WBD383 Audio Transcription

Fighting Regulation with Decentralisation with Erik Voorhees & Udi Wertheimer

Interview date: Monday 9th August

Note: the following is a transcription of my interview with Erik Voorhees & Udi Wertheimer. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to Shapeshift Founder & CEO Erik Voorhees and Developer & Consultant Udi Wertheimer. We discuss the increasing regulatory pressure, decentralising a company and whether tokens have merit.

“Regulators are not going to be happy that there are unregulatable systems out there...Bitcoin has shown that if you get to a degree of decentralization you cannot be stopped.”

— Erik Voorhees

Interview Transcription

Peter McCormack: Erik, hi.  How are you, mate? 

Erik Voorhees: Hi, I'm good.  How are you, mate?

Peter McCormack: I'm all right, mate.  Good to see you.  Wish I'd seen you in person recently at Satoshi Roundtable, but couldn't make it.  Udi, how are you?

Udi Wertheimer: I'm great.  How are you?

Peter McCormack: I'm good, I'm good.  Right, listen, I'm going to get into a lot of trouble for doing this show, you know this, people are going to yell at me.

Erik Voorhees: Thank you for your courage.

Peter McCormack: It's not courage, it's just interesting.  I spoke to Udi about it, I pinged Udi and said, "I don't know why but I'm interested in this.  I know it's not a Bitcoin project essentially", etc.  I just think it's interesting.  You know I don't really give much of a damn about shitcoins or altcoins or whatever, but something about this interests me.  I just want to know about it, I want to understand it,  I want you to explain it all to me, because I actually think the journey of ShapeShift itself is quite interesting, what you've been through.  I think what you're trying to do is interesting and I've asked Udi to join us to maybe explain some of the concepts if I don't understand it, or see if he has any questions.  But the idea of trying decentralise a business is, I think, super interesting.

Erik Voorhees: I do too, I do too.

Peter McCormack: So, here we are.  Let's go through it, let's accept that I'm going to get yelled at and then you're going to get yelled at.  Then Udi will make a joke and everyone will forgive Udi.

Udi Wertheimer: I somehow seem to get out of it.  I don't think this will be the one that gets me cancelled, but we'll see; maybe.

Peter McCormack: This might be my final show, I'm sorry; I'll do something else.  All right listen, Erik, we've made a bunch of shows together, I don't give a shit what people say.  We're friends and I like having you on the show; we don't agree on altcoins but I do like talking to you about the vast number of things we spoke about in the past.  This is interesting; you are decentralising ShapeShift.  Can we do a bit of a background? 

ShapeShift was, I think, the third exchange that I ever used, but I didn't know you at the time.  So, my very first exchange was LocalBitcoins, when I discovered Bitcoin years ago, and then when I came back in 2017 I started using Coinbase.  Then, when I wanted to start buying all these altcoins, someone introduced me to this website ShapeShift.  It was really easy to use, I remember buying loads of EOS back on it back in my altcoin trading days. 

I just love that you would put your exit address for the token you wanted, you would say how much you were going to buy, and as I remember it, it was a very simple screen.  Then you would send your Bitcoin in, maybe it was Bitcoin or maybe it was another altcoin; for me, it was usually Bitcoin.  You would just do the trade in the background and at some point, you would sit there waiting, you'd get the delivery of your coin.  But it was a really easy way to buy altcoins.  As I remember, you didn't have to log in, right, you didn't have to create an account or anything?

Erik Voorhees: Correct.  It's like a vending machine, when you walk up to a vending machine there's no account.

Peter McCormack: This was a secret Erik Voorhees project, right?

Erik Voorhees: Yeah, so when I started it, I started it under a pseudonym, Bjorn, which is the pseudonym I still use, and this was --

Peter McCormack: I think they know who you are now!

Erik Voorhees: Yeah, it was revealed!  It was not long after when I was dealing with the SEC and it was still at a period of time when I thought the government would be cracking down on Bitcoin far more than it has so far.  So, I wanted to be low profile for a while; the SatoshiDICE days were stressful.

Peter McCormack: Let's go back a few steps, let's explain a few things to people, because there's a lot of context here.  Explain SatoshiDICE to people, because my downloads have gone up massively in the last six months to a year and I think the vast majority of them are going to be new people.  We're talking about from 4X to 5X in terms of show numbers, so lots of people are not going to know a lot of the history.  Explain SatoshiDICE to people and why that was stressful.

