EPISODE 1798

[INTRODUCTION]

[0:00:00] ANNOUNCER: Ethereum is a decentralized blockchain platform that was created by Vitalik Buterin and Gavin Wood in 2015. It uses a cryptocurrency called Ether as its native token to power transactions and operations on the Ethereum network. Ethereum's proponents envision a future, where the network forms the foundation for a second platform layer called L2, where decentralized applications are run. As we approach the 10th anniversary of Ethereum's creation, we wanted to understand the state of the technology. So, we spoke with Andrew Koller, who is an engineer at Kraken, which is a software company and popular cryptocurrency exchange.

In this conversation, Andrew talks about Kraken, security considerations at an exchange, the history of Ethereum, L2, and the future of Ethereum. This episode is hosted by Sean Falconer. Check the show notes for more information on Sean's work and where to find him.

[INTERVIEW]

[0:01:07] SF: Andrew, welcome to the show.

[0:01:08] AK: Hey, Sean. Thanks for having me.

[0:01:11] SF: Yes, absolutely. Great to meet you. Thanks for being here. Excited to talk about this. So, Kraken's one of the world's largest leading cryptocurrency exchanges, but I think for those that are in that market and steeped in the world of blockchain, they might not know that much about it. So, to start off, can you tell me a little bit about Kraken? What is it? How is it unique?

[0:01:32] AK: Yes, absolutely. So, cryptocurrency has gone through many, many cycles. You see it in the news when the price is going up. You also see in the news when the price is going down and everybody has these articles that come out that are, "Hey, I told you so. It's not going to work." And then, two years later, it starts going up again. So, I think with any kind of emerging technology, AI included, there's all these kinds of hype cycles around it of like, "Okay, we pushed the limits of the tech. Everybody's been going nuts on improving efficiency." And then, all of a sudden, we kind of crash back to the earth of like, "Okay, what's the use case?" Think of the machine learning in the 2010 time where it's the hot thing, and then there's a cool-off period of, "Okay. Actually, where do we apply all of this?" 

Now with, gen AI, and all the recent resurgence, it's clear that there's applications. Maybe this will be another bubble, I don't know. So, just a little precursor to cryptocurrency and the cycles of it. But Kraken, we were founded back, I believe it was around 2013, 2014, and it was after this exchange that had not really great security practices in Japan called Mt. Gox collapsed, and they became insolvent. Our co-founders, one of them being Jesse Powell, started cracking as a response to that of let's bring some trust into the cryptocurrency space and make a very secure exchange, where people can bring the enthusiasm that they have for this emerging kind of like distributed ledger technology, and be able to use trusted platform that they can conduct their trades on.

Over time, we've evolved that to getting into basically doing everything that you would do with your finances in a daily life and have very ambitious goals to be kind of like a one-stop shop platform for finance, but with a heavy emphasis on crypto. So, yes, that's kind of Kraken in a nutshell in its place. We're second in the U.S., we're leading in Europe, among the big regulated exchanges, and it's a wild ride.

[0:03:26] SF: Yes, I would think that being part of any startup and technology company, especially going through growth phases, has a lot of ups and downs. I think crypto, at least as an outsider, I would think that those things are even more amplified just because the swings are even more wild than even a conventional startup.

[0:03:45] AK: Yes. In the crypto space, we always say that bear markets are for building. Right now, we're kind of in a bull market, like Bitcoin is hovering around $100,000, and we are still building. But it's difficult as in the crypto space, especially when you're kind of like a small startup to not pay attention to the hype that's going on when you're just trying to build like cool technology and good products. So, there's a little bit of distraction that happens, but typically, like yes, when there's bear markets, you just huddle up, you shelter, and you don't care about price, you just push the technology to its limits because people that work in this space get very fanatical about it because we believe in it.

[0:04:21] SF: You mentioned with the Japanese exchange, that there were some challenges around safety and trust, and that's been a big area of focus for Kraken. But given that, at least my understanding with blockchain, the advantage of decentralization, immutability, crypto security, all these things is sort of, like, the focus has been sort of safety and trust. So, why was that a problem? What was sort of the disconnect there?

