Audio and transcript from the January 7th, 2022 installment of “Conversations with the Coop” with Dr. Karl Kreder, the CEO of GridPlus and core contributor of PhononDAO.
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Crypto Texan: Hello, everyone. Welcome to Conversations with the Co-op. This is where we source questions from the Index Co-op community to gain insights from today's leaders in crypto and DeFi. I'm your host Crypto Texan, and on this installment of Conversations with the Co-op, we have Dr. Karl Kreder, who is the CEO of GridPlus and a core contributor to the Phonon DAO. We also think that Justin Leroux will be joining us shortly as well. But thanks for being here today, Dr. Karl. How are you doing today?
Dr. Karl: I'm doing great, thanks for having me. A fun start to the new year.
Crypto Texan: Yeah, yeah. The price action is a great start to the new year. Absolutely. But let's just start off with some introductions. So why don't you tell us, Dr. Karl, just a little bit about your background and how you got into crypto.
Dr. Karl: So I got into crypto back in 2012. I actually heard about it on NPR, or as I like to say, the "nipper." Back in 2011, they did a story on people buying drugs on Silk Road, and I obviously got interested just from the monetary aspect of it.
At the time, though, I wanted to buy some and the only way I could buy it was some convoluted process of getting like a phone card using cash and converting that to an Okpay card, somehow redeeming that on Mt. Gox for like a coupon to buy bitcoin. So I waited till 2012 to do it, and I ended up buying my first bitcoins from Charlie Schrem's, from Charlie Schrem's company. I think it was, I'm trying to remember the name of it, actually. Wasn't, BitPay is still around, but anyway, it was Charlie Shrem's old company, and you had to go use cash at Walgreens and use a Western Union to get your bitcoin, so that was like my first bitcoin.
So my background though is that I'm an engineer by training and I figured this out actually in 2012, I just started my doctorate at University of Texas in engineering. So I was very interested and kind of lurked in the space, but there wasn't really much you could do at that time, if you didn't have a secondary means to support yourself.
So I did my degree, graduated and then I went to work for ConsenSys and I worked for ConsenSys for a year, then formed the spin-out GridPlus, and I've been working on GridPlus ever since. My focus at GridPlus has always been trying to make crypto easier for people to self custodian and use.
So I've always been working on sort of like a hardware wallet set of solutions, which is really the loudest one at this point, as well as SafeCards. Yeah, that's a little bit about my background. One of the things that happened, though, is when we were working on the SafeCards, and SafeCards for people that don't know, are effectively using a smart card to create a pin protected seed phrase.
So if you think about the logistics of actually storing a seed phrase securely at a somewhat adversarial environment, I mean right now, I think most people find it pretty easy because it's basically just being stored in an obscure way. But as crypto becomes more and more ubiquitous, I think seed phrases are going to become more and more targeted, which is to make storing them harder. Certainly in plain text on paper.
So the cool part about the SafeCards is it's effectively like a plaintext seed, except it's protected by a pin so you can just leave it on your desk and not worry about it. We actually sell SafeCards that have 10 ETH on them, so if anyone thinks they can break the security around a SafeCard, they can go to GridPlus.io and buy SafeCards with 10 ETH on them and see if they can get the 10 ETH off.
But so those are SafeCards. So one of the things that I kind of figured out with SafeCards, though, is they have some unique properties with them, specifically regarding something called a physically unclonable function. And the concept of a physically unclonable function is that SafeCard can never be copied, right? And that's one sort of key piece that goes into crypto that we talk about, as not being able to do a double spend. So I realized that not being able to do a double spend and not being able to copy a physical, unique thing were an interrelated concept. And that triggered me to start thinking about how that could be used and that's how Phonon was born.
Crypto Texan: Yeah okay, that's interesting, I didn't realize you went to the University of Texas, are you a native Texan as well?
Dr. Karl: So I've been in Texas since '08. Yeah, I moved down here for my first job after college.
Crypto Texan: Okay, I'm assuming the Austin area because that seems to be where a lot of Web3 people are in Texas.
Dr. Karl: Yeah, so I actually started it out in San Antonio, and then I moved up for my degree in '12, well my graduate degree in 2012. And then I've been here ever since.
Crypto Texan: Yeah, well I'm in the Dallas area, actually, and I think Delong formerly from Sushi is out there in San Antonio as well. But now that's besides the point. I feel like a lot of times with the kind of crypto OGs like yourself that got started, in 2012, it's either they got started off either being a Bitcoin core dev, working at Coinbase or going the ConsenSys route and you went the ConsenSys route and you said that GridPlus kind of spun out of ConsenSys.
