Section 2: Disruption in Process:
Olaf Carlson-Wee, Coinbase: The Democratization of Payments
Olaf Carlson-Wee, Coinbase
Coinbase is a technology company that offers a bitcoin wallet and exchange service. Other companies in this area include Xapo and BitPay.
What is bitcoin and why does it matter?
Bitcoin is a currency built on a decentralized ledger protocol. Bitcoin transactions are an efficient way of communicating changes in the ledger, which is managed entirely by decentralized nodes. This ledger is called the “blockchain”. The key thing to realize is that bitcoin is like the payment app on top of the blockchain, and the blockchain is the core technology here. Bitcoin matters because it is more efficient than traditional payment rails for making fast, cheap and international payments. The internet has been missing a payment protocol since its inception. Using credit cards online is inefficient because it’s insecure to enter your number; fraud and identify theft are huge problems. Plus, there are fees for merchants to accept payment, due to unnecessary middlemen processing the transaction. Credit cards really weren’t designed for the internet era.
What exactly is a blockchain?
The blockchain is an enormous ledger that is cryptographically secured and distributed among a large network of people that are all communicating through the internet. The blockchain is an objective truth, in real time. If I send you one bitcoin, my piece in the ledger goes minus one and your piece goes plus one. The moment that happens, the entire network sees it happen. Full transparency of the network is its power. Everyone can see every transaction that has ever occurred within it.
Other than a payment app, you can imagine a number of other things that can be decentralized and distributed to a large network that is cryptographically secured – for example, decentralized contracts. A system can be created that says, “I will send you 30 bitcoin at this time”, and that can be programmatically input into the blockchain; and then, in the future, all nodes in the network will see it’s time to send that payment, and so it will be made. These are the types of things where you can apply computer logic on top of this decentralized ledger to execute all sorts of things. On top of bitcoin-based economic contracts, you can also have “smart contracts”. For example, instead of a deed to own property stored with a trusted third party, you could time-stamp a cryptographic signature of ownership in the blockchain and then transfer that signature in a peer-to-peer manner, much in the same way a bitcoin transaction transfers a payment. You could apply similar logic to decentralize things like cloud storage, DNS [Domain Name System], certificate authorities and voting, making all these things more efficient by removing middlemen, fees and central points of failure.
If bitcoin is the first level of a larger blockchain system, what’s your vision for bitcoin and the blockchain?
In my vision, every cross-border payment will be made via bitcoin; every internet payment will be made via bitcoin; every micropayment will be made via bitcoin. With bitcoin there aren’t the typical fees applied to all those services because there is no central party, just a peer-to-peer network.
Another example use case is in high-risk markets where there are a lot of small- to medium-sized enterprise (SME) owners that can’t afford to deal with the fraud risk of international payments, or don’t have a direct connection to international payment rails. Being able to open up SMEs to international, or high-risk, buyers by accepting bitcoin could be a huge market. This could facilitate a whole microtransaction economy that simply doesn’t exist right now.
Bitcoin has only been around for four or five years, and in that time it has grown so much that it’s very hard to envision the next 10 years. But we will definitely see a lot of entities moving into this: for example, financial institutions leveraging the blockchain technology in order to create an internal, verifiable and auditable record of transactions. I could imagine a bank leveraging the blockchain technology just for its internal ledger, since it’s more efficient and distributed than whatever ledger system they have in place now. I view the possible applications as being endless.
Coinbase is one of the companies at the forefront of bitcoin. What do you do?
We really have one central goal, and that is to make bitcoin easy to use. Bitcoin is an incredibly complicated technology at its core. The cryptographic security of its distributed system is the result of decades of cryptography and network research, eventually culminating in solving what is called the “Byzantine Generals’ Problem”, which relates to reliably transferring information in an untrusted network, which has been a very difficult problem to solve.
Coinbase is taking that complexity and abstracting it away as much as possible from consumers and merchants. The goal is that merchants and consumers will have all of the benefits of bitcoin (cheap payments, international payments, peer-to-peer micropayments and an alternative means of storing wealth), while we abstract away all the technicalities, i.e. public/private keys, private-key security, generating a transaction, relaying transactions to the network, trading, etc.
Coinbase is working to make payments and storing value easier for customers and merchants in a few specific ways. We offer the ability to buy and sell bitcoin in 19 countries, using a bank transfer. We have a wallet to send and receive bitcoin, as well as a vault for secure storage. We offer payment processing that allows merchants to accept payments without volatility or chargeback risk. We also have an API [application programming interface] that developers all around the world use to build apps on top of bitcoin and the blockchain. In this way, developers can build useful applications for bitcoin, without having to re-solve the hard issues of key storage, network interaction, banking relationships and security, by bootstrapping on top of the infrastructure layer we have already built.
How does Coinbase relate to existing banks?
We are more like a vault than a bank. If you send a bitcoin to Coinbase, we will never lend out or invest that bitcoin, but we will hold onto it in a secure way. We are also a payments company in that we’re processing payments. It’s hard to pin down exactly what we are in relation to existing companies, because bitcoin is such a large breakthrough that we really are a “Finance 2.0” institution that the world has never seen.
Right now, bitcoin is used by a niche population of technologically savvy people. It’s gaining mainstream adoption with large-scale merchants such as Overstock, Expedia and Square, but a lot of the benefit of bitcoin is going to be realized by users in other parts of the world. For example, in parts of Africa, peer-to-peer payments are extremely popular where there are many people not served by banks. With bitcoin, users can effectively be their own bank with a peer-to-peer currency that transacts on mobile devices, and so I see this being a huge opportunity for developing economies in Africa and elsewhere.
In much of the developing world, a large part of the population leapfrogged the corded phone and went straight to mobile. In a similar way, I can imagine that same population leapfrogging commercial bank accounts and credit cards in favour of mobile peer-to-peer payments. There is a huge market for bitcoin there.
What would be the implications for society?
One of the larger impacts of bitcoin in the long term is to democratize payments and create a stable store of value. Many countries that have unstable economies can be hurt by high inflation or unstable governments, which can have volatile effects on people’s wealth. Something like bitcoin offers a decentralized, international ledger that can be a huge boon for those people who can now store their wealth and protect it from unstable systems. In developed countries, we take it for granted that our currency is a relatively stable store of value, but in other countries, people don’t necessarily feel that way, and bitcoin can help to democratize access to a stable store of value and payment network.
Bitcoin will not replace everything, like fiat currency or banks. But bitcoin does have a place in this world that hasn’t yet been carved out. A big part of that is giving global access to a decentralized network of value, which doesn’t exist yet, as well as global decentralized access to financial instruments like effective payments and an effective store of value, which also doesn’t exist yet. In a sense, I think this puts everyone on a level playing field by being able to interact on a global scale.
How are the risks of bitcoin being mitigated?
It’s important to recognize the risks, but bitcoin is an open-source protocol that is endlessly resilient. You can’t destroy something that is open as long as people gain benefit from it and are using it. When there are disasters, for example with Mt. Gox, it’s an important reminder that security is critical and there are actors in the industry that don’t have the expertise needed to run secure operations. But despite what occurs with private entities, the protocol itself will move forward.