[0:04:46] AK: For a centralized exchange, you are still taking deposits on behalf of clients, right? So, even though they are using a decentralized ledger like Bitcoin or Ethereum, where you don't have to worry about your funds being compromised, because you fully owned and self-custody your private key. If you want to go do an on and off ramp, you have to take that to usually a centralized entity. Because no matter what, even though cryptocurrencies allow you to kind of do your entire kind of family's wealth just at your desk without a middleman, if you are plugging back into the traditional banking system, you do still have to do typical AML, KYC laws, and make sure that you're adhering to all the jurisdictions that have their all kind of little flavors of how they handle AML and KYC. 

That's where the trust comes in. If I had five Bitcoin and I want to get some USD for it, because I have to go pay my mortgage or something, then, I'm going to go to a trusted on-ramp, in my case, Kraken, and make sure I'm all KYC'd. Then, when Kraken takes my Bitcoin, it's custody under our own secure, private key storage and infrastructure. So, that's like where some early exchanges may have gotten that wrong. I don't necessarily blame them because cryptocurrency was in an infancy. You could generate a private key with just running a command on your terminal, and you see the output of the private key, and you think "Okay, cool, this is secure." But that's why we've evolved to have so many offline private key generation, a lot more advancements in cryptography with multi-party computation, and the space is a lot more mature.

A lot of the big exchanges out there, you can do a decent amount of trust that they're going to be custodying the funds in the way they should. Otherwise, you get into all kinds of
insolvency things. If there's a hack and your funds leak, you're going to be hit with all kinds of penalties, and it's not good for the space. So, that's why Kraken spends so much money and so much time investing in security and making sure that those private keys that hold deposits are 100% sound.

[0:06:48] SF: Got it. So, it's less to do with the underlying model of the blockchain. One of the things are server on the chain is secure, but how do I offload that essentially in a secure way in exchange it for some other financial currency like a USD or something like that? That's where conventional security and trust is going to come into play.

[0:07:07] AK: Exactly, yes. I mean, if I talk about the top, whatever, 10 currencies on CoinMarketCap, you can very safely say that most of those are what we would consider decentralized. So, if I had a private key on my desk and I have, I don't know, X amount of Bitcoin associated with it, borrowing any kind of quantum like changes in that technology that could like crack a private key, nobody's ever going to get that. The Bitcoin consensus is decentralized enough where that's never going to be compromised. There's not going to be a cabal of miners that come together to try to censor transactions or anything like that. There's so many people mining, or in a Ethereum space validating the blockchain that that censorship isn't there.

[0:07:46] SF: Okay. You've been at Kraken for six years or so. We talked a little bit about these sorts of change that's happened in the general crypto market and the ups and downs. But what about from an engineering and technology perspective? How have things changed for you and in your team there over the six-year period that you've been working on it?

[0:08:06] AK: I think the biggest change is, even around what we were just talking about. So, you create these offline air gap places where you generate private keys, and hold client funds. And maybe in the early days, it's more of like, you just kind of using an offline laptop or something. But as the space has evolved, the people that provide like HSMs, which are hardware security modules, they get more advanced and they start adopting blockchain technology or the - not really blockchain technology on HSMs, more of like what elliptic curves do these cryptocurrencies need? And the HSMs will then start supporting those out of the box because they know exchanges like us need good tamper-proof hardware.

I think, one of the biggest changes is, is that private key storage. I led the engineering efforts of building out a qualified custody product, started about three years ago, and we launched that last year. It took a lot of engineering effort to make a qualified custody product that can be audited and can be shown to all kinds of jurisdictions and prospective clients, so they can kind of trace exactly how we're doing private key generation offline. They can see the whole technology stack, where if one person has access to it, they can't compromise it. So, it's a lot of time in front of the whiteboard, kind of just threat gaming your technology to make sure that truly, nobody can ever access this. That is a constant evolution at Kraken. I think, five years from now, there will be a whole another way that we're doing private key storage. We just always have to stay on top of it. 