Erik Voorhees: Okay.  So, back in April 2012, I launched a project called SatoshiDICE and it was a Bitcoin gambling game essentially where there were 20 different sets of odds, and you could choose which odds you wanted, and you'd send Bitcoin to the specific address for those odds.  Again, like ShapeShift, there's no user account; and because it was built on Bitcoin, you could send money from anywhere in any amount. 

Basically, the system would roll a number and if you won, you'd get more Bitcoin back and if you lost, you'd get a tiny little dust transaction back so that you know that you'd lost.  It was just a little project and then it completely blew up and it became more than half of all of the Bitcoin transactions for the first several years of Bitcoin's history. 

A lot of people hated me for it, because they did not like how I was using the Bitcoin blockchain.  More than half of all the mining fees for miners up until 2013 were paid by SatoshiDICE.  It was certainly controversial; controversial both because some people hate gambling, and controversial because some people don't like how others use certain blockchains.  But it was unequivocally a success, the project, and I think it demonstrated a really cool way to use Bitcoin to bring about what's called provable fairness, where people knew precisely what the odds were and after the rolls happened, you could prove that the outcome was what the maths was supposed to be.

So today, nothing in Vegas does that and it was just this beautiful example of using mathematics to bring honesty; honesty and transparency to what is otherwise a pretty shady industry.

Peter McCormack: You can still go on to the Bitcoin talk forums and see the discussions regarding it.

Erik Voorhees: Yeah.

Peter McCormack: I've done it.  Years ago I went on and looked at them actually.  I'll try and dig them out and put them in the show notes.

Erik Voorhees: Yeah, it's quite an interesting piece of history and stressful both because of how quickly it started growing, and stressful because I got in trouble with the SEC for selling shares of it.  They were not happy that I did that without their permission, so I had a whole battle with the SEC back in 2013 about SatoshiDICE.  It was at a time when Bitcoin was growing, was getting popular, I was getting more known, and I was getting increasingly nervous of the profile that myself and others in Bitcoin had as things like the Silk Road got taken down, and just a lot of heat around that time.

Peter McCormack: You sold SatoshiDICE?

Erik Voorhees: Yeah.

Peter McCormack: Did they continue it on?

Erik Voorhees: The buyer, who I've not disclosed, I don't know what happened after they bought it, but it ended up at Bitcoin.com years later.  I don't know what sequence of people ran it, but certainly by the time I sold it, there were already a lot of other Bitcoin gambling games; that whole ecosystem had blown up and frankly, a lot of them were more innovative than SatoshiDICE at that point.  So, it was on the decline already.

Peter McCormack: Okay, so that's your first run in with the SEC.  You then go off and create ShapeShift anonymously and I think it was a very popular site at the time, I used it a lot.  You must have used it, right, Udi?

Udi Wertheimer: Yeah, ShapeShift was revolutionary, to be honest, at the time.  There was nothing else like it, because you didn't have to register; that was a huge selling point in my view.  It was super easy to onboard.  If people are joining crypto in the last year or so, then that probably seems obvious, because something like Uniswap looks the same, but before ShapeShift nothing was like this, so that was pretty cool.

Erik Voorhees: It was right after Mt. Gox collapsed and $400 million of money got lost.  So, the whole idea was, let people trade these assets without custodian risk.  I thought that was safer for me as an operator, but also the right way to do something that was built on crypto.  If you collect everyone's assets under a custodian, then you're going to end up looking not too different from banks and centralised brokers.

Peter McCormack: And so, after a period of time you then had to obviously reveal it was you.  Did you have to do that?

Erik Voorhees: No, I just did.  One thing I've realised is that it's really fucking hard to be pseudonymous, just flat-out full stop.  But if you're going to have phone calls with someone, suddenly you need to disguise your voice, because people knew from interviews and Bitcoin documentaries.  I started having to have business calls where I couldn't speak.  There's actually a couple of times when I had my co-founder do the call under my name, because I didn't know what to do about my voice, just practical problems like that.  It just became more and more obnoxious and I realised all right, whatever, I'll just own it, I'll be myself again and we'll move forward.

