of them looked an awful lot like securities, which Gary Gensler was not very happy about. But one of the things that became a critical part of interacting with the Ethereum ecosystem was you needed a way to trade some of those tokens. So because Ethereum was so expressive and because there are a lot of clever people on the internet (and off the internet) working on various ways to interact with these chains, some folks figured out that you could actually engage in swapping these tokens in a manner where you don’t actually have to rely on a counterparty like in a central order book fashion. So, let me give you another example here. Let’s say that Amazon stock that you regret not buying, right? If you go onto a brokerage and you go to try and buy or sell Amazon stock, what that brokerage does is that they find a willing buyer or seller on the other side of that trade, right? So there’s always, two people and there’s an intermediary in there. What’s interesting about some of these concepts that people built on Ethereum, these so-called DEXs (or decentralized exchanges), is that a lot of people figured out, “Oh, we can actually create a mechanism by which people can just supply liquidity, they can just supply these tokens in aggregate and then other people that want to either buy or sell them don’t have to actively interact with the people providing that liquidity. They can just go on to Ethereum and they can buy and sell to their heart’s content based off of that liquidity.”

Dad: So let me ask a question. What would stop a bank to have a physical presence somewhere in your community and they have, instead of your typical teller, on the other end, as you just described this ethereal thing up in the sky having some way of collecting all of this liquidity, the bank has that all the time. So when they issue a loan, they’re taking money from their liquid assets, whatever, wherever they are, and giving it to you. And then you, of course, either pay interest– So why couldn’t you, in a way, do it in a very physical sense, and not even deal with the internet, or computer program, or just do it physically?

Me: Well, I mean, I think on some level–

Dad: And bring in cash instead of–

Me: That defeats a lot of the purpose. But no, yeah, okay, okay, sure. So there–

Dad: Of course, that’s too old school. ‘Cause there are people without computers.

Me: There’s a core to your question there that I think is actually quite relevant, which is, how do you take, another way to frame that is like, banks typically deal with real world economic activity, and how do you take real world economic activity and actually bring it into a lot of the crypto world, you know?

Dad: Right.

Me: And oftentimes it’s a very difficult thing to do. I will say for your specific question, I think a bank is probably prohibited from doing — well, not prohibited, there are some banks maybe exploring how to do that in a physical sense, but they’re somewhat constrained based off of the regulatory environment that they live in. But one of the big promises of this whole edifice of cryptocurrency is the idea that you don’t have to be a bank to do that. You can be an individual with this liquidity and you can, with this capital that you can then find buyers, sellers for whatever tokens or financial instruments that you want on these protocols and buy and sell them and swap them and so forth, right?

Dad: And that’s not called loan sharking, is it?

Me: No, it’s not called loan sharking.

Dad: Okay, ‘cause I’ve come across some of that.

Me: Although I guess some people might engage in that.

Dad: Yes, in some of the communities I’ve been in.

Me: So you know about like the Bank Secrecy Act and all that, right? Like if you spend, you transfer too much money, the bank has to file a report.

Dad: Right. I’ve never had to worry about that. But I do know about it.

Me: Sure. Yeah, you know about it. It’s good you haven’t had to worry about it.

Dad: If the SEC is listening.

Me: Yeah, great, great. This is on Gary’s playlist for sure.

Dad: Yeah, but get that old man who has no cash in his wallet. SEC got nothing going on I don’t carry cash.

Me: Okay, very well. Hey there you go. That’s a both a pro and a con but anyway back to the point before we get on another tangent we have to get back.

Dad: Yeah, we have to get that’s the point of this podcast. Yes. I thought it was that fun. I’m not you know–

Me: No, there’s no fun allowed here.

Dad: You mean I actually have to learn something.

Me: Yes, yeah. It’s good for brain plasticity in your old age, come on.

Dad: Too late.

Me: So I will say something about the bank that’s advantageous right now. If I go to a bank and I give them \(2,000 in cash, most of the time, especially, you know, maybe I made that as part of my business, from customers, but you know, when I spend that \)2,000 and give it to the bank, I know about it, the bank knows that I deposited it, but no one else should know about it, right?