[0:09:32] SF: Okay. Can you walk me through a little bit about how does that private key generation offline system work/

[0:09:39] AK: Yes, not to get too into like the secret sauce. For prospective, qualified custody clients, they can definitely jump into it. But if you have like a hardware security module that has a tamper-proof processor in it, and you want to have sufficient entropy to be able to make sure that you're having good randomness to your private key. Then, typically, it's just sourcing some entropy from that from that and generating your 32 bytes of randomness that goes into being the seed of the private key.

Because at the end of the day, on all these curves, the private key and the public key are just big integers. You just got to make sure that as you're generating these, that you're not doing it in any kind of predictable way. Using cryptographically secure algorithms or cryptographically secure entropy to be able to create these is what's needed. Because there has been over the decade plus in crypto, there have been some libraries that come out that claim to be a safe generation of private keys, but say, the entropy they're using is from the CPU clock. And people have been able to kind of reverse engineer and see that if you're generating a private queue with these libraries, then you can kind of like predict what's going to happen.

If you know somebody generated of a private key at midnight on some date, and there's these kinds of processes happening, you might be able to kind of tell what the CPU was doing and then get close to that private key. So, as long as we're using those hardware security modules and doing this with sufficient entropy, you can be very confident that it's cryptographically secure.

[0:11:08] SF: And in terms of CPU security, are you talking about enclaves in this situation? 

[0:11:14] AK: Yes, like that's another thing, is we were huge fans of Intel SGX before, and that's more on the encrypted memory part, but we were huge fans of being able to have a hot wallet, which is a private key that's not in cold storage. Because cold storage is where you truly don't have it connected to the Internet anywhere. It's like you have to physically go there to perform an operation. But if we had wallets in the hot setting, then, utilizing something like Intel SGX is great, because, at least, we would have confidence that if something was compromised, an intruder is not going to be able to decrypt the contents of the process that's happening.

[0:11:50] SF: Got it. Then, it's really difficult to get encryption right. I have a little bit of experience with this, working previously at a privacy security company, and even based on some of the things that you're talking about here, choosing the right libraries, choosing the right algorithms, encryption key rotation, there's all these trip wires that can really creep up that someone could eventually exploit. How did you learn this space and know that you're following the best practices?

[0:12:19] AK: Good question. Personally, I had no formal cryptography training, but I think that's one of the huge benefits of getting enthusiastic about cryptocurrencies, and kind of like importing your first few libraries, or maybe you're just making a wallet and a private key on a terminal. You naturally have to start to do your own education and understanding of like, okay, Ethereum uses ECDSA on the Secp256k1 curve. Or Bitcoin has Schnorr signatures that allows the Edwards curve and EdDSA signatures.

When you see the libraries having to perform these things, it naturally makes the crypto enthusiasts just go explore. We never, at Kraken, we would never release a new currency for people to deposit, withdraw, and trade with. We would never really put deadlines on them, because we, 100% wanted to make sure it was secured before it went out. So, we would have dozens of eyes looking at how we're doing the signing on the hot wallets and everything, and inspecting the libraries that these currencies might have as a wrapper of a high-level SDK, and getting deeper into like, what library are they actually using for the private key generation for the signing. Most of them use like the audited ones out of the box, like something with Secp256k1 is going to be very popular among all the SDKs.

So, at least we have some confidence that there's not just dozens of Kraken eyes, there's also thousands of open-source eyes looking at this. Unfortunately, though, we have to be really on top of it, because some of those popular ones can still get vulnerabilities. Knock on wood. We've never had that at Kraken, but if there was a major one that a vulnerability came out, then, us and probably all exchanges would need to have a 24-hour war room, where we're rotating some keys and upgrading the processes there.

[0:14:03] SF: Even outside of, whatever sort of encryption libraries are you using, what kind of care do you have to take when working in financial space, when you're thinking about incorporating a new library, a new service. How do you protect against the risk of some supply chain attack that happens way down through a variety of different library dependencies?

