ASH BENNINGTON: Sergey, welcome to Real Vision.
SERGEY NAZAROV: Great. Great to be here. Thank you for having me.
ASH BENNINGTON: It's a pleasure to have you here. This is an interview that I've wanted to do for some time now. We first met, I guess, a couple of years ago at a conference in Brooklyn.
We had a conversation where we talked about what you were doing, and I was just spellbound by it. And it's really a pleasure to have you here, and to get you to have the opportunity to explain a little bit about what you do. So let's just come jump in and get started. Starting at the very beginning, what are smart contracts, and why are they so significant to the global financial system?
SERGEY NAZAROV: So smart contracts, in the simplest terms, from a user's point of view, are math-based contractual agreements. And I think the way to contrast them is to think about brand-based contractual agreements. And this will highlight, for people, the notion of something called "tamper-proof-ness," and the usefulness of "tamper-proof-ness," because a lot of the times, blockchains are explained in these technical parameters of "tamper-proof-ness" and reliability and censorship resistance and immutability, and these concepts don't always transfer over to use cases.
So the thing that I think is needed is an understanding of a contrast between how the world works today, and how the world will work in a math-based agreement kind of world. So the thing that people maybe don't think about so much, because it seems to be working, or it works in certain cases, and so is good enough, is that the agreements they have around their bank accounts, their assets, financial instruments, are really brand-based agreements.
And what brand-based agreements are are a logo. There's a logo on a building somewhere, just like in the Wild West. The biggest building was the bank with the pillars, and everybody would put their money in the bank with the pillars, because it would have the really nice pillars, and be really impressive, and it would be the nicest building-- nicer than the church.
And that was the brand-based guarantee that that bank gave you in that kind of gold mining town. And things haven't really changed very much. In reality, over-- I would even say hundreds, maybe even thousands of years, where you basically have a brand-based guarantee. I have a logo. My logo represents an institution or an entity.
My institution or entity has been around for x 100 years, and I guarantee to you, on paper-- on a paper document-- that my relationship with you is such that your assets or your financial product or the value you hold in my institution is within your control. You will be able to access it. You will be able to buy and sell financial products. You will have a savings account that you will always be able to access.
All the money in your savings account you can always access. All the money in a trading account you can always trade, and you can always liquidate it whenever you want, and all these types of guarantees are foundationally based on a logo. They're based on I exist for a long time. I will continue to exist. I'm guaranteeing to you that this relationship that I manage for your value that you hold with me will function in a certain way. And so those are brand-based agreements.
Now, what math-based agreements do is they basically say, there's no brand. There's no thing that has existed for hundreds of years, and I promise you, things will work a certain way in a paper document. There is just math.
So there's cryptography and mathematics that guarantees, at the level of physics and mathematics, that you have a certain relationship with a certain asset, certain financial product, certain contract. If we begin to unpack this and we think about, what does that mean? Let's take Bitcoin as an example.
The relationship that a user has to a Bitcoin, regardless of the value of a Bitcoin, regardless of the value that a Bitcoin attains within the global market, is that they have something called a private key. So they have a cryptographically enforced way to sign and to mathematically prove that they have, and only they have control over this digital good housed in this network of thousands of computers.
And so I'll give you an example of where this really starts to make sense. So if you look at the debt crisis that there was in Greece a few years ago, you saw people only being able to withdraw 66 euros per entity and per person from an ATM. So whether you had a business as an entity, or you had an individual, they could only draw 66 euros. You have similar situations in certain countries where things aren't going as well as they could be, and you have ATMs and bank controls being locked up.
What you also see, in all those geographies, is wallet registration numbers growing by 300%, 400%, 600%, because people basically realized that their relationship with a certain asset was not what they thought. They thought their relationship was very deterministic. It was very direct. It was on the level of physics, and a certain amount of surety and guarantees.
And what the reality is-- it's very different. It's like insurance policies. People don't know what's in their insurance policy. Realistically, people that rely on brand-based agreements to underpin their relationship with their assets have that same level of counterparty understanding. People are universally surprised when, oh, something goes wrong in a country, and the ATMs get locked up, and they shift to Bitcoin.
And the reason they shift to Bitcoin is it doesn't matter if you have a billion dollars in Bitcoin. If you have that private key, if you have the mathematical proof in your hand to move that asset, there is no way that that can't happen short of physics and mathematics starting to work differently. And so this is the unique difference between brand-based and math-based guarantees.
And this difference actually goes much, much further than people think, and part of the reason that this difference is underappreciated is because-- well, basically, while everything's working, everything's fine. That's basically how the global financial system works. Everything's working, so everything's fine, and you don't really need significant improvement for your assessment of counterparty risk, for your management of counterparty risk, because, well, everything's working.