Dad: Right.

Me: Now, none of that is really like cryptographically guaranteed or anything, and in fact, the government can always snoop at your accounts if they get a warrant for that, and then oftentimes, they don’t even need a warrant, if you just pass that BSA $10,000 limit or what have you, but you know what is true about that general setup is like the traditional financial system — for privacy, for regular people below those BSA thresholds is actually much better than cryptocurrency today. Because the thing that I was describing to you, all of those people trading assets without a counterparty, I mean that part’s super cool, right? That you can be able to engage in that finance and you can do it without any intermediary stopping you. But the problem right now with the vast majority of cryptocurrency systems is that all of that is publicly visible on these blockchains. Because they have to, in order for these blockchains to come to consensus about either the state of how much Bitcoin in your account or what the status of a computer program on Ethereum that represents a spreadsheet of tokens, right? All of that, that has to be publicly visible for people to come to agreement on that. And so it’s very hard to actually be private.

Dad: I was gonna ask a question does that have anything to do with this notion of — in Bitcoin’s case for example — with this notion that there is a limit to the number of Bitcoin that exists so if you have–

Me: No no no it has nothing to do with knowing that–

Dad: In fact there are not more than 21 million and someone has somehow counterfeited?

Me: …you know what that’s a great point, sorry.

Dad: Yes, so that is part of the auditability.

Me: You’re right. You’re right from the auditing standpoint, so it’s not the supply schedule, but you’re right actually…it is part of the reason that you want that visibility is so that you know that no one is is counterfeiting. That’s a brilliant point.

Dad: Otherwise it becomes crypto piracy as opposed to crypto privacy.

Me: …You’re gonna trademark that?

Dad: I worked on that all last night.

Me: Oh good, good for you.

Dad: No I didn’t, I’m just naturally witty.

Me: Sure, sure, that’s where I get it from.

Dad: That’s great.

Me: Yeah, that is a very good– That auditibility is, no, that’s exactly right.

Dad: I thought so.

Me: And so, you know, in my own personal career arc, that’s what led me to working on Zcash because Zcash was basically, let’s take Bitcoin, and it was literally a fork of Bitcoin and the Bitcoin blockchain, and let’s figure out a way for people to be able to transfer value the same way that you would on Bitcoin, but if you use the right features of the chain, you could do it in a way where you were assured that the only people that know about the transfer are you and your counterparty. But, even though that that’s true, everyone else observing the chain, despite the fact that they don’t know who’s sending what, you know, everyone else observing the chain understands that yes, it’s still valid according to the rules that we all agreed on, including that whole inflation piece. There’s a lot of nuance there about people actually using the privacy features of Zcash that we don’t need to get into, but that was the underlying concept behind that. And that’s what I, you know, I went in that direction because I’m a big believer in a lot of these personal rights and the fact that we should have peer-to-peer digital cash and anonymous money.

Dad: AKA cash.

Me: AKA cash, yeah, exactly. Which, you know, you don’t carry anymore.

Dad: I don’t really carry much anymore yeah.

Me: It’s a tragedy, really, because there’s no good digital equivalent. So, that brings us to, for me anyway, my personal arc of this: I got into Bitcoin and loved it. I got into Zcash because I realized that Bitcoin has this huge promise, but there are these issues on the privacy side that we can try to fix. But then I’ve also, for me personally too, I’ve seen — and I was originally very skeptical about a lot of this Ethereum stuff, to be honest. I love the Ethereum community and I’m friendly with a lot of people in Ethereum and in Cosmos (Penumbra is a part of that ecosystem). But, you know, what they were building initially to me, I didn’t really…I was pretty skeptical about it. But I sort of see that there is value for people engaging in a lot of other financial tools in a way that can’t be stopped. Unfortunately, in a lot of the cases, it’s resulted in scams and people getting hoodwinked and rug pulled and all that, which has been problematic.

Dad: Can you explain Cosmos to me?

Me: I can try.

Dad: Okay, as opposed to the other two bits of universe you just described, the Ethereum and Bitcoin. Is it another token or just another system?

Me: It’s another system.

Dad: It’s another product.