[0:14:25] AK: Yes. First, just on the initial build out. S ay, you haven't written a line of code and you're going to look at how we're going to do this new currency or this new storage system. Most of the lower-level dependencies, we're going to be looking to see if they're NIST compliant, they're audited. We might even fund our own third-party auditing firm to go look at it. We've done that a few times. Even though they have some certifications, we just want our own kind of set of eyes on it. So, as I said before, we have a massive Kraken, I think more than any other exchange because we will rotate people around to just go do our own independent audits even outside of a third party.

Every single library, lower level, we have our own list that we performed audits on, but we'll look at anything under the sun to make sure it's up to our standards. Then, care on these, it's like the actual kind of architecture and planning of these, I think can, for the custody build out of that new cold storage system. I want to say it took maybe four months of just constant iteration, being in front of a whiteboard, filling it out, wiping it, and trying again. Because there's so many other considerations outside of just libraries and generation, where you want to make sure that these private keys don't have access by one individual. So, that's where you get into thresholds, photography, so you can split these things up, and make sure that there's an M of N, like three or five people have to come together.

I would think that we're not unique there. Everybody has to do some of that, because we also have to show to regulators and everyone that no individual, no one person can go to this private key. You must have certain directors with secret material to come together to do something with it.

[0:16:02] SF: Okay. I want to talk about some of the work that you're doing with respect to layer 2 protocol. So, first of all, can you give a little bit of background on what layer 1 protocol is, what layer 2 protocol is? How do they kind of compare, and what are the advantages of this layer 2 protocol over layer 1? 

[0:16:23] AK: Yes. Earlier, when we were mentioning the security of a centralized side, and then the security of a decentralized side. In order to sufficiently maintain a level of decentralization on a blockchain, you really want it to be as accessible to all people. So, If you want good decentralization, you want it so that anybody can go open up like a laptop or spin up a kind of cheap AWS server, and run the binary of Bitcoin, or Ethereum, or something, and be able to start validating and mining blocks. Independent of anybody telling you what to do, it should be like very cheap to do so. Therefore, you can have maximum world participation in that protocol.

Some protocols take a different route, and they push the technology to its limits, and they might do some decentralization tradeoffs and say, "You know what? Okay, you have to spend $20,000 a month on this AWS server to run and participate in the blockchain." That definitely limits the amount of people that can participate, and so, you can run into these little bit of centralization risks.

Us getting involved in an L2 protocol and wanting to take Kraken more on chain is really latching on to the decentralization ethos that Ethereum maintains. They really want to make it so that it's super cheap to run something. To do that, you can't really push the scaling limits as much as you want. Again, because the cost will go so high, if you're pushing that throughput to like 100 milliseconds a block. You have to have some beefy infrastructure to do that. So, Ethereum has taken this different route, decentralization above all else, and that's where L2s come in. 

Ethereum has a scaling roadmap, so that on the layer one, which is the base blockchain of Ethereum, you don't push the limits of that. You allow layer 2s to have their own blockchains that actually settle back to the L1 for security. And the L2s can do all the experimentation they want. So, if we really wanted to push it and say, "Our L2 by the end of 25 is going to have 200 millisecond block time." It might be more costly to run it, and that can be a tradeoff that the user then takes, is like, "I'm going to go participate in Kraken's L2 with really fast block times." But at the end of the day, I know that the L2 that I participate in, and I say I have a million dollars or something on there, it's still secured by the L1.

So, even if Kraken went defunct tomorrow, and people had a ton of money on our L2, they still can cryptographically submit something to the L1 to get their funds back in control at the Ethereum kind of base layer.

[0:18:45] SF: How does that work, the part where, essentially, of getting the funds back from the layer 1.