So maybe just provide a little more color on that background. Can you give us a little background on ConsenSys and how GridPlus came to be from forming and then spinning out of ConsenSys? How does that program work?
Dr. Karl: So we were actually the first company to spin out of ConsenSys, so it was slightly a novel thing, obviously when we did it. But effectively the three of us had an idea. I thought it could be a good opportunity and then we just talked to Joe and worked out a way to spin out the organization.
ConsenSys is always interesting because they've always referred to themselves as a mesh, not a company. And they've evolved significantly since 2017, so there's actually a more distinct formalization now, so they actually have like ConsenSys software, which is more of like a separate corporate entity from ConsenSys Mesh, which is more like an incubator type entity now.
So those things weren't distinct and didn't exist back in '17. But now they do so, the process that a company would go through is they would pitch an idea to Mesh right and potentially be brought into the Mesh, and that would act as an incubator with some degree of funding and support around it to get them started. So again, I'm not super familiar with how it works now, but that's my understanding.
Crypto Texan: You being the CEO of GridPlus, what's it like being a hardware focused company in the crypto space, which I feel like at least recently, crypto has been a lot more software heavy, I guess. Just kind of want to get your take on that in general, and then we'll move into Phonon.
Dr. Karl: Well, fundamentally, I think that crypto and a lot of the UX problems around crypto can only be solved by hardware. And I really don't see a way that software can solve all these problems, so ad GridPlus the goal is to create and maintain decentralized systems, right? If everyone just keeps their crypto on Coinbase, we don't actually have a decentralized money system.
We have potentially decentralized or replaced the Federal Reserve and monetary policy, but you're just replacing JP Morgan with Coinbase, and you're going to see the same brand-seeking behavior over time by definition, right? So to kind of keep things as free, peer-to-peer money, you have to enable people to keep assets themselves, and that's really the focus of GridPlus.
In terms of being a hardware manufacturer in the space and just hardware generally is much harder than software. So there's a lot of things and dependencies that we can't directly control, and those have been exacerbated with COVID, right? So our lead times get higher, shipping rates go up. So it's a lot more difficult to execute successfully than a software strictly play.
Crypto Texan: Yeah, absolutely, and yeah, with Coinbase being the custodian for a lot of retail digital assets and I guess there is security there with Coinbase being a custodian, right? And then you have protocols, or not protocols, but hot wallets like Coinbase Wallet and MetaMask, and there's, I guess, just a lack of security. And I think security is something that we want to touch on as well in this conversation. So I don't know, do you have a hot wallet personally? Like, what's your view on those or are you 100% hardware all the time?
Dr. Karl: So I still have hot wallets, but they're really just like legacy, and there's not enough in the wallets that, the only reason I still have any assets, not on a hardware wallet is because I've been too busy to deal with it, and it's not the highest priority in my life. But any of my meaningful assets that I have that are just like some random coin that I bought way back when. Everything with meaningful value is on a hardware wallet and it's on a Lattice. And every day that I use crypto and every transaction that I do, I use a lot of support, so.
Crypto Texan: I probably could have guessed that your assets were on a Lattice.
Dr. Karl: Yeah, I mean, the problem is once you get SafeCards, they're like crack. Because they're just so much better than seed phrases, and they're so much easier to use and they're so much easier to replicate and back up and store, that like once you've done it once you're going to keep doing it, right.
And the other thing that's great about it, too, is it's super easy to keep like segregated funds, so you can have money for your company on a set of SafeCards on a separate seed. And then you can have some personal crypto over here, and then you can have crypto for your family over there. And those are all separate sets of cards and seed phrases, like once you start using SafeCards, they're pretty addicting and you're going to end up with like 20 or 30 of them.
So I mean, the analog there is right, like people would have a bunch of ledgers and they would have a bunch of seed phrases written down somewhere. But the cool part is like, you just have these SafeCards -- again much easier to store, much easier to replicate backup, much easier to use, right? So like when I want to use a SafeCard, I just plug it into my Lattice and I pin in and I'm hot, right? I'm ready to go. Whereas if I had a seed phrase and it’s like 20 words to restore a seed phrase on the ledger, right? So like, that's not an easy methodology to use. So they're just super convenient, super fast if you're managing any set of monies of any amount.
Crypto Texan: Yeah, absolutely, and yeah, you mentioned Ledger, and so, yeah, when I think of hardware wallets in the crypto space, I think the GridPlus Lattice, Trezor, and then the Ledger are probably the top three that I think of. How do you view your competition and like, how do you differentiate yourself between those other two competitors? And I don't know, like where do you see the opportunity for GridPlus in the future to kind of gain some more market share, just in your opinion as the CEO?