Me: Well, Cosmos itself, there is a…

Dad: It’s not a tangible token though, is that correct?

Me: Well, okay, let me take a step back actually. Bitcoin and Ethereum have tangible native tokens attached to them.

Dad: Okay.

Me: The Cosmos world is actually a series of individual chains, all of which have their own tokens, but they all have the same standard of interacting with each other.

Dad: So they have something in common.

Me: They have something in common, and what they have in common is an ability for people to, in a trust-minimized way, transfer assets from one chain with its own rules and its own features, and you can transfer it from that chain with its own rules and features and governance and what have you, to another distinct chain in a trust-minimized way.

Dad: So can Bitcoin be part of that as well? So could or does it–

Me: Not directly, but there’s a way, and maybe if Bitcoin had…there are ways for Bitcoin to be a part of it one day. Although I’m not the best person to talk about that.

Dad: But not right now.

Me: Not right now.

Dad: Okay, so you can’t be part of the cosmos if you’re Bitcoin or Ethereum.

Me: Well, not directly. In the Ethereum case, there is a direction that people can take where you can be what’s called, so IBC, Inter Blockchain Communication protocol, IBC protocol, is what that commonality is between all of these Cosmos chains. And there is actually a path forward, I think on the Ethereum case, there are lots of people working on bridging, being able to bridge Ethereum and Ethereum assets onto Cosmos. There is actually an interesting difference, I think, in the vision between what Ethereum is doing and what Cosmos is doing. So Ethereum imagines that there’s a lot of, that effectively the way that people are going to come to consensus on all these computer programs is to build what they consider a settlement layer. And that settlement layer is Ethereum. And then people will just build what they’re calling L2s, rollups, things that consolidate lots of transactions that then settle onto that base chain. So it’s sort of a, there’s a sort of hierarchy you can almost imagine. In the Cosmos side, it’s actually more each of these chains is operating independently with its own, you know, with its own protocol and node software. A lot of them are called Cosmos SDK chains, so they use the same code and tooling, but they’re still their own independent entities, and they can choose to interact with each other by transferring assets through IBC. So that’s the difference I think in vision.

Dad: …okay.

Me: Yeah, you’re giving me that blank stare again, so I screwed up. I didn’t do a good job here.

Dad: No, no, it’s just I’m still trying to grasp it from a layman’s perspective.

Me: Yeah, I’m just not doing that.

Dad: Which is difficult to quite grasp, but.

Me: Yeah, let’s try to, okay, let’s think of another analogy that could work.

Dad: What makes it stick?

Me: Oh, actually, an internet, let’s just use an internet analogy, right?

Dad: Okay.

Me: So, when you have like a common settlement layer…

Dad: Yeah, but what does that mean? That’s what I’m, you lost me at that term of art, I guess, or jargon.

Me: Okay, yeah, that is jargon.

Dad: What does that mean, layer of settlement? I mean, it sounds almost like you’re talking about the Grand Canyon with its many layers of sediment.

Me: sediment, settlement.

Dad: I got that, I understand, but I’m trying to use a sort of play on words here because you’re talking about layers and this is what I don’t quite get. What is that settlement layer, if you will?

Me: I’m not really, I actually feel like I’m going into a place that isn’t my expertise talking about this as an analogy, but you can imagine that in some world, right, this is not actually, this isn’t probably real with the actual financial system, so let’s take that as a caveat. But if you and a bunch of other banks are all trying to come to agreement on what your order, you know, how much money is in your own account and everyone else’s, right? You might want to choose to have some central ledger or some central place where you can all look at your accounts together and say, “Yes, that’s right.” Right? And you come to consensus on that. Right? Okay. So, but within your bank, right? those banks are working together to find some central point of agreement, right? But within your bank, there are tons of transactions happening within that bank, you know? Debits and credits going from one account to the next. Debits and credits going from that bank to another bank, right? External, right? That isn’t getting, and none of that is getting necessarily settled on that, that, you know, “base chain.” It’s just the aggregate amount of money flow that gets settled. And you can kind of imagine that in the Ethereum case, that’s what they’re trying to do, where there’s a base layer where all of the people that are engaging in these higher layers, they might have lots of different interaction somewhere else, but they all agree on whatever the state of the accounts might be, or the state of–

Dad: Right, right, right.