[0:18:50] AK: Yes. There's this concept of bridging in the scaling roadmap of Ethereum. If I have funds on Ethereum right now, and I want to go to Kraken's L2 Ink, then there's a contract that you actually send the funds to, and a contract is like a smart contract. Basically, a program that you can deploy on chain, and the validators are all participating in the computation of what you want to do on chain. So, if there's a contract deployed, it's usually called a bridge contract, and I would send funds to it, and the contract will lock my funds, and then, actually mint you the equivalent on the L2. Because the L2 is posting data back to the L1, so there's a bi-directional communication there.

The L2 will understand, "Okay, Andrew sent funds to this contract, it's locked there. Now, I'm going to credit him on the L2 for the equivalent amount." And then, you can go participate in the L2 with those funds. Then, when you go back to the L1, it does the same thing. The Ethereum on the L2 goes away, your balance goes to zero, and then you get released the funds back on the L1.

[0:19:49] SF: Yes. So, there's essentially built-in backwards compatibility.

[0:19:53] AK: Yes. Again, if you went away tomorrow, you could interact with that contract on the L1, and you can do a proof that the blockchain is not running and posting data to the L1. Then, that will allow you to actually unlock your funds on the L1. It's a beautiful, kind of trustless system where you really don't have to trust kraken here to maintain Ink, and you can get your funds off even if we turn off everything tomorrow.

[0:20:18] SF: Are there new problems that get introduced with this new protocol?

[0:20:21] AK: Fragmentation, I think, is the biggest right now. That's what we're all thinking about pretty much every day in the blockchain space. So, you want to maintain decentralization, great. That means, you need to kind of scale horizontally in all these L2s. But fragmentation comes into place. If we, I think globally, there's 100 million people interacting with decentralized ledgers. So, that's kind of a small fraction of the world still. If you have a bunch of people using Coinbase's L2, you have a bunch using ours, and then there's like 50 other L2s that people are dabbling in.

The liquidity of funds kind of gets fragmented in all of these places. And you might have the same, say, lending protocol deployed in multiple places. Well, you can't really tap into the liquidity if you're on Ink over to Coinbase's L2 base. And this is a huge scaling problem that that blockchain researchers and the whole community is thinking about is, how do we make communication channels between the L2s such that, if I'm on ink, I could use liquidity on base and vice versa without the user even knowing. I think a lot of those interoperable research projects are going to start coming online in about mid-25.

[0:21:33] SF: Was the learning curve for L2 a challenge above what you would experience with L1?

[0:21:39] AK: L1s are, that's just like the - you launch a blockchain and it's there, right? And you have whatever block times and kind of centralization or decent tradeoffs. L2s introduce all kinds of, I think, new complexities because they had to hard fork the L1 to be able to support this kind of communication channel, where the L2s post data back to the L1. So, the L1 can look at it and say, "Okay, Ink performed all these actions in the last hour. I'm going to bundle them up and post them to a block in the L1 so it's now immutable."

That kind of learning and getting into the protocol changes for that, that was huge feat, I think for all of us, because we weren't protocol engineers to start, and we really had to dive into some complex, you know, Go Code and Rust and all that to really understand like how this is working. So that, if we do any modification of the protocol, we don't mess it up. That's like, in crypto, kind of financial engineering. That's the thing that can maybe make you sprout a few gray hairs early in your life, because one small change or one small mistake on the protocol level, you could be compromising people's funds. That's maybe why some people perceive cryptocurrency moves slow on the research side because you really have to get this right.

[0:22:57] SL: Yes. I mean, I think that's the case even with sort of conventional or like non-blockchain-based financial services and FinTech, is essentially, the consequences of getting it wrong are massive.

[0:23:08] AK: Yes. You will always see in the news that some protocol was hacked or - and it's not, I kind of scoff a little bit at the headlines because it's not really a hack, like somebody has breached a system, and stolen traditional database data and those database leaks. But it's really just looking at the assembly code on the Ethereum virtual machine and noticing that somebody doesn't have a lock correctly coded on a liquidity pool or something. So, they find some roundabout way to be able to drain these funds. You know, it has a lot of bad press, but like, that's why the auditing firms, the blockchain space makes so much money because they have to have that hardcore expertise to review these things.