Dr. Karl: I mean, for us right now, our biggest issue with gaining market share is just production. So, right, we're just working on getting more throughput and productive capacity. That's really like our bottleneck. I think within the sort of high end whale community, the funds and any very native Web3 people, right, a lot of them know about the Lattice and a lot of them use it already.
if you're talking about differentiation, I mean, this is like the difference between a horse drawn wagon and a car right? There really isn't any comparison between a little USB dongle and a Lattice, right? A Lattice is sort of an always on sort of Web3 terminal, like a Bloomberg terminal would be to the stock exchange, right? Compared to like a little security USB dongle that you have.
So like, I don't think they're comparable in use. I don't think they're comparable in scope. I don't think they're comparable in security, right? One of the big issues with Web3 is that Trezor and Ledger weren't really designed and haven't really changed for Web3. So one of the problems that you face is when you interact with a contract, you need to verify what you sign. There's two ways that you could lose money in crypto. One is somebody gets your seed phrase for your private keys and they just take all your money. That's why you have a hardware wallet.
But the thing the hardware wallet also has to do for you is allow you to verify what you're signing on the hardware wallet, right. So when you look at Web3, even like a simple Uniswap transaction, it's going to be several hundred bytes of data that you're going to have to verify. And Ledger doesn't have a way to present that because of the small screen. Nor can they present that in any sort of marked up or human readable form.
So like on the Lattice, if you do Uniswap swap transaction, you can load an ABI pack, and it parses out that data payload into a human readable form, and then you can also use what we call address tags to tag the different addresses that are used either a contract address or an asset address or if I do Uniswap, I can tag the contract router as Uniswap V3. I can tag my USDC as "USDC" and I could tag wrapped ether as "wETH." And then when I go to confirm it, it just says, oh, you're doing a Uniswap exact output for USDC from wETH in these amounts, and it's super easy to read and confirm, right?
So that is essential to maintaining security when you're interacting with Web3 contracts. And we've seen two hacks last year showing that the hackers are moving into the space of hacking people that have hardware wallets that are forcing people to blind sign right. One hack was Hugh Karp earlier in the year, and then the second hack more recently was Badger DAO, and that was quite a bit of money. So I mean, as people interact with Web3 more, and there's more and more value against it, they have to realize that they can't blind sign and they have to have a wallet that allows them to confirm what they're signing.
Crypto Texan: Yeah, the blind signing aspect of the Ledger Metamask connection has always been kind of a, has made me a little apprehensive as well, so I definitely get where you're coming from there. And yeah, the Badger hack that was, yeah, that was a pretty bad one. And, we've got Badger in our DeFi Pulse Index as well, so we are obviously staying pretty close to that situation.
But yeah, it's unfortunate and it's just important, especially with new people in the space to stress that security, because it's, this is a very new and nascent space and there's a lot changing on a day and it's just different, right? This isn't like someone robbing a bank and your funds are secure there. It's very different. It's self-sovereign, and it adds a little more responsibility to the users as well. I think that's important to stress. But let's kind of get into Phonon DAO.
Dr. Karl: Well–
Crypto Texan: Go ahead.
Dr. Karl: Before we hop there, I just want to say, right, so like a Ledger is great if you're doing a simple EOA transfer right, from one account to another. But the second you're blind signing and you're not confirming what you're signing, the only thing that is saving you is the fact that the majority of hackers aren't targeting that yet. But they clearly are starting to, so that, at that point, relative to your take, when you're making a signature, it's security is like it's Kabuki theater, right? It's the TSA. It's a security talisman that you like, hanging around your neck to make you feel good about what you're doing, but it's not actually providing anything for you the second you blind sign.
Crypto Texan: Right, so what would you say, when you're interacting with a smart contract, what are the best practices to go through?
Dr. Karl: So
Crypto Texan: Just use a Lattice. Is that it?
Dr. Karl: Well, yeah, I mean, the reason that they do blind signing is because it's close to impossible to get confirmations done on a Ledger because your data payloads are in hex code, right. So the first thing that you have to do is you have to take that hex code and you have to use an ABI or you have to support EIP-712 to be able to represent that hex code in a meaningful way that's human readable, right? All it is, is just bytes to begin with.
So if you're like on a Ledger and you're just seeing like a string of bytes go across, you would have to like, write down the string of bytes, you then have to like, go manually look up the ABI, you'd have to figure out how to parse that set of hex strings. So you then would end up doing some conversions and some indian flips looking at the different fields and then confirming them against what you think they are, right?
But with a Lattice, if you go through that process, like I said, if you load the ABI pack and you load up address tags, then you're simply confirming, what am I doing, Uniswap swapped for exact, for this asset, for that asset, to this destination wallet and this amount, right? So then that's something that anybody can really confirm. But you need to get away from just signing hex blobs to actually confirming what those hex blobs are, and that's really one of the things that the Lattice brings to bear, so.