Me: Does that kind of make sense?

Dad: Yeah, and I guess if I understand it correctly, they don’t have to worry about any one piece of this collapsing correct because they’re all They’re all kind of…

Me: I mean… Maybe? Lots of other things could happen exogenously, outside of this system that could cause certain collapse right but here’s an example on the Cosmos side about the difference in vision. So you may have heard of, I don’t know if you’ve heard of the Terra and Luna collapse.

Dad: Yes, yeah, vaguely.

Me: Okay, so that was a Cosmos chain. And it was IBC compatible, actually. So it meant that people could actually move assets on and off that chain, right? And that was a huge, huge, I mean it was like $50 billion plus ecosystem. So that ecosystem went to zero — or close to it — close enough for most people. You know that that collapse happened and it resulted in — I mean there were people I think that that had some Luna trapped on other chains from IBC — but the other chains in the Cosmos universe kept chugging along, right? They kept working. Even if all of those assets that were in that were suddenly worth a great deal were, you know, worthless.

Dad: And where did all those assets go? Where did $50 billion worth of?

Me: Well, the $50 billion wasn’t really there to begin with. It was inflated, you know, the actual value was inflated quite a bit, right? Because the whole thing was…well that’s a discussion for another time maybe.

Dad: Okay.

Me: Yeah, yeah. Okay, so.

Dad: So back to– Penumbra.

Me: Okay, yeah, Penumbra. Okay, so what the hell I’m doing?

Dad: Yeah, which is how we started all of this.

Me: Yeah, well do you feel like you have enough broad understanding of all of these pieces? ‘Cause I think I threw a lot at you.

Dad: Yeah, I think–

Me: You think so?

Dad: Yeah, if not, I’ll certainly break in and obfuscate.

Me: Okay, so if you accept the premise that it’s really great that people can, in a permissionless way, engage with a variety of different financial tools, whether that’s trading assets, and some of those assets might be tied to real world value, like a stable coin, right? Some of those assets might just be completely virtual. They might be NFTs, which I’m not the biggest fan of, or at least the common occurrence of NFTs, but it might be like game currency on some other chain or something. It might be maybe things that look like equity that probably should be called equity. I don’t know. But take it as a given that that people will want to be able to do that without having to go through the process of going to a bank or engaging with some other traditional part of the financial system.

Dad: And can you do that with actual currency, a government backed piece of currency?

Me: That’s why stable coins exist.

Dad: Okay.

Me: So stable coins are these–

Dad: Is that what Facebook was trying to do?

Me: Yeah, yeah.

Dad: With the coin?

Me: Facebook was trying to create–

Dad: That would be government backed, in theory, right?

Me: Yes but as a result, actually, the one that I think is most prominent and probably most trustworthy, quote unquote, is USDC, which is backed by Coinbase and this organization called Circle, the org that has built it. But that stablecoin is across many chains that it operates in, like, I think they’ve issued $50 billion or something close to that. And that’s just that’s just so you can have so you can have something that is more closely tied to US dollars. It’s actually coming to Cosmos soon in a native way, but people have figured out other ways prior to tha… it exists on Ethereum and Solana and all these other places. While people can actually use USDC now, the thing that’s that is troubling to me as someone who, again, is a big believer in permissionless finance, is that ultimately someone can, the people that run USDC, they have to run blacklists to be OFAC compliant. They have to run, they have to be able to freeze assets in addresses and what have you, right? And anytime someone has that power, there’s a potential for it to be abused even if it’s you know used with good intent even if it’s the good guys are behind it. It’s sort of similar to the argument that is made about back way when, we had that that debate in the 90s quite quite some time ago where people would argue well the good guys need to be able to exploit cryptographic systems in order to break the encryption so we can see what the bad guys are doing. But I think a lot of cryptographers understandably fought back against that because if that exploit existed then all of the good guys that were using this encryption would be just as vulnerable to the bad guys exploiting that.