[0:23:51] SF: From an engineering perspective, what do you have to do in order to do everything within your power to reduce the risk of, we misinterpreted this particular part of the protocol and we ended up with a situation where we did risk somebody's money?

[0:24:07] AK: I think this is just not even trusting yourselves, Because we can engineer everything and build out this beautiful change to a protocol or making our own smart contracts. But then, it's like a multi-month process of getting just as many eyes as you can on it. And so, that's why things like Uniswap, which is one of the biggest decentralized exchanges on the Ethereum virtual machine space. They build entirely in the open, and they have dozens of audits on their contracts. And the hope is that more open-source work in this space is going to catch these things earlier. There's some protocols that like build closed for a while. I think a lot of the hacks or a lot of the exploits have been from places like that. So, kicking off that process of after we're done with something, to just give it out of the world for a while, and just see what comes back. That's key to this process. And I think. hundreds of other startups that engage in this.

[0:25:06] SF: Outside of some of this stuff we're talking about in terms of the attention to detail that you need to have in order to do this right. What were some of the other technical or conceptual challenges with this build out?

[0:25:18] AK: So, we use something called the OP Stack, which is this optimistic rollup stack. So, you can Google just OP Stack, OP-Stack, and you can see that this is one technology stack that people have created to be able to launch in L2. There's other things like zkSync, which uses zero knowledge proofs. There's Arbitrum, which is also using optimistic proofs like optimism, and they all kind of have their own flavor of how they're allowing this kind of rolled up data be posted back to the L1. So, some of the challenges were thinking, how do we differentiate in the space? If everybody's deploying these rollup stacks that are very similar to each other at the end of the day, then, how do we push the limits of the protocol to make sure we're differentiating without violating any kind of consensus?

So, that's where -- if you run the OP Stack, you are locking yourself into all the other people that run the OP Stack. You all have to agree on any protocol changes together through like a decentralized governance. So, a big challenge is like, if we want to push the limits of the block time, and maybe make this go down to 250 milliseconds, which is a target for us by some time in 25, then. we have to develop all kinds of sidecars around this binary. So, if the OP Stack is sequencing blocks on the L2, we now kind of have to make a little bit of a Frankenstein to say transactions come to our sequencer. Now, how can we reroute those to some other binaries that we either use from externally or we create that can reorder the transactions in an efficient way, so that we can keep optimizing that block time?

I really think with small changes to these kinds of sidecars that we put next to the sequencer will enable us to incrementally start shaping off block times. As we learn and as we get more in depth with, or into the efficiency of transaction ordering, and block creation. Then, we'll be able to announce that, "Okay, we're now down to 900 milliseconds." Hopefully, a month later, it's like, we've optimized this down to 800. Yes, that's like one of our biggest technical challenges, is fitting within the consensus of a protocol while still trying to differentiate.

[0:27:31] SF: Does the faster execution times help with usability of the platform as well as someone who's actually using Kraken for doing exchanges?

[0:27:44] AK: Yes, that's huge actually. Bitcoin has 10-minute block times. Personally, my philosophy of Bitcoin is, that's okay. I really don't want Bitcoin to push the limits of speed because Bitcoin has kind of taken this evolution, where it feels like more of a store of value, and it's almost like a savings account. Where you're participating in this, you have some Bitcoin, and the price is appreciating because there's so much going on in the world with inflation So, it's a hedge on governments behaving nicely, right, and not inflating their currencies.

Some of the other ones, like Ethereum or Solana, where you can actually put your programs on top of it and say, "I'm going to build this decentralized lending protocol," or "I'm going to build a really efficient exchange that nobody ever has to create an account for. You just plug in your wallet and you're using NASDAQ on chain." That requires some significant throughput because you really want traders to be able to execute orders in millisecond time because traders really need that efficiency and that throughput to be able to time their market making correctly, have 50 different limit orders up, quickly cancel orders, remake the orders. And you can't do that with a 10-second block time or something.