I can access my assets. I can liquidate them. I can do whatever I need to do with them. But let's say there's an unfortunate possibility that the global financial system is now in a direction where its underlying solvency and its underlying assumptions might result in certain issues where assets can't be accessed. Counterparty risk becomes apparent in how faulty it is as a way to hold value, or hold assets.
And this is where the uniqueness of math-based agreements, even in their simplest form-- Bitcoin is like the simplest form of a math-based agreement. It's the first one. It's the simplest one. It's the most secure one. It's the most adopted one.
But it is, by no means, the only one. And there are many, many other forms of math-based contractual agreements that have taken the form of other tokens. Now we're starting to take the form of DeFi-- decentralized financial products. But what they all have is they fundamentally have this level of control, and this level of transparency and counterparty risk assessment and mitigation, that traditional financial markets don't have.
And I think there's a very important difference there that's going to become more and more appreciated as that problem surfaces. And then as that transparency of these smart contracts that work in these systems begins to get valued, you also see people composing them in very useful ways. So fundamentally, from a user's point of view, it's a math-based contractual agreement. From a technological point of view, it's basically a piece of code that represents an asset, or represents ownership, or represents a financial product, but this piece of code operates in a system of computers beyond the control of any one party.
And it's beyond the control of the person holding the value. It's beyond the control of somebody who'd want them to stop from liquidating their value, or controlling their value. And that's the uniqueness of it. And then because you've now taken contractual agreements, financial products, and ownership, and you've turned it into little pieces of code, now you can have many, many smart people build all kinds of configurations of those pieces of code, and that involves creating an ecosystem for that-- which is partly what we're involved in-- and then once you create that ecosystem of people being able to combine these little math-based contracts in the forms of pieces of code, you'll start to see an explosion of new financial products, new assets, just like you saw an explosion of what internet companies could do, because once internet companies could compose little individual pieces of code into chains of code that interact with each other in meaningful, new ways, you saw ecommerce, you saw Uber, you saw all these other kind of innovations that were really the composition of existing other pieces of code together in unique ways.
And so you'll, on the one hand, get a system that gives people an ability to properly manage counterparty risk. And on the other hand, you'll get an ecosystem where people can finally compose and build financial products the way internet companies build web products-- at the same speed, and at the same usability that people expect from the web.
ASH BENNINGTON: Yeah. There's so much there, but two things really have jumped out at me. The first is just how truly profound that shift is between a brand-based relationship, as you call it-- some others might call it a relationship-based-- and physics and mathematics on the other hand being the true underlying bond between counterparties.
And the second point that I thought was very interesting is how truly globalized this effort is-- and you touched on that in a number of different ways. There are many people here who have been fortunate enough to grow up in the United States whose parents and grandparents have been enmeshed in this system for 75 years, and they've never had a significant incident.
They may have lost a job and had trouble paying the mortgage, but no one ever questioned the title on their house, and their bank account was always available. But that has not always been the case throughout the rest of the world, and I think it's crucial for people to understand how this is truly a global challenge, and also a global movement that is moving to solve it.
Sergey, to follow up on some of the points you made, you've just described the case for Bitcoin, the case for what the underlying value of the technology is. But what specifically are smart contracts? What differentiates smart contracts from Bitcoin, for example, and how do smart contracts continue to extend the existing functionality of an asset like Bitcoin?
SERGEY NAZAROV: Sure, sure. So smart contracts are basically code. They're business logic that define relationships between assets, between data, and outcomes. So they're just code in business logic. But they're code and business logic that operate in this unique, tamper-proof, math-based guarantee universe.
So it's basically the difference-- it's almost like the difference between-- well, it's a difference I said, right? It's brand-based and paper-based I promise I'll do something, and when a system says it's going to do something, physics forces it to do it. And so it's basically code that operates in this universe.
What it really does is it extends-- it's an extension of what you can do with financial products in this universe. So if you have the math-based guarantee universe, and before you only had let's generate a token-- first, really, the evolution of this was first Bitcoin. And you had one ledger for one asset on one network of computers only focused on that one piece of data, and that network is only interested in, hey, how do I maintain and secure this one ledger of ownership about this one asset called a Bitcoin? And I have thousands of computers doing that, and I have a lot of hash power and security assigned to that, and I'm securing this one ledger. So that was the beginning.
And then you had an evolution where people started to say, well, hey, I want to apply this universe-- this math-based, contractual guarantee capability-- to other things. I want to tokenize art. I want to tokenize equity. I want to tokenize land. I want to tokenize whatever I want to tokenize. I want to create a token, and I want to put it in this format, essentially for two reasons.