Crypto Texan: Yeah, and I think that's a, I think we can start to transition to Phonon DAO in that sense in that, I've heard about Phonon DAO a couple of times, one on the Into the Ether podcast with, Eric Conner and Sassano. And I've heard Sassano talk about it on The Daily Gwei a bit, too. And that's a way to allow for peer-to-peer transfers of digital assets off-chain. So I just kind of want to, kind of get your sense - what was the idea behind this? Like, what's the history of Phonon DAO? And why do you feel like an innovation like this is important to the space?
Dr. Karl: Okay, so let me answer the second question first. The reason that I think something like Phonon is important is because I am not a Bitcoin maximalist, I'm not an Ethereum maximalist, but I am a crypto maximalist, so I am convinced that cryptocurrency or crypto-like systems will be our money in the future. Really, period.
So what we have to do is we have to build systems that allow everybody to have access to crypto and be able to use crypto for all things. And ideally we want to do that in a way in which it remains sort of decentralized and uncontrolled. So layer one solutions, right? We all know about the gas fees and whatnot. And from a technical standpoint, layer one solutions can scale, but they're going to run into a network constrained upper limit at a point that sort of balances sharding of state and throughput.
So sort of reasonable estimations of what that limit might be for, like a layer one are going to be maybe 7000 TPS. So if you can get to say 7000 TPS, that's great, and that does a lot, but that still doesn't create a system that can replace money as we know it today. So we're going to need another set of systems to do that.
And Phonon is super interesting because it allows for off-chain transfers of assets between Phonon cards. It scales linearly with the number of participants. So if there were 7.9 billion Phonon cards in the world, you could do 7.9 billion transactions/second. And I think we're going to need something like that to make up the gap between 7000 transactions/second on layer one to everybody in the world using crypto. So that's the second answer - why do we need something like that?
The first answer, what the history was, is Phonon was an idea that I had. I kind of mentioned this a little bit earlier based on understanding some of the characteristics of the SafeCards when we were working on those, specifically the fact that you wouldn't be able to replicate the SafeCards. So I knew that that could help basically create a system where you could guarantee the enforcement of double spends without having to have a centralized ledger or ConsenSys mechanism. And so that was kind of the genesis of the idea of Phonon. And I'll just give the TLDR; of Phonon here now that we're talking about it.
So Phonon is a hardware enforced off-chain layer zero scaling solution for any crypto asset. So it effectively lets people deposit something into a Phonon compatible chip, so that could be a smart card, that could be a SIM card, that could be an eSIM that could be interfaced with a computer via a HID reader that could be interfaced with a smartphone with an NFC connection, that could be a card at a point of sale terminal with an NFC connection, that could be a smartphone that has a natively embedded eSIM that's been flashed with the Phonon applet.
But using any one of those interfaces, they'll be able to take something from a chain, they'll be able to trade it entirely and privately off-chain at no fees, an infinite number of times between any of the other Phonon cards. And then they'll subsequently be able to redeem it back to chain at a future point if they so desire. So that's kind of what Phonon does.
Crypto Texan: Yeah, I'm going to try to ask, I feel like this is such a very novel idea. Or maybe not a novel idea, I think people have had this idea, but you and Phonon DAO and GridPlus are actually implementing this idea. Well, actually first, I'll ask, what is the relationship between GridPlus and Phonon DAO? I think that could give us a little bit of background as well.
Dr. Karl: So the idea here is we came up with this idea at GridPlus and we were originally looking at it to solve a problem that we were trying to solve, which was how do you do kind of streaming payments or microtransactions? This is potentially very interesting for a lot of different things, not just microtransactions. I think Phonon is applicable to creating interoperable swaps between any blockchain. I think it's useful for sort of in-person peer-to-peer payments using smartphones that don't even require network connectivity. And I also think it's good for microtransactions.
So it spans a large amount of potential applications and spaces, and so GridPlus develops the Phonon applet. We've developed a CLI, we've developed sort of like a backend, we call it Ripple. We've developed a mock, so when we've released that and the idea is we've built something that we think is becoming close to akin to a native cryptographic sort of protocol, right, it transcends blockchains, it transcends any asset and transcends any single protocol so in of itself you think of it as a protocol, right?
So GridPlus has developed the basic framework, and the DAO is formed to help build additional services and applications on top of that framework. So GridPlus is still intimately involved in developing tooling and helping the DAO get established and hopefully the first few applications developed. But it's much more of a protocol. I mean, you can think of it as a layer one, but it's a layer zero in that you need a disinterest, like not a singular corporate entity sort of pushing the use and development and adoption of that protocol. And that's really the purpose of the Phonon DAO.