Dad: Right, right, right. It sort of defeats the purpose of setting that up.

Me: Exactly. And that’s the way that at least I view, you know, privacy and permissionlessness in financial transactions too. So if there’s some method or means for money flows to be stopped or countervailed or value to be both stopped and surveilled, then you have to assume that even if the good guys were the ones who were planning to use it, that the “bad guys” are going to be able to figure out how to use that to their advantage. too. And ultimately, you know, as much as we like to think that, as much as, not maybe we, but other people like to think that the U.S. government’s always the good guys, that hasn’t always really been true. And there are a lot of cases where powers that the U.S. government has have been readily abused for the advantage of certain people or that have been maybe, maybe immoral even, but we don’t have to get into that discussion. Just to say that I think it’s It’s principally important for people to be able to trade and exchange value freely and privately. Right?

Dad: Right. Right.

Me: So if you assume that as a premise, then I think you can accept that the current state of affairs in a lot of cryptocurrency is pretty flawed. All of these trades are public, even though you can engage with these systems in a permissionless way…it isn’t really. Either if you’re using USDC or something it might get frozen. And if you’re just sending USDC or if you’re sending ether or bitcoin or you’re swapping all of these things will wind up being publicly visible and and then a big company like…Chainalysis is now huge you know, they can just press a couple buttons, do some computation, and then they can show anyone who pays them a financial history associated with any of your activity on blockchains.

Dad: So let me ask a sort of just very broad general question.

Me: Sure.

Dad: In terms of getting back to Penumbra again.

Me: Okay.

Dad: Who is the demographic that you’re targeting for Penumbra?

Me: Penumbra is shielded, so a private protocol for people to engage in decentralized exchange of assets within Cosmos. So that’s at least the first phase.

Dad: But are these large entities, small entities? Who benefits from this Cosmos protocol?

Me: Anyone who wants to trade any of these Cosmos assets, including the USDC stablecoin, anyone who wants to engage in that kind of trading would benefit from having a place to do so privately.

Dad: Privately.

Me: But part of it is like, it turns out — and I don’t wanna get too into the weeds, both because I’m not 100% technical and I’d probably butcher the explanation — but beyond that, there’s a lot of like nuance and trade-offs that you have to make when trying to build a private exchange because you still want public information about the markets to be visible, right? But what’s really cool about Penumbra is that it will be a place (once it launches) for people to actually have potentially a much better experience engaging in those trades. Because you can actually, if you apply privacy the right way, and make the kinds of trade-offs that offer a better trading experience than you’d get elsewhere. And then for me, what’s exciting about that is if you provide a better trading experience, people get better prices, and they feel confident that they continue you to trade privately, well, that expands the number of people using it, which actually makes it more and more private. The more people that are using it, the more private it is. And then you can start to build other things where maybe you can, hopefully, I don’t know, fingers crossed, create the beginning of actually recreating digital cash. You can–

Dad: So tell me, when you say a better trading experience…what defines a better trading experience? What makes that experience better than going to, I guess what, Coinbase? I don’t want to pick on Coinbase because I don’t even know them, but what makes it a better trading experience than doing that? Or in sort of the non-crypto world, what makes it a better experience than calling your broker and asking them to buy 50 shares of Amazon. So what makes it a better experience when you say that?

Me: Yeah, that’s a good question. Well one, if you’re talking about the traditional world, the good news is you don’t have to get on the phone and talk to another human being, so that’s great.

Dad: Which I don’t necessarily agree is the worst thing in the world. I think that having tried to change my auto insurance recently, and trying to do that using my app and using the internet. It didn’t actually happen until I talked to a real body. And that’s when it actually happened. And it wasn’t because of my fault. I was pressing the right buttons.

Me: …I’m sure you were. I’m sure you were pressing the right buttons.

Dad: It just wasn’t happening.

Me: No, it wasn’t. It was not a great trading experience. You were not able to trade your money for insurance, which is bad.

Dad: Which is bad.