[0:29:01] SF: Do you see these ideas around, shift towards decentralization, on chain operations? Do they have the potential for even larger impact outside of this to how we think about software stacks?

[0:29:16] AK: Yes. I think one of the coolest parallels is the early days of the Internet, where everybody had a geosites page, or just random websites for their dog, or something like that. Or people running their own email servers in the nineties, and before Gmail kind of took over everything, and it's really difficult to start your own email server now. Because the moment you do, there's just all kinds of thousands of spams and things that hit. You have to rely on these centralized entities like Google, or whatever, or Apple because they have all the millions of dollars into the spam filters and algorithms that are going to just keep your inbox pretty sane.

I think that blockchain technology is getting us back to what it felt like at the early Internet, where you can actually take this beyond just vanilla kind of finance and trading. And there's going to be, throughout the next decade, I think a lot more just applications that feel like the Internet. But behind the scenes, it's running on immutable blockchain. So, people that are worried about database hacks, or any kind of compromise to websites, you have confidence that this is running in a decentralized way. It's completely transparent. It's immutable. 

Hopefully, that level of security kind of propagates to the world that like, this is kind of a new Internet, where I can just plug in my finances instantly and go interact with applications that might be doing like a streaming service, where I want to have my wallet connected and only pay for the video for every second I'm watching it. So, it just kind of like streams your cash. So, if you turn it off halfway through and you don't ever watch it again, okay, you only paid for half the Netflix show or something like that. I really think that this is kind of like a new resurgence of a decentralized Internet, again, with just a finance layer on top of it.

[0:31:07] SF: Yes. So, sounds like, if you could get to a world where you're able to do that, essentially, you're able to open up almost like new forms of payment, or new business models, or ways for businesses to make money, going back to your example in terms of, "Hey, it's almost serverless or consumption-based pricing, but for a streaming service that you're watching a video on. 

[0:31:30] AK: A hundred percent, yes. Remittances are huge right now. Everybody - there's tons of people in the US, or even in New York, or whatever, that are wanting to send money back home, and the traditional ways of doing that are like Western Union. Or things like it, where somebody makes $100 a day for some kind of work, and they want to send a good portion of that back. These companies charge so many fees for it. If you have 100, what goes back to your family is probably like $50, $60 or something, and that's a huge rip-off. The payment space in the blockchain world is just with stable coins, with decentralized stablecoins. I think that the remittance side, and onboarding, and letting other developing countries know that this stuff exists, there's a huge opportunity for a decentralized system to be able to bring financial freedom to the world. They can accept payments for their work in just USDC, or something, or USDT, or any of the other dozens of stablecoins out there.

[0:32:36] SF: Given the challenges around exchanging, sending money to your family across borders and things like that. Is it just due to sort of the legacy of the historical players in that market or is it a technology orientation?

[0:32:51] AK: No. I mean, maybe a little bit of both, but I think that the banking system has evolved from the sixties to now. So many of these banks are still like built on cobalt, it is old stuff. As we all know, these banks only - they close up on Friday at 5pm. And then, there's nothing you can do with your money until Monday when banks open. They're closed on holidays all the time. So, there's things like Swift and other kind of government style payment rails, but they all adhere to this kind of like old banking system. And that's the beauty of blockchain, is like, I have paid friends. I have done art contests on chain and stuff, like midnight, and it's like, you are just with one signing of a transaction, you're sending money anywhere in the world. Like once you do that a few times, or maybe the first time you do it, it feels like magic. I've been in the space for over 10 years. Every time I still send something or I interact on chain, it still feels like magic. It just hasn't gone.

[0:33:50] SF: Yes, I guess it's kind of like the difference, although even more transformational, but sort of the difference between using something like Uber, or Lyfts, or some sort of rideshare, where you've essentially cut out the historical dispatcher that was in control of the communication channels. And then, because they were the facilitator or the orchestrator between, essentially the consumer and the person providing the ride, they can kind of put whatever limitations in that system that they want.