Crypto Texan: So just make sure I understand this, Phonon DAO's purpose is to build applications on top of the Phonon protocol, am I understanding that correctly?
Dr. Karl: Yeah. To build applications and to also build value-added services and to help facilitate other people to build applications, that's correct.
Crypto Texan: Okay yeah, and you, you're describing the Phonon protocol as a layer zero. And I'm trying to think of other protocols that market themselves as such, Polkadot is one that I can think of who markets themselves as a layer zero. Can you kind of go into like the differences because it feels like two very different definitions of layer zero there?
Dr. Karl: Yeah. So I would say I'm not intimately familiar with all specific implementations of people marketing themselves as layer zeros. The ones that I have looked at, I would argue that they're not actually layers zeros. The reason we're calling it layer zero is because the Phonon protocol does not have dependencies upon the blockchain protocol. So the only thing a Phonon protocol has to– the Phonon protocol has to support, to support a blockchain is the same signing curve.
So there's effectively three signing curves that exist, K, R, and Edwards, and if you support those three signing curves, you support every blockchain. So the topology of the stack, if you think about what is dependent on what, Phonon would be below, not above, the layer ones. Other things that are playing themselves as layer zeros have some protocol specific connectors that have to be built on top of the protocol specific constructs that exist in the layer ones to connect them together. So they're marketing themselves as a layer zero but if you drew a technical stack, they're clearly a layer two, whereas Phonon is literally a layer zero because the only thing that we really understand is key pairs, and that's it.
Crypto Texan: Okay, and yeah, that makes sense, and maybe it just comes to this is such a new space. There needs to be some sort of redefinition of these terms, right? Because I can see how both of these could be considered a layer zero in some sense. Maybe a better term for something would be like a sub, just call it sub layer one because maybe not necessarily layer zero and maybe not a layer two, but something in between. But I don't know if that's just me kind of rambling there, just something I think about. But yeah thanks, that's helpful.
Dr. Karl: Right I mean, traditionally when you look at the tech stacks and you say, like what's on top of what, it is done based off what has a dependency on what, right. So our dependency is really like cryptography. It's not anything specific to Ethereum or Bitcoin or Solana. We don't even understand the base protocol, the, so there's different parts, right? And I kind of mentioned them earlier. But when I say the protocol, and effectively just referring to the Phonon applet.
So the Phonon protocol and the Phonon applet has no understanding of any blockchain. Like it doesn't know what Ethereum is, it doesn't know what Bitcoin is, it doesn't know what a sat is, it doesn't know what a GWEI is. It doesn't know anything. It doesn't, and it can't, right?
Because it's a highly constrained environment that has no guarantees on having good information about the world. So like, it can't make a decision about what a Bitcoin is versus what an Ether is versus what ETC is, right. Like all of that is like a subjective thing that you would have to have a node and you'd have to be connected to the internet and understand what generalized social consensus is to like, come up with an idea, right? The cards themselves don't understand any of that, all they understand is that they have a key pair and they can atomically swap those key pairs. That's like all the cards understand, all they need to understand.
Crypto Texan: Right so that's what's going on under the hood of these Phonon cards, right, is just an exchanging of private keys. Is that correct?
Dr. Karl: Yeah, that's correct. So the process for creating a Phonon is you would tell your Phonon client that you want your card to create a new Phonon, it would pop out a public key. The client would turn that public key into an address for what asset you want to send money to, so that public key can be turned into a Bitcoin address or an Ether address or a Solana address doesn't matter. You then send money or an asset to that, so it could be Ether, it could be USDC, it could be an NFT, doesn't matter, to that address.
You then load the metadata describing what that asset is. So a Phonon is fundamentally metadata and a key pair. And then the Phonon card will enforce the uniqueness of the existence of that private key and the atomic swap of that private key between other people in the network. And then and that process can happen an infinite number of times, so I could send you some money, you could send Justin some money, Justin could send it to Alex, and then Alex could then withdraw it. When you withdraw a Phonon, you're exporting the key pair, which makes it no longer exchangeable in the network. But now it becomes visible and usable back on a layer one.
Crypto Texan: Okay, and is there a point in time where I guess these transactions, these exchanging of key, private keys, I guess batch back to the layer one or, I guess, I guess they don't have to. Okay yeah I'll let you explain.
Dr. Karl: Correct, so they don't have to, right. So like if you export a private key and that private key represents a bitcoin that effectively is just another entry in a UTXO wallet, right? So you could just add that private key to your wallet and the wallet would just do its normal thing. And that's the end of it.
