"I'm Not Super Bullish on DeFi. We're Using This Tech to Enrich a Small Group of People:" James Prestwich
The founder of Summa speaks to The Defiant about cross-chain interoperability, building on Bitcoin, ETH2, and about why he has become disillusioned with DeFi.
|Oct 26, 2020||2|
Hello Defiers! In this week’s interview, I speak with James Prestwich, who has focused on cross-chain interoperability as founder of Summa, and now with proof of stake blockchain Celo. We talked about how against his expectations, users have opted for wrapped tokens, instead of cross-chain swaps; it all comes down to ease of use. He believes in the future, all dapps will have to be built with cross-chain, cross-shard capabilities as a default.
We got into DeFi on Bitcoin, which James says he’s not very optimistic about, as he’s found it’s extremely difficult for developers to build on, and for users to access.
About the common criticism that DeFi on Ethereum is centralized, he believes decentralization is just a marketing term and not a very interesting debate. What people should really be asking is: who has control over the funds and what are their limitations?
In general, he has become disillusioned with the way DeFi works in practice. Stories of financial inclusion are much rarer than stories of somebody raising hundreds of millions in a token sale or people throwing money at the latest yield farming protocol.
Still, he’s encouraged by the fact that it is much easier to launch a financial service than it ever has been before.
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James Prestwich: A lot of people have these like crazy stories about getting into crypto and feeling like it's their life calling or something. But for me, it kind of happened because I was bored. At the time, this is late 2013-2014ish, I had just finished college, I was moving to rural Japan. I was mostly doing freelance translation and consulting work for small businesses.
I was living out in rural Japan with gigabit internet like a very small social group. So I started spending more time, like becoming part of these online communities. That's how I got involved in crypto. Was I had an idle interest in this and decided to pursue it more and more over time. So it's kind of like this gradual slide down the slippery slope more than the fall down the rabbit hole that other people seem to have.
Camila Russo: Do you mind telling me what you were doing in Japan in the first place?
JP: Actually, before I got into software, my bachelor's degree is in Japanese literature.
CR: Oh, interesting. That's kind of very two different subjects to specialize in.
JP: There's not a whole lot of overlap there.
CR: So you were living in rural Japan, I guess, driven by your interest in Japanese culture and literature, doing consulting work and so you got bored, and just were online all the time and got slowly slid into this world of crypto?
JP: Yes.I mean, it was a very exciting time for crypto. After the kind of 2013 bubble pop, we went into this long, slow phase where everybody was building things and that gradually led back up to the year 2016-2017 hype.
CR: In what ways were you involved?
JP: While living in Japan, I co-founded a company called Storj, which is based out of Atlanta. I think they're probably 60 or 70 people now. They work on distributed cloud storage, and I worked there into 2017 when I left and founded Summa pretty shortly thereafter.
CR: What led you to found Summa?
JP: One of the things that I was working on at Storj was kind of this treasury management with crypto is like, you have this company you need to plan to make payroll in dollars, you have assets in five different cryptocurrencies in the bank account. I started thinking more and more about how you can hedge your risk and how you can make smart contracts to do this capital management planning for you.
We founded Summa to work on a lot of those things. We started off building derivatives, options and other kinds of complex financial instruments. We wanted from the start to work with Bitcoin and Ethereum, you know, the two most adopted liquid cryptocurrencies out there, and thought that being able to work cross-chain would be a really interesting and compelling story for the technology.
What we realized really early on in this process is that the cross-chain ecosystem has a bunch of unique problems and user experience issues and that solving those isn't something we can do just for one product. We could build out this whole bespoke solution for one product and it would take years, and we would probably end up with something we were only a little happy with. Instead, we started pivoting more and more into just building out the base interoperability technology.
“What we realized really early on in this process is that the cross-chain ecosystem has a bunch of unique problems and user experience issues and that solving those isn't something we can do just for one product.”