Peter McCormack: What was that like, coming out, because I guess people knew you as Erik Voorhees the Bitcoin guy, and then you became Erik Voorhees the altcoin guy as well, which has never really sat well?

Erik Voorhees: Yeah, well certainly ever since then a lot of the Bitcoin maximalist types have not liked me.  This is interesting: the first one who really got angry with me was Roger Ver.

Peter McCormack: Really?

Erik Voorhees: Yeah, Roger Ver was an investor in ShapeShift and he was not happy that it was supporting these other coins.  He was an investor in it, because him and I were friends and he wanted to support me, but he was uncomfortable with investing in a project that supported altcoins.  So, the irony of that certainly unveiled itself over time.

Peter McCormack: Interesting.  It's funny you --

Erik Voorhees: There was also other people that hated me for SatoshiDICE for using the blockchain for the transactions.  ShapeShift was built to within a very similar model; no account and all the transactions happen on-chain, and a lot of people do not like that because they think it's an inefficient use of how the blockchain is supposed to work.  Those people piled on and certainly didn't like it.  Then, of course, as Ethereum launched and that all got big and tokens became everywhere, certainly the vitriol expanded.

Peter McCormack: You've just had a history of basically pissing people off, haven't you?

Erik Voorhees: Yeah, I'm here to destroy Bitcoin, so that was the way to do it.  Use it a lot, pay a lot of mining fees and hopefully if I do that enough, Bitcoin will collapse.

Peter McCormack: Can you talk anything about the KYC pressure that came down on you?  We've had conversations about it before and last time I spoke to you about it, a couple of years ago you said you didn't really want to go into detail.  Is that something you can talk about yet?

Erik Voorhees: I can talk about some of it.  It really bothers me that I can't talk about all of it freely.  It would be a risky thing to do that and perhaps some details will come out in the future.  Suffice to say that by early 2018, ShapeShift had gotten very large, we were over 100 people.  Lots of attention was on the crypto industry, we had a lot more resources and we were pouring a lot of those resources into legal analysis of our model and to what degree it would be a problem from a regulatory perspective.  We had earlier got legal opinion that our model would not be treated like a financial institution unless KYC was not necessary, but by the time 2018 came around, the opinion from different lawyers started changing.

So, long story short, we had a decision to make, either one of three things: do something that would probably get us thrown in jail; shut down the business and fire everyone and then send all of our customers over to Coinbase and back to the custodian world; or, bite the bullet, implement KYC, which means Know Your Customers, a whole apparatus of Orwellian financial surveillance, and continue running.

Peter McCormack: Hold on, Erik, can you do that?  Don't you have a fiduciary duty?  I always hear about this thing in the US, you have this fiduciary duty to your investors; so if you just shut down the business are you breaking the fiduciary duty?

Erik Voorhees: That's not breaking a fiduciary duty.  Certainly a lot of investors would not want that to happen, but if I want to shut down the business, I can do it; myself and a few people have majority control of it.  That's a tricky issue, but ultimately after a lot of struggle and dark, miserable thoughts and questioning my own character and what is right, what is the right thing to do, we decided on option 3, to implement the Orwellian surveillance and to continue operating ShapeShift.  That was May 2018.

Peter McCormack: That must have hurt, right, because I know you.  I think our first two or three interviews were really just about you teaching me about libertarian ideas.  You specifically said in one of those, I always repeat where you said to me, "Let's not talk about getting rid of government.  Let's just start by making it smaller, like 1%, 5% even until it gets bigger".

Erik Voorhees: Sure, yeah.  I love that.

Peter McCormack: That's always stuck with me, but you as a libertarian, this must have fucking sucked?

Erik Voorhees: Yeah, it sucks because the whole premise of ShapeShift was to give people a safe way to transact.  We use this phrase "consumer protection by design", and that meant we didn't hold their funds and it meant we didn't take their private information, both of which endanger people.  We get to 2018 and we're coerced into endangering people to take their personal private information, which we do not want and they do not want to give us.  Yeah, that was ethically very dubious and I, to this day, know it does not sit well with me.  So, at the time we just went through it.

Peter McCormack: That's funny, because you're talking about consumer protection and not taking that data, because there's a risk to them.  We've had Gensler, I think that's how you pronounce his name, from the SEC come out today and say crypto needs tighter regulation to protect consumers.  People see consumer protection in two different ways.