In Ethereum, and how we use Ethereum with accounts, there may be an argument, not that you need to reaggregate that key in some way to make it usable, but to make it convenient to use you may then aggregate it into one of your used accounts, right? But there's no implicit requirement to do a redeem on chain, because once you have the private key in your possession, you have the use of that asset on chain and you doing a transaction is just making it more convenient for you to hold that asset.
Crypto Texan: Okay.
Dr. Karl: You see what I'm saying?
Crypto Texan: Yes, yes, I do.
Dr. Karl: So in an account model you probably would want to reaggregate it into your account, so there would be an on chain sort of redemption.
Crypto Texan: Right, that's right because Ethereum has the account model and then Bitcoin has the UTXO model for managing the ledger, right?
Dr. Karl: Yeah. Right.
Crypto Texan: Okay and so, yeah, just kind of thinking through like a real world example and I can see, I mean, obviously, there's so many benefits to this. But let's say, me and my friend grab dinner. He pays for it and I decide, yeah, I'll just send you some sats with my Phonon card. Is it that simple? Or, how do these Phonon cards communicate? And is it, can I do just any arbitrary number of my choosing or, I don't know, if you're exchanging private keys, do these private keys have to be preloaded with specific amounts or how does that work?
Dr. Karl: So in the alpha version of Phonon, each Phonon is representative of an on-chain asset. There are potentially ways that we can extend this to make them divisible off-chain, but that hasn't yet been added. So if you were going to say pay in the alpha format, everything that is a Phonon should be thought of as a UTXO, and it's similar to UTXO treatment on Bitcoin. So if you wanted to pay your friend 35 bucks because he picked up dinner and you wanted to pay for your half, what you would likely do is send him 4 Phonons, right.
Maybe you would have 3 Phonons for $10 in one wallet, so you would just pull your wallet up. The wallet could do sort of the extractions that a Coin wallet can do so you don't need to go and specifically pick your Phonons, you would just say, I want to save this guy 35 bucks and the wallet would figure out how to make that happen in the most efficient way, right.
Crypto Texan: Right, yes, I can see that, yes, I can see how it would work.
Dr. Karl: So ideally what it would look like so if you have a smartphone that's been built within the last three years, that's one of the nicer ones like a Pixel 3 or greater, an iPhone 10 or greater, like a Samsung s20 or greater, we think we can actually deploy Phonon as an app store download to your phone and provision the applet to the micro SIM as part of– or the eSIM as part of the process. So what it would look like from a user standpoint, is you would just have an app on your phone, he would request 35 USDC from you, that would generate a QR code, you would scan it with your app and then confirm and send it.
Crypto Texan: Wow. So I feel like there's just a lot of basic questions that are coming up because this is, it feels like such a novel implementation of this idea. And I think two of the things I'm thinking of– one of them you touched on a little bit, but I'm thinking of counterparty risk.
Like just a way of knowing that the sender of the Phonons didn't keep a copy of the private key somehow to steal the assets back. And then I guess that, like a double spend problem with which you said you've solved but, so these cards only transact with, I guess, other GridPlus cards or other Phonon cards?
Dr. Karl: So, so there is, there's two things that have to happen to make sure the whole system works. The cards need to be running Phonon code and the cards need to have the property of being unclonable. And if they have those two properties, you can guarantee that the person can't retain a private key and that the keys can't exist in new places and that the assets in the cards can't be duplicated, right?
So as long as those two things are met, sort of all of the guarantees can be met. So somebody has to attest to those two guarantees. So initially, that could be say, GridPlus. So we manufacture the cards, so we're like, okay, these are NXB cards, they have these physically unclonable functions, we've confirmed that from the manufacturer and also through the security chain that happens with the manufacturer.
And then we're going to put the Phonon code onto it and then we're going to issue a certificate. And that certificate is effectively attesting to those two properties. Now when I go and I want to receive a Phonon from another card, I'm only going to receive Phonons from certificates which I trust. So initially in the alpha version of this, it would just be GridPlus, so only GridPlus certs would be trusted between cards.
But you could envision a scenario where another manufacturer comes in, maybe that's Status, maybe that's Ledger, maybe that Samsung, maybe that's Apple. And then if we say, okay well we can establish that we mutually trust each other in this certification process, then you would freely be able to transact between a GridPlus applet and a Status applet and the Samsung applet using the same guarantees. It's just a different set of manufacturers certifying that guarantee.
Crypto Texan: Okay, yeah, that makes sense, and so with the Phonon DAO, there's also the Phonon token now, and I think GridPlus has a token as well. So I want to talk about what are the use cases for the Phonon token? And I guess like, is there any relationship between the GridPlus token and the Phonon token? And I don't know, just kind of what is the purpose of the token within the DAO.