Along the way, we got to work with Ethereum, the Interchain Foundation, Cosmos ecosystem, with Nervos, and Celo and tBTC, and a bunch of other different interesting platforms in the space. That's what we did, basically for the entire lifespan of Summa was go out and try to work with everybody possible to just push forward tooling around cross-chain interoperability.
CR: You obviously have a really good grasp on what that ecosystem is working with, all the different players, so would love to get a state of interoperability overview from you. What are the different approaches that these teams are taking to achieve this goal of having interoperable blockchains?
The State of Interoperability
JP: I gave a talk at the MIT Bitcoin conference earlier this year about the state of interoperability. It's about six months out of date right now, but it's still pretty accurate and descriptive. So for anyone looking for more context after the podcast, I would definitely recommend going to look that up.
In terms of the state of interoperability right now, the really condensed version of the talk, is that a lot of the work that we did over the last two to three years is finally panning out. We're starting to see a bunch of things like tBTC, and the Near Rainbow Bridge go live. We're starting to like see more of these systems in the wild. What we're seeing though, is, everybody is using the light client-based interoperability that we pioneered with Summa and the Bitcoin relay we built. Basically, nobody is doing just simple cross-chain transactions, which is what we all expected back in 2014-2015. So over the last three, four or five years, we've learned really a lot about how people use this stuff and how teams approach it. It's not at all what we expected.
CR: I guess, just straight across blockchain transactions would be, you said, atomic swaps but right now, what people are doing are these wrapped tokens. So you can take tokens from one blockchain, put it in a smart contract and issue some sort of derivative of that coin to interact with another blockchain, which I guess has its own set of tradeoffs; you need to trust whoever is controlling that smart contract. So what's your opinion on how the space has evolved in this way? I mean, do you think it is a good solution? Would you see it go in another direction?
Pushing Complexity Away
JP: The reason it's evolved in this way is it pushes the complexity away from the user. When you go and do an atomic swap the user needs to have a wallet and this wallet needs to have Bitcoin and Ethereum. So already, we've got two sets of keys and two different wallets built out next to each other. They have to fund those wallets with Bitcoin and Ethereum, so they have to go out and buy two different assets, and then they have to send them to this wallet.
There are six or seven major steps to onboard our user, and nobody goes through those. We had something like 100 downloads of our original wallet. Because you need Bitcoin, you can't use MetaMask and because you need Ethereum, you can't use any of the Bitcoin wallets. With atomic swaps and cross-chain transactions in general, you're trapped into using these special-purpose wallets, and it's impossible to convince anyone to use them.
“With atomic swaps and cross-chain transactions in general, you're trapped into using these special-purpose wallets, and it's impossible to convince anyone to use them.”
So this kind of motivates the move toward all of the wrapped tokens and bridging assets, things like tBTC. We're trying to move all of that complexity to a small group of users, people managing these specific nodes that handle wrapping the asset and doing so safely and taking care of failures so that the end-user who only has an Ethereum wallet can just hold tBTC.
CR: Of the current solutions, it was surprising to me how quickly WBTC grew beyond all the other more decentralized solutions. Is this again, because it's easier to use? Why do you think those more centralized solutions have seen greater adoption?
JP: Well, WBTC came to market a lot sooner than almost anything else and that's a huge point in its favor. tBTC has only been out for, I want to say a random month now, we launched in September, so it's still very early days. renBTC has a significant supply as well. So we're seeing building momentum from these raft Bitcoin projects and we're seeing things like Nervos, and Celo launching Ethereum bridges to try to wrap ERC 20 tokens on their chain. At Celo, we're kind of working in that direction slowly. But we're still in very early days of launch and user adoption for these things. I definitely wouldn't say there's a clear winner yet.
CR: That's a great point. You mentioned Celo, can you get more into what Celo does and how that transition was from Summa to Cielo?
JP: Celo is a higher throughput proof of stake chain that's compatible with the EVM. So the goal here is that you can take whatever Solidity contract you've already written and front end for it that you've already deployed on Ethereum and move it directly over to Celo. By doing that, you get access to a native stablecoin, cUSD as well as a higher throughput, lower gas fees, etc. Celo is targeting a kind of mobile-first customer base, so a lot of the work we do goes into building out the Android and iOS wallet called Valora, and so it's not trying to compete with Ethereum directly, it's trying to address a different set of users.