Me: Yeah, but no, I think that the Coinbase experience, and this is also like you have to assume– so you can’t buy Amazon through this now, right? You can only buy other Cosmos assets. There are probably, I think, you know, honestly, the only thing stopping people from representing equity as, you know, blockchain assets is purely on the regulatory side. And there are people that have been able to represent equity in blockchains, but like it’s really, it’s very limited because of the regulatory environment, right? That said, there’s still opportunities for, I think, people to engage in trades with other assets on Cosmos. But then the comparison is like what makes it better than Coinbase, right? So in the Coinbase case, have you ever, you haven’t signed up for Coinbase, have you?

Dad: No.

Me: No, okay. So the first thing that happens when you sign up for Coinbase, and you know, I actually haven’t signed up to Coinbase or a new exchange in quite a while, but the general idea behind the flow is if you’re signing up with a centralized regulated exchange, the first thing they’re going to do is ask you for every bit of personal identifiable information they can to make sure that you’re not doing something nefarious, and to abide by their KYC/AML…KYC stands for Know Your Customer. AML is Anti Money Laundering regulations.

Dad: Which I personally think is not a bad idea. I kind of like knowing that the money’s not going to a really, really bad–

Me: Sure, that might make you feel pretty good, but the counterpoint to that is there is this one organization…there’s OFAC that controls who can be on that sanctions list, for example. Why is it that they have that power to describe where people can send their money? And then frankly, on a less grandiose, is this moral or not, is money laundering good or bad, we don’t have to get into that necessarily. But even from a user experience perspective, when you go onto Coinbase, and you have to give up all of your private information, you actually have to go through that process. And then that information, which is usually quite sensitive, like social security number, passport photo, they sometimes take a picture of your face and you have to move it around to show that you’re really there. And then they store all of that information on a centralized place, right?

Dad: Which I had to do to get auto insurance.

Me: Yeah, yeah, which also maybe someone should do something about that.

Dad: Should be easier to do that.

Me: Yeah, it should be easier to do that, right? In general, and there are people maybe working on that, but that is a bad user experience.

Dad: Right.

Me: And it’s a bad user experience not just for that moment of friction where you have to spend all of that time giving them all that. But on top of that, even if you think that they have the “best,” “most moral” intent, you know, with collecting all this information…now there’s a third party who is doing God knows what with that data, who’s storing it in God knows what way, and that is a huge target for someone to eventually steal or associate. And then on top of that, when you go to trade on Coinbase, any of your trades are associated with your identity, right?

Dad: Right, right, right.

Me: And in the US, you might feel comfortable comfortable doing that, but there are lots of places in the world where you don’t want some organization that’s very buddy-buddy with the government to know what kind of financial transactions you’re engaging with, you know? Because you can make the argument that, well, if you’re doing it in the U.S., at least the U.S. is protecting you from, you know, terrorists or what have you. But if you’re in Russia and you are wholly against the war in Ukraine and you want to send money to maybe, you know, Maybe you want to just send it to the Red Cross in Ukraine, right? Or maybe you want to send it to the Ukrainian Department of Defense, right? You don’t want the Russian government to know that, right?

Dad: Or you want to send it to the Starlink account to fund the satellites.

Me: Yeah, sure.

Dad: Elon is pulling out.

Me: Sure, sure. We don’t have to get into that because there’s already too much of crypto that revolves around him. So we can just, we’re going to sidestep that completely.

Dad: It’s really much more fun.

Me: It is more fun, but we’re not here to have fun.

Dad: Are we dodgeing it?

Me: We’re not here to have fun.

Dad: Are we dogging it then?

Me: No, no.

Dad: We’re not dodging it, we’re dogging it?

Me: No, we’re not dogging it, very good.

Dad: Yeah, yeah, yeah.