Dr. Karl: So the GridPlus token can be converted to the Phonon token, so that's one thing. The point of the token in the DAO is to create, it's a governance token first and foremost, but it's also a token that's used to create incentives as well as revenue. Generating things by providing services to the protocol layer, right.
So in the very basic form of I want to send you a Phonon and it's for dinner, so there's not like, significant amount of money or significant counterparty risk here, right, your friend, when you're saying I'm willing to pay you this $35 USDC, his client would go and it would look up that that is indeed $35 of USDC before you actually send it to him, right. So he doesn't have to, he could just take your word for it too, right. But he needs to at least believe that you're not trying to screw him or just verify that you're not trying, you're not going to screw him by doing a read to an Etherscan or Infura or whatnot.
So that's one level. However, if you do something that has significantly more money and has significantly less trusted parties, you need to start having mechanisms for making sure that transactions complete, specifically swaps and that there's recourse if it goes bad, right? So the issue that you have with the swap, which is one of the more interesting use cases because with swaps, they can basically tie together every asset on every blockchain, meaning with just a Phonon card, you could swap any asset for any other asset on any blockchain, right?
So you could think about a simple use case making a DEX, but a DEX that transcends any crypto asset in existence, right? So instead of just being Uniswap in ERC-20s and whatnot, it's Ether, it's Bitcoin, it's Binance, it's Solana, it's Cardano, it's everything. So that's what you can do with it. The problem, though, that you have with the swap is that we can't guarantee completion because somebody has to go first, right. Somebody will always have to send, the first half of the transaction before the second half is sent.
And so there's this problem that the cards themselves can't enforce the understanding of completion, either through a network loss of connectivity or through someone nefariously trying to, like cut off a transaction. So we could partially answer that question with the protocol through something that we call a conditional transfer or conditional swap, wherein prior to the first person sending money, the second person basically provides a signed agreement to what we're going to swap and then their card will only accept the first half of the agreement. The first part of the send, after it has sent the second half.
And if that were to happen, we've made it so that you could do untrusted swaps between parties, and no one would ever economically benefit in this process. We've got it down to what we'd call a griefing attack. Now the problem, though, is it's still a griefing attack. So what the DAO can do is create a smart contract layer above it. It says in this swap scenario, if this transaction doesn't complete, the first party actually has a proof that we agreed to this transaction and they initiated the first half. You could then have the cards guild effectively swap.
So if each card put one Ether up against doing swaps into that smart contract, these parties could swap one Ether and always know that if the transaction didn't complete, they could go to the smart contract and be like, hey, I have evidence that this card tried to or didn't complete the transaction, therefore, I would like to receive a portion of their guild. Obviously the party, the other party would also be able to contend that and basically say, oh no, I completed my half of the transaction, here's that receipt. But that receipt would effectively provide the money to the first person.
The cool part about the guilding process, though, is if we say only guild our cards to one ETH, we could still trade 100 ETH, we could still swap 100 ETH worth of assets. We would just do it one ETH at a time, right, so we'd stream 100 ETH, 1 ETH at a time. And if either one of the parties sort of breaks the agreement on any one of those transactions, we would just stop and then go and adjudicate it with a smart contract. So there's a number of secondary services that start to make sense as you come up with more complicated applications that you'd want to build and provide to the protocol from the DAO. And those would be revenue generating services.
Crypto Texan: I mean, do you foresee users using this for 100 ETH transactions, or should this be, I don't know, kind of like the cash in your back pocket type of metaphor. And–
Dr. Karl: It depends, it depends.
Crypto Texan: Okay.
Dr. Karl: So it depends on the use case and it depends on the alternative, right? So I think if everything in the world were perfect, the only use case that this would collapse into would be cash in like microtransactions. However, I don't think that the world is perfect, and I think there's a lot of unmet need for higher value transactions cross-chain. And so I think I will get used to that.
So, and everything is like a relative, a relative risk and friction trade-off, right, so like if you go and you look at CMC and you look on the top 100 assets, there's probably 40 assets up there that I can't easily get access to as somebody in the US, those are assets I'd like to get access to. So Phonon would actually facilitate liquidity against any pair with no gatekeepers. So I would be able to obtain access to those pairs regardless if I can get access to those on a centralized exchange or not. So people would use it for 100 ETH transactions because the other option is like going to hotbit (dot) io and setting up a non-KYC’d or like account with a fake name, using a VPN and putting 100 ETH into that, which is not a very good option. So, yeah.