Erik Voorhees: Yeah.  I don't know that people feel very much like there's significant consumer protection in the financial markets.  I think people properly understand that there are very elaborate means of financial exploitation by people who know financial markets against the broad public, so this whole talk of consumer protection, I'm going to give the SEC that they probably believe that's what they're doing, but I think they are not actually causing much consumer protection to unfold and they're building this entire apparatus, which ends up excluding the poorest people in the United States from being able to invest. 

I think that's horribly unethical as well.  Preventing the poorest people from participating in financial markets, that should be a crime frankly, and yet they are doing it with the blessing of the government.

Peter McCormack: Those people who can afford to invest or can afford to sign up to these websites and start investing, whether it's in companies or crypto projects, are put at risk by having little pockets of data all over the internet, which is constantly being hacked and attacked and revealed.

Erik Voorhees: Exactly.

Peter McCormack: My assumption is that my personal data, you might feel the same, is now everywhere.

Erik Voorhees: Yeah.  It's large organisations, the IRS itself, smaller companies, they all leak this data all the time; it is par for the course.  And so, this whole consumer protection bullshit, meanwhile these people are out there buying lottery tickets; it does not sit well with me.  Yeah, that was the struggle that we entered into.

Peter McCormack: Right, okay, so bring us forward to today, you've now got this new thing where you want to decentralise the company.  Like I say, I think that's massively interesting.  I'll tell you why it's interesting enough that I want to take a look at it, is that I always try and think personally, and right now a couple of things are in my mind; my personal data and address.  I haven't actually talked about this yet.  

I had somebody who turned up and knocked on my door who listens to the show.  I was doing an interview and my daughter answered the door.  Funnily enough this guy was called Eric as well; it wasn't you, I know.  So, she goes, "Eric knocked on the door.  He said can you give him a call".  I was, "Eric?  I know an Erik".  I phoned him and I chatted to this guy and he said, "Oh yeah, I was listening to your show and I saw you were in Bedford and you were talking about how you go for a walk round the park, so I just thought I'd come up and say hello and maybe we could just go for a walk and talk about Bitcoin".  He himself was harmless and I felt really sorry for him, but at the same time I was, "Well, that's a bit a fucking weird that someone can find me".

Erik Voorhees: How did he know your address?

Peter McCormack: My address can be found; the easiest place to find it is Companies House.  I'm in the process of moving house and hiding my data, so that's one thing I'm thinking of, but I'm also thinking of the next level, which is not even having a home and just becoming a little bit more digital nomad.  I travel a lot with work anyway, so it just makes sense. 

So, I'm starting to think about services or things I can use which basically exit me from the system, exit me from bank accounts, exit me from having even an address, etc.  So, the idea of you creating a decentralised business, I have a business, it's very small, it's six employees but it's still a business; they all have to be paid, we have to have bank accounts, etc. 

Erik Voorhees:  Still at a registered address?

Peter McCormack: We have a registered address, etc, but the idea of getting away from that and creating something a little bit more decentralised where we can operate as a business, but nobody really knows who we are or where we are is something quite interesting to me.

Erik Voorhees: It should be; it's very much in line with the ethos of Bitcoin.  So, we went through a miserable couple of years and all the while, I'm trying to figure out how do we get out of this mess.  Our customers hated it, our employees hated it, I hated it, everyone hated it except the surveillance state which is glad, because now they have one more operative in the field.

Fast-forward to 2020, early 2020 and I had become very familiar with Uniswap; and Uniswap, when you visit it, it has that exact magic that you guys describe the first time you used ShapeShift; just this easy, civil arrival at a website.  You push a couple of buttons and the thing you want to happen has happened and it's no more complicated than that, and that's such a rare beauty.  So, when I saw that I was, "Damn, these guys did it.  What's going on, how are they doing this?"  That sent me down a path of really understanding and learning about that model; far more down the path of really researching financial regulations, where they stem from, what they're based on.

We decided last Fall, in 2020, that we would start integrating decentralised exchanges into ShapeShift.  Instead of ShapeShift being the counterparty, where you send us a coin and we send you another coin, we would let you just trade directly through the DEX, the decentralised exchange, using the ShapeShift interface.  That started with Uniswap and several other Ethereum DEXs in January and THORChain in April. 