CR: What users is it targeting?
JP: Celo is a very mission-driven organization and so we're primarily targeting users worldwide, rather than in the US. We're doing pilot programs in the Philippines and in Africa and other places around the world, trying to reach users who don't traditionally have access to financial services.
CR: I think those are the hardest users to get and it is kind of the holy grail of or like the main goal of DeFi to provide access to a broader range of people. So how do you think Celo can differentiate itself and actually reach this group?
JP: One of the things I've really been interested in during the brief time I've been at Celo is how many just people we have on the ground around the world. Celo doesn't just talk about reaching these people. We try to send people out there to do things and I've been personally really impressed by it while I've been here.
CR: It’s like onboarding people on the ground, is that the idea?
JP: This isn't my like area of expertise. I'm not working on user acquisition or onboarding. I could go and talk to someone and have a bunch of answers for these questions, but I'm not going to be the best person to answer them right now.
CR: You're still working on getting Celo to become interoperable with other chains as you were doing at Summa, right?
JP: For us, this move to join Celo was a very vision-driven thing. We got into this originally because we wanted to give more people access to financial instruments. So we've known the Celo team for a while. As we were building out all of this abstract technology, we wanted to get back to working on a product that someone would use. We built out a lot of technical showpieces, and some very impressive bits of code, but they're all very far away from end-users, which is where we want to be building.
What we're working on at Celo right now is contributing to the core tech and wallet that is out there helping people today, and working on how we can give Cielo more access to the DeFi ecosystem on Ethereum and how we can give people using the Cielo chain access to Bitcoin. So that's why Celo foundation is partnering with tBTC to bring tBTC on to the Cielo platform.
We're hoping to take these great things that have been built on Bitcoin and Ethereum and help provide access to them to the billions of people out there with smartphones and no crypto experience.
CR: Well, so about Celo, I don't know much about it. How long has it been live and how many users does it have?
JP: I don't have those off the top of my head. It has been live since earlier this year, I don't know the exact date. Fortunately, for me, the chain launched before I joined and I did not have to deal with that particular headache. I have a lot of respect for anyone who can ship software of that size and weight.
CR: So talking about tBTC and just Bitcoin on Ethereum in general, it's interesting to me to talk about where these users are actually coming from. Is it in Bitcoin holders who are curious about DeFi and Ethereum? Or is it more Ethereum holders who just want exposure to Bitcoin? In your experience, where's demand coming from?
JP: I think we've seen a lot of this from both sides. There are a lot of Ethereum users who would like access to Bitcoin’s liquid markets and the brand recognition of Bitcoin as well. But we've also run into a bunch of Bitcoin holders who are looking over at the DeFi ecosystem and would like to, in a safe Bitcoin-friendly way, check it out. So obviously, there's a lot of interesting things being built and launched on Ethereum and for people who have Bitcoin holdings, this gives them a way to keep their Bitcoin holdings and still participate in this new ecosystem.
CR: I'm interested in your view, you have deep knowledge on both Bitcoin and Ethereum so what are your thoughts on DeFi on Ethereum? There's like this kind of argument that always brings up with bitcoiners saying the real DeFi is on Bitcoin, everything on Ethereum doesn't work, it's centralized. What's your view on that? Can DeFi on Bitcoin happen? What are your thoughts on DeFi on Ethereum?
DeFi on Bitcoin
JP: Building out DeFi on Bitcoin is extremely difficult, and there are a bunch of development and user experience challenges to doing it. I'm not saying it's impossible, but typically, the lead time to launch a Bitcoin product is two to three times longer than the lead time to launch an Ethereum smart contract. I've spent a significant amount of time building out Ethereum and Bitcoin wallets and integrating them and it's much, much quicker to bring an Ethereum product to market. That's why I am not immediately optimistic about DeFi on Bitcoin.