Me: Three for three for amazing wordplays. That’s where I get it from. To everyone listening, if you see a cringe joke on Twitter, know that there’s a genetic lineage there. That’s where it comes from. So yeah, like that is a bad, that creates a bad user experience. But on top of that, Coinbase or any other, in fact, any other centralized entity, any other exchange can actually see all of the trades and all the order books and everything else in real time. And now, granted, you know, in like a brokerage that’s slightly regulated, but even in a brokerage, you know, there’s this concept of payment for order flow, right? Where someone like Citadel or you know Ken Griffin — and I don’t want to make him into a boogeyman or anything, but when you as a consumer go to buy stock on an exchange that engages in payment for order flow you actually get a shit deal because ultimately there’s someone front-running all of your trades, right? And all of that is like visible information to that agent, so my contention is that all of that leads to a worse experience, worse prices, all the KYC nonsense, the exposure of your personal data, it’s all terrible, right? So I think on some level, the state of play right now for DEXs is slightly better — in some ways — because you don’t need to go through all that KYC stuff as long as you have, you know, you do have to acquire some of that cryptocurrency to begin with before you start exchanging it for other things. So in the Ethereum case, You know you there tons of tokens on Ethereum, but you have to acquire ether in order to exchange it and that still probably results in some kind of US dollar bridge that you need to engage with. Or you need to mine it — but not mining it anymore in the theory you need to stake it, but that’s its own thing so so yeah anyway… There’s still that on-ramp issue (which is a big one granted) and then in the current state of play all of those trades are still very public and very visible which means that people can very easily front-run lots of trades, do various things with the way they construct blocks to screw you over as a consumer, and people can, like Chainalysis, can very easily figure out your identity and collect all this information on you.

Dad: So what makes it a better and easier experience than the way I purchase my measly couple of dollars of Bitcoin a week using the Cash App? Because that’s pretty darn easy. I mean, it’s so easy that I don’t even know what happens until I get an email alert telling me that I just…

Me: So for someone who’s just dollar cost averaging into Bitcoin, I don’t know that this would be a better or easier experience.

Dad: Okay, so it gets back to my original question as to who is your target demographic?

Me: Again, initially people that are actively trading these assets. So people that are actively trading and don’t wanna be — they wanna be able to get the best prices, they wanna know that their counterparties aren’t screwing them over.

Dad: Right.

Me: Right. And that’s I think the main focus initially anyway. But like I was saying before, what gets me excited about this is that the trading activity can be really good for the protocol and it can create a lot of economic surplus that winds up going to people using the protocol and the protocol itself, which could then subsidize something that I’m very passionate about: which is actually creating private cash transfers, private digital cash. Because if you have all of the tooling in place for people doing private exchanges of assets, that’s actually a superset of what you need to do to do just private transfers. of assets, right? And then you just have to figure out, okay, well, if we want to do that, how do we build up the necessary front-ends, the necessary wallets, the digital wallets that people work with? How do we figure out how to get them from a place where they’re using their traditional bank and going from there to using this peer-to-peer digital cash thing? And there’s a lot of big unknowns there. And this is all for a protocol that hasn’t launched yet, so this is all still early. But yeah. It’s pretty cool, though.

Dad: It is. Yeah.

Me: Especially if you fully understand it. Which this podcast did not accomplish. Not in the least.

Dad: Maybe not. I think I may be going to my ATM machine after we’re done and just withdrawing 20.

Me: Hey, cash is wonderfully cypherpunk, so I think it’s great that you wanna go get some cash too. But maybe we’ll figure out the digital version someday.

Dad: Yes, the digital version would be good, I think so. I agree with that.

Me: So last question.

Dad: Yes.

Me: Quick hit. This is a special one for people that have listened to the full 50 minutes of this.

Dad: Has it been 50 minutes?

Me: It’s been 50 minutes.

Dad: Wow, I thought it was only about 15.

Me: Okay, here it is. Do you think I’m wasting my life? Yes or no.

Dad: No, any intellectual endeavor is not a waste. So I believe in any and all intellectual endeavors…okay ultimately it has to pay the rent and the food, so that you would have to provide for your family. So I would always say when you and your siblings would give me grief as I walked out the door to make a buck— I’d say someone has to pay for the Cheerios that you’re eating.

Me: Yeah, and those Cheerios have gotten way more expensive.

Dad: …and they have gotten way more expensive. So my advice is to pursue that intellectual endeavor to the extent that it does not infringe upon your ability to actually provide a source of income.

Me: Okay, well when the Feds put me in jail for trying to build private money…

Dad: I will visit and come with a peanut butter and jelly sandwich that you could have.