In April, we terminated all of our own trading.  So, since April, we have not done KYC anymore because we are no longer a counterparty to the trade, which means we're no longer a financial intermediary or a financial institution.  That was really the start of things getting better and that was the first couple of quarters of this year.

Peter McCormack: What regulations are you bypassing?  How are you doing this because you still manage the code?

Erik Voorhees: This is why lawyers like to use this phrase "facts and circumstances".  Regulations apply to specific sets of facts and circumstances and specific activities that someone is doing, or that a business is doing.  If you do those things, you are regulated; if you do not do those things, you are not regulated.  So, this was simply a question of us figuring out the things which were regulated activities and figuring out how to stop doing those things, so we stopped.  We no longer do the activity which is regulated.  That's it.

Peter McCormack: Can you explain that again?  What is the bit?  Is that managing the trade?

Erik Voorhees: Managing the trade is not the answer.  When someone does a trade with ShapeShift in the past, let's say it's Bitcoin for ETH, they send Bitcoin to ShapeShift, we have hot wallets, we receive their Bitcoin into our hot wallets and as soon as that is confirmed, we send out the ETH to them.  So, we are a counterparty and for a moment we're arguably an intermediary.  That is arguably a regulated service and that is what we stopped doing. 

The trick was trying to figure out how to stop doing that while at the same time letting the users continue to trade, and that's where the DEX protocol infrastructure saved the day.

Peter McCormack: Right.  Before I carry on, Udi is there anything you want to jump in and ask yet?

Udi Wertheimer: Not necessarily ask, but I want to point out, in case people are listening to this and they're hardcore bitcoiners, one thing they might think is, "Well, ShapeShift is not doing those activities anymore, but it is still doing something".  If the government really wanted to stop you, they could still find some excuse to do it maybe.  And, Bitcoin, where people are really trying to get rid of all possible pressure points to having none of them, not just in the legal sense, not even in the technical sense. 

I guess what I'm trying to say is, ShapeShift is taking a different approach maybe than the extreme Bitcoin approach.  That doesn't mean it's wrong though; it's a practical approach which is, "Okay, there are laws, so we are going to make sure that we stick to the letter of the law".  We're not going to be ultimately the most decentralised thing in the universe on day one, but we're going to do what is practically necessary.  That seems to work so far, so I think that's not a bad choice; it works.

Erik Voorhees: Let's put this in Bitcoin terms for a second.  When I got into Bitcoin, one of the biggest things people considered and discussed was Liberty Reserve, and Liberty Reserve was a way of sending private money between people in a relatively anonymous way.  It went down in flames because the government came in and shut it down; a lot of people know that story.  Then there's also e-gold, which had the same phenomenon. 

The reason that Bitcoin did not suffer that same fate is but one thing, which is decentralisation; there is no office to shut down, there is no person in charge of Bitcoin.  It perpetuates because it's doing a regulated service, the movement of money is the most regulated service of all.  How is it that Bitcoin is able to continue providing a regulated service without getting shut down by every regulator in the universe?  It's because it's decentralised, there is no money to go after.  That principle is absolutely key.

So, this whole development of DEXs is the attempt at figuring out higher levels of the financial stack which can also be decentralised.  Base money; done.  We have Bitcoin, we have base money that is decentralised.  How many other layers can we build that are also sufficiently decentralised to withstand that kind of attack? 

Peter McCormack: But could the regulators look at what you're doing and say, "Okay, you found a loophole here.  ShapeShift is still a company itself, so we'll just change the regulations"?

Erik Voorhees: Sure, yeah.  Nothing that we're doing makes us immune from the government.  There's always an arms race and it's how well do you understand the law and what is the law that exists today.  Absolutely, regulators will likely try to change the law, but they can't just flip a switch and do that, especially when you're talking about the fundamental bases, like the Bank Secrecy Act, on which most US regulation is based.  You can't just put out some guidance and change that; guidance has to comport with the Bank Secrecy Act. 

To change that would be a multi-year process and would be likely an Act of Congress, it would be a big, massive thing.  If they do that, then that's their next step and we take our next step.  This is a game where we're all trying to figure out how to build and survive against an adversary, and we're not going to build anything that we believe is in violation of the law, but we're also going to find where the law is not applicable or where there's space to operate legally in the way that best serves our customers, and so that's what we're doing.