That said, we're seeing a lot of interesting things going on in Layer 2 on Bitcoin and I think we're going to be exploring a lot more of the design space there over the next few years. But it's still difficult to see how you could build a Bitcoin product with the same user experience that we expect out of these DeFi apps.
“Building out DeFi on Bitcoin is extremely difficult, and there are a bunch of development and user experience challenges to doing it.”
CR: Some of these Layer 2s, are these Rootstock or Liquid, what do they look like right now? What’s the ecosystem of Bitcoin on DeFi?
JP: Rootstock is really interesting. It's a whole complex system that I don't want to get in-depth on, because we'll spend the rest of the podcast on it. But I think it's a really interesting attempt to bring Bitcoin to an EVM. But the goal here isn't to bring Bitcoin to an EVM, it's to bring Bitcoin to the rest of the users, to the rest of the applications out there.
You also mentioned Liquid specifically. If you've ever used POA, Liquid is basically analogous to POA; it's a small federation of trusted custodians holding on to the coins.
CR: It doesn't sound like they're really very good replacements.
JP: Yeah. Right now, none of the Bitcoin Layer 2 stuff is going to compete with Ethereum. The work that's being done on Lightning right now is really interesting, but we haven't seen as much Lightning adoption as we've seen of Ethereum dapps.
“Right now, none of the Bitcoin Layer 2 stuff is going to compete with Ethereum.”
CR: Why do you think that is?
JP: Again, like, it's much more complicated to launch because of the technical concerns involved. Because of the way Bitcoin works, it's much more complicated to launch these systems than it is on Ethereum. Lightning has to manage all of these UTXOs, they have to manage the keys and the revocation secrets and all of this complex state off-chain. Where in Ethereum, you just kind of shove that on-chain and let everyone else take care of it.
So the tradeoff here is, in Ethereum, all developers are used to externalizing the costs of their application development to the network. So every time we launch one of these nice big smart contracts, what we're doing is we're making it more expensive to run an Ethereum node. We're having that cost paid by all the full nodes on the network. Bitcoin doesn't let you do that. What that means is essentially, that the developer needs to pay those costs. They need to spend extra development time ensuring that the state gets maintained somewhere off-chain.
CR:That's a really interesting way of looking at it. So would you say that on the other hand, the downside of building or using Ethereum, is that because all of this work is being done by Ethereum nodes, using Ethereum becomes more expensive?
JP: I think there's some really interesting effects here, and this may seem very abstract, but it comes up almost every year. Some Opcode gets repriced in terms of gas as storage gets more expensive. The cost of calling other contracts is going to go up. It's going up, because there are a lot of contracts and a lot of state on the chain and all of the full nodes need to replicate all of those. What we want to do is make it more expensive to add stuff to that state and more expensive to read out the state that's already there.
[ … ]
Paid subscribers have access to the full transcript, including sections on:
Sharding as a scaling solution
“I'm sure that sharding will work when we eventually get it. But I have no idea when that will be, and I'm not making any plans that rely on it.”
Cross-chain communications as a default
““I'm optimistic that this is just going to become the default. If I am thinking about cross-shard communication, it is very little additional work to make it work cross-chain as well.”
ETH 2 Uncertainty
“There's no magical scaling solution that's going to make a happy home for DeFi forever.”
Decentralization is a marketing term
“What we should actually be talking about isn't this very binary, is it decentralized or not? It's what kinds of trust assumptions do you have to make in order to use the system?”
Disillusioned with DeFi
“Since the birth of the DeFi narrative, I've become progressively more disillusioned with the way it works in practice, so I'm not like super bullish on DeFi as a concept (…) Overall, what we seem to be using this tech for is enriching a very small group of people.”
“What we've done as DeFi, as the Ethereum community, is just normalize putting ourselves at the money printer.”
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About the founder and editor: Camila Russo is the author of The Infinite Machine, the first book on the history of Ethereum, and was previously a Bloomberg News markets reporter based in New York, Madrid and Buenos Aires. She has extensively covered crypto and finance, and now is diving into DeFi, the intersection of the two.