[0:34:16] AK: Yes. One of my favorite examples is back when I was at Santa Cruz in 2015. I picked up a Mastering Bitcoin book. This is an awesome book written by a guy named Antonopoulos. And it kind of walks you through like, what is blockchain? What is Bitcoin? Why do blocks get mined? How do transactions go into a Mempool, and then go to miners for them to kind of order these in a canonical way, and include them in blocks?

My favorite example from it was getting down to the private key level, and showing basically like, you can - I mean, it's all math at the end of the day, so you can just get out a piece of pen and paper, and you could make your own private key, you could mine your own block just by manually doing the hashing stuff by hand. Of course, it would take a long time. But that's where it kind of clicked with me. It's like, "Oh my God, I can just sit here with a pen and paper with just math and I can interact with my finances and there's no middleman. I just love it."

[0:35:11] SF: Yes, there's certain immediacy and feeling of control with that.

[0:35:16] AK: Yes.

[0:35:17] SF: In sort of the broader context of this, given that there's this trend of, you know, launching new chains and the layer 2 solution, what are some of the implications for people investing in this space?

[0:35:30] AK: Unfortunately, I think with any emerging technology, investors need to look pretty heavily on who's just kind of latching onto this, because it's a hype. I think there's a lot of that that can happen in the blockchain space. But once you find the, and there's hundreds and thousands of these. Once you find the protocols, or the startups that are really evangelical about this, and really believe in kind of this mission of financial freedom for the whole world, then, that's where you kind of strike gold, and it's like, "Okay, these people are really serious about it." And they're going to be building something that can allow people to maybe participate in financial products that are typically reserved for wealthy Wall Street people." That might include perpetual future trading or some deeper options trading, or bigger borrow, and lend protocols.

If you are sitting on some cash that isn't doing anything, you might want to go participate in something decentralized where you can actually lend that out and make some yield on it. It's hard to do from just an average person living in the U.S. to say, "You know what? I have this big savings; I'm going to go lend it out." That's really hard to do. And you can do that very easily with just at your desk by participating in one of these protocols.

Investors, I think, need to always be looking at those people that are just evangelical about it. That's where you're going to hopefully have a good return, and really see the space evolve. Unfortunately, a lot of grifters, too.

[0:37:02] SF: So, what's next for you and the team at Kraken?

[0:37:06] AK: Yes. So, we launched this blockchain yesterday. We originally stated that it was going to be out in Q1 sometime, but we feel that there's this perception sometimes on crypto that it can move a little slow. So, we've been working night and day to accelerate this timeline. And so, we got it out yesterday. You can go to inkonchain.com and see kind of the applications that are deployed there, and then you can see the bridges and the ways to connect your wallet and be able to interact. I think, hopefully, we'll have some tutorials coming out very soon in some campaigns that make it really easy to onboard to this.

So, our focus for probably the next six months of these three pillars that we have called UX, security, and privacy. UX is a core focus of this, because of all the stuff we've been talking about, it all sounds great. But to the new user, onboarding to some of this it's wildly complex. You have your funds on Ethereum, and you're like, "Okay. Now, I have to bridge this." Then, now, I have to go look at a different application to be able to interact. I have all these popups of like, I need to sign to authorize my wallet, and then I have to sign to do the transaction. The UX is not there yet.

So, our core focus for at least six months is like, can you just open a wallet, scan your face, within five seconds you have addresses, and then you have really easy to use curated experiences to be able to interact with these financial products.

[0:38:29] SF: Awesome. Well, maybe we'll have to have you back to talk about that once that launches.

[0:38:34] AK: Absolutely, yes. Q1, I think we'll have a lot of improvements to our wallet infrastructure, and yes, we're going to be very loud about it.

[0:38:41] SF: Andrew, thanks so much for being here.

[0:38:43] AK: Awesome, yes. Thank you for having me, Sean. It's been a pleasure.

[0:38:45] SF: Cheers

[END]