Crypto Texan: Yeah, I can yeah, and I've got probably 100 more questions that I could ask you on this, but I've got to get to a few of just like more of the macro related questions here before we run up on time. I think the first one I want to ask here is just building on the Phonon network right? I mean, there's a DAO who is charged with, I guess, building applications and services on top of the Phonon network. And I'm just curious what would you recommend or what would you like to see the DAO, I guess, kind of target first or spearhead first in terms of applications to add on top of the protocol.
Dr. Karl: So there's a plethora of applications. If I were going to say which is the easiest in terms of a distribution model that has the sort of smallest barrier to getting critical mass to kind of work, I would argue that it would be something like facilitating cross-chain swaps, so like a DEX. And the reason for that is, right, if we just deploy Phonon making capabilities to the existing Lattice user base, that would be sufficient to create enough sort of liquidity in quite a few pairs.
And then anyone else that just wants to come in and run a take, just has to either download the phone applet or get a card and hook up to the computer, whatever it is, and they can easily start using that system. So I think that's the lowest barrier of adoption to getting things going. But obviously, there's a lot of more applications like P2P cash. I mean, really Phonon is most akin to cash, like in every way. So when you said it's like cash in your back pocket, the physical properties of Phonon and how it's used and how it's traded and everything is most akin to having literal bills. So, I think that is its killer use case.
But to make that work, you have to have some sort of critical mass, at least in a geography, to make it useful. I think the other applications to start out, though, would be in the microtransaction space. So in the microtransaction space, you could actually do some really cool stuff like creating incentivized Tor alternatives wherein you actually pay in a streaming sort of way for the bandwidth that you use. And if you do that, you'd actually incentivize a lot more exit nodes to exist and if a lot more exit nodes exist, you're actually going to get a much higher, provable degree of security than you do currently with Tor. So, yeah.
Crypto Texan: Wow, I am a big proponent of that. I think I've been tweeting for four years about why aren't these Tor nodes compensated somehow for running this network or running exit nodes, right? I think that's very important as well. And you and I could–
Dr. Karl: Right, so like you could make it, because like if you know how Tor works, usually you get a route and you use that route for a predefined period of time. Right. So, you could basically make a bunch of Phonons that are worth like 10 cents at this point, add the 10 cents like to your exit node as you're creating the tunnel. So it creates a very easy mechanism to add payment to a system like that.
Crypto Texan: Well, that might just be the solution that I've been looking for for a while. I thought Zcash could be an interesting use case for that. Even like Lightning Network to some degree, but I feel like this is probably the ultimate solution to that Tor exit node issue that I've kind of seen. And I've got one more question for you and we're running up tight on time. So if you don't feel like you have time to answer this, that's fine, I understand.
But just seeing Phonon network a scaling solution to blockchains in general, I just kind of want to get your general take on scaling and maybe more Ethereum focus, because that seems to be like the most hotly debated topic right now, is Ethereum scaling. Where do you see, I guess, the future of blockchain scaling? Is it the optimistic ZK rollups? Is it more quasi-sidechain related like Polygon? Is it a Phonon layer zero? Like, I don't know, where do you see this going in the next five years, if you can predict that?
Dr. Karl: So I think that there are reasonable scaling solutions that can be had to take layer ones into up to 10,000 TPS. I think that you're going to need that to keep these things decentralized. I don't think that creating L2 or rollups is going to be a tenable solution in the long term because of sort of how things silo and you kind of, there's still trust and there's issue about tragedy of the commons and economics and paying back to layer one. There's a lot of issues with a number of topologies in layer two. So personally, I think that people are going to figure out how to scale proof of work layer ones with EVM compatibility to 10,000 TPS. And I think that's what the future is going to be.
Crypto Texan: Yeah, thanks for your insights on that. This has been a fascinating conversation. I'm really excited about this project and I really appreciate you coming on the show and sharing your insights with the Index Co-operative. And yeah, just where can people go to find out more about you and Phonon DAO?
Dr. Karl: Yeah, so if they want to find out about Phonon, they can go to phonon.network, they can check out our blog there. They can check out the GitHub pages and they can start developing apps that are using Phonon. If they want to find more about me, they can go to gridplus.io and then go to the blog at GridPlus and they can see a lot of my thoughts and writings about some of this. Some of these questions go back quite a ways. So, yeah, hey, I really appreciate you having me on and giving me the opportunity to share about Phonon.
Crypto Texan: Yeah, I appreciate it, too. Thanks for coming on. I saw a question earlier. Yes, this is being recorded, and we'll probably get this out in about a week. I hope everyone has a great weekend. And thanks again, Dr. Karl, for being here with us.
Dr. Karl: Yep, thanks so much, guys.
Crypto Texan: All right, bye.
Host: @Crypto_Texan
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Transcript: @qjuniperus
Conversations with the Coop - Dr. Karl Kreder - Phonon DAO, GridPlus