Me: …maybe bring my kids so I can see them. That would be nice, and my wife would be great. Cool, well thank you.

Dad: Actually, I think, no, no, I think it’s very, very fascinating and, you know, truly, truly interesting. My only overall question is that, does the Cosmos — unlike the universe which apparently is continuing to expand and is endless — how many different protocols can exist? Until they literally Start tripping over their own digital steps. You know what I’m saying? This is again what gets to my earlier question about not only the demographic that you’re targeting, but also the, you know, you talked about USDC and you talked about some of the other formats. I don’t know if that’s the right term, but how many different pieces, how many bits and pieces — which I recommend, by the way, if any of you are Dave Clark Five fans–

Me: Stay on it, stay on it.

Dad: Listen to that song, it’s really wonderful, “Bits and Pieces.”

Me: “Bits and Pieces.”

Dad: But that’s my point. How many bits and pieces could you ultimately have in that universe, in that Cosmos, until it literally implodes and becomes a black hole, right? Which is where the universe ultimately gets sucked up. I’m sort of mixing a lot of different scientific–

Me: I don’t have a good answer to that.

Dad: Do you know what I’m saying? Have we perhaps kind of exhausted–

Me: I don’t think so.

Dad: All of the possibilities.

Me: One predominant view is that, the idea is that these blockchains are ways for people to coordinate on information, right? And in an adversarial setting or semi-adversarial setting. And I think that there are always ways in which people are going to want to coordinate on information with different rules and different rule sets. And I think that’s part of the Cosmos vision. That’s not to say that you’re– I think that you’re right that there’s sort of a, potentially an upper limit to how many of these like sovereign chains and protocols might exist. But I suspect that we’re pretty far from that now.

Dad: But you just touched on something that I could see sort of another ultimate use for. This protocol or this system is to in fact use it in sort of an intelligence capacity to move information. Forget about…

Me: Well that was actually supposed to be my point behind what Ethereum was trying to do in the beginning. It’s mostly about coming to consensus about information rather than just…

Dad: Yeah, but I think that’s a valid point though, a valid observation because imagine if you could use it for information. Information meaning… intelligence data and meaning there’s a number of other things that could actually have some common good some public good in the in the world right as opposed to just having misinformation…

Me: Well that’s a weird rabbit hole that would probably take us way more than the hour-ish we’ve already spent. So, I think we’ll end it there. Well, thank you so much, Dad.

Dad: Well, this has been fun.

Me: Yeah, this has been fun. This was enjoyable. I hope you, listener, enjoyed it too. It was a little different from what I normally do. And let me know maybe, Dad, would you do this again about something where I’m not shilling my job?

Dad: Where we’re gonna answer other topics?

Me: Sure, there’s so many topics.

Dad: I know, I feel like we could talk forever about– one of my favorites, as you know, is low tech, high tech.

Me: Yeah, no, I… do you wanna explain that to people instead of just saying that? No, no? Just leave that as a teaser.

Dad: Yes, I’ll leave it as a teaser, but, think about anything you do in this world, whether there’s a low tech approach or a high tech approach. And I could certainly play the part of the low tech person and my approach versus the high tech person.

Me: Yeah, yeah.

Dad: So, going to the ATM is not quite low tech, but it could certainly be construed that way.

Me: Get some cyberpunk private money out of it.

Dad: So yeah, that’s a certainly low tech way to do it.

Me: Well, we’re gonna wrap up. Thank you for listening and thank you again for joining.

Dad: Thank you for your patience.

Me: Yeah. To who? To me? To them?

Dad: I don’t know. Your patience, your listeners’ patience. Yeah. Because some of this, of course, is totally–

Me: All three of them will be ecstatic to hear from us.

Dad: But remember, if there are more than 10,000, they must report it to Twitter.

Me: …that’s not how that works.

Dad: No, that’s not how it works.

Me: …I did a terrible job. Yeah, we really fucked this up. We will chat again.

Dad: Let’s not use foul language, please.

Me: Thanks, dad.

Dad: Sure.

Me: All right, thanks everybody. See you again next time!