The first reason is this math-based guarantee reason, and the second reason is because due to the internet, when I tokenize something in this format, this becomes globally accessible. So I can make a token that people can interact with globally, instead of I make a token, and I put it on some small platform, and only that platform's universe can interact with it.
And that's part of the reason why blockchains and tokens have taken off, where basically, even if one geography at any one point says, hey, I'm not into this. I'm not into this token thing. There's 15 other geographies that are into it. And then if one of them says, I'm not into it, well, they're not saying it at the same time.
So even if one geography says, I don't like tokens, the other geographies are either behind or ahead on their thinking-- depending on how you look at it-- and they're all saying, we're fine with this. And so there's still a global market for tokenization. But tokenization is not-- it's a very simple smart contract. And what it actually does is it basically says, I'm going to generate a list of assets. I'm going to make a digital list of a million things-- a million units. And then I'm going to track where those units go.
I'm going to see the 10 units go to you, and 10 units go to you, and 100 units go over there, and I'm going to maintain a ledger that basically tracks who has what units, and I'm going to maintain that history of ownership. And that history of ownership is really what a token is. It's a token, the issue of ownership, and then the token represents something. And that's the story that people craft around what that token represents.
Does it represent a house? Does it represent a piece of art? Does it represent a digital good of some kind, or equity, or whatever it represents? And that is the next-- that was the next evolution.
And that evolution-- we can thank Ethereum for that evolution. Ethereum did a very impressive thing where they took the space from, hey, you can only have one token, or it takes you years to make a token, to hey, it'll take you a day to make a new token. And so that was the functionality that Ethereum enabled. It enabled the functionality of, let's make tokens.
And so because that functionality finally became polished to a certain level of usability while maintaining security-- and that's actually an important aside here, that the point at which things in our space begin to get adopted and utilized is once they can be built by developers without the developers having to build the security.
So once infrastructure creates enough security for the developers to efficiently generate things, that's when things get built. So first you had Bitcoin. It generated security. It generated Bitcoin.
Then you had Ethereum. It generated security around making tokens, and it allowed people to generate tokens, so there was a big boom in token generation. And that was a smart contract, but a simpler version. And now you're moving on to more advanced smart contracts, where the business logic is basically saying the types of things that financial products in the real world say-- let's make a derivative. Let's make a futures contract. Let's hedge some kind of risk against a market event, or a real-world event like weather.
And these more advanced smart contracts, they are really the thing that I've been working on for, I think, over seven years now. And the thing that has got me into this space, and got me very excited, because it applies this math-based guarantee to such a large universe of contracts.
Whether that's insurance for emerging markets, so that farmers can have crop insurance and be able to withstand weather events, and that that allows them to continue operating a farm, even though there's a drought or something. Whether it's financial products, or savings accounts in emerging markets, where people wouldn't usually have a savings account to combat inflation, or even whether it's more advanced contracts within developed markets, where you're properly managing the risk around transparency, and mortgages, and all these types of things.
So, I think that smart contracts are this tamper-proof, mathematically guaranteed contractual agreement. But they're mathematically guaranteed specifically because they're run in these networks of computers that are run in a very specific way. And this is what decentralized infrastructure means.
Decentralized infrastructure equals math-based guarantees. Anything other than decentralized infrastructure means brand-based guarantees. And that's, I think, the important mental leap for people to make in their understanding of why does this matter.
It's because-- this is the problem, if I explained the Internet to you by saying, hey, there's this cool thing called HTTPS, and it'll let you move around credit card numbers. And once you can move around credit card numbers, it's going to be great. You would sit there, and you would go, why am I, what? HTTP what? Credit card numbers, why? You would just be completely like, why do I care?
But when you really think about it that HTTPS has enabled people to move credit card numbers led to e-commerce.
ASH BENNINGTON: Right.
SERGEY NAZAROV: And e-commerce led to all of us being able to sit in our house, and click a button, and have things delivered to our house.
ASH BENNINGTON: Right.
SERGEY NAZAROV: And so that's the connectivity between new infrastructure and new use cases that is not as simple as like, oh, yeah, they released a new version of a phone, and it makes a new interface where I can now order things in my hand. Like that mental leap is shorter. It's like if people can order things from their hand, they will. OK, that's a mental leap most people can make.
To understand the history of infrastructure in web-based, network-based systems and then extrapolate how that history evolves into new use cases, that's not a natural leap. So, that's where I think there's this disconnect, that once people get past that disconnect, and once they see math-based agreements and their value, and that decentralized infrastructure creates that, they begin to see value in that.
And smart contracts are just the name for that. So, they are the name for-- like if you had a choice, do I want a brand-based agreement where the insurance company might pay me out or might not pay me out, or do I want a smart contract that guarantees me payment if something happens, every rational actor would choose the math-based smart contract. And that's the guarantee that smart contracts have, which other