Peter McCormack: You're a bit of a pain in the arse then for the government, because you're finding ways to allow people to do something they don't really want people doing, which is trade and move cryptocurrencies without KYC AML.  Therefore, my worry for you is that you become a target of some frivolous accusation, lawsuit, etc, something to target you which might be far easier than targeting what you've built.

Erik Voorhees: Sure.

Peter McCormack: Does that worry you?  Is that part of the program?

Erik Voorhees: Of course it worries me.  It is something that I have dealt with for ten years now.  It is something that I have to constantly weigh up the risks and rewards.  I want to push boundaries, but I don't want to violate the law because I am a known person and an easy target.  At the same time, what is life but the times you demonstrate principles and try to make things better.  People who are unwilling to take any steps because they have personal risk means that nothing good will happen.

So yeah, I'm sure a lot of regulators don't like me.  Fortunately, me not being liked is not illegal.  Whenever I fly into the US, I get stopped at the border and my shit gets stolen.  That's been happening for years, it's been complete violation of law.  So yeah, it's a struggle.

Peter McCormack: Like what?  What are they stealing?

Erik Voorhees: Laptops, Kindles, USB, mice.

Peter McCormack: They just disappear, or they just take them off you and say, "We're taking it"?

Erik Voorhees: They pull me aside at the border, and this has happened both entering the US and leaving the US, they confiscate my electronic devices, they answered none of my questions and asked me many.  They're complete pricks about it and seemingly have no care or concern for the Fourth Amendment of the Constitution or even the laws about border searches and seizures, which mandate that the equipment must be returned within 30 days, and it is not.

Peter McCormack: Wow.  Do you just stop travelling with electronic equipment then?

Erik Voorhees: I assume stuff I travel with is confiscated.

Peter McCormack: Right, okay.

Erik Voorhees: I'm not the only in crypto who has this happen to them.

Peter McCormack: Interesting, it's not happened to me yet. 

Udi Wertheimer: It's never too late, Peter; it's never too late.

Peter McCormack: No, and I am starting to think more about stuff like this.  I have been stopped at the US border a couple of times and last time I was taken into a room and questioned about why I was coming in, which was new; that's not happened before.  It was nothing to make me think it was targeted because of crypto/Bitcoin at that time.  Yeah, interesting; wow.

I guess right now then, it must be a really interesting time for you, because we are going through a crazier and crazier world, there is more surveillance, there is more financial surveillance; the overreach of the government and the Fed seems to be creeping further and further.  How are you feeling now, Erik?  Are you feeling more up for the fight or are you feeling more exhausted by it?

Erik Voorhees: I feel like I understand the state of play very well at this point and we're making our moves accordingly.  So, yeah, I feel good.  I am every day incredibly inspired by the decentralising technologies and how far they're getting and how quickly; it's amazing.  I wake up more excited every day to see this stuff unfolding.  Frankly, this is all about bringing monetary sovereignty to people and anything I can do to support that, I will do it.

Peter McCormack: Right, so a few more questions on ShapeShift.  You're decentralising the company, but really we've talked about decentralising the exchange.  How else are you decentralising the company?  Are you actually breaking down the company?  Is your end game here really that there will be no ShapeShift?

Erik Voorhees: Yeah, so up through April this year, we had integrated decentralised exchanges and destroyed our own exchange, so we stopped being an exchange as of April.  That was not us decentralising ShapeShift, but it was us decentralising trading.  On 14 July, just a few weeks ago, we announced that we are decentralising the entire company. 

So yes, this means that the entity itself will go away with time; it means all of the code at ShapeShift, front and back end, will be open-sourced with time; it means we will not have any employees, we will not have me as a CEO, we will not have bank accounts, we will not have business contracts.  The entity goes away and the product, the project lives on as an open-sourced, decentralised token-based community.  So, we can go into any part of that if you want, but that's essentially what's happening.

Peter McCormack: Okay, so first point, because ShapeShift does have a team, therefore it does have costs.  What's the revenue model right now?

Erik Voorhees: Right now there is no revenue model; everything on the platform is just free.  If you do trades for ShapeShift, you're getting the same rate as if you went directly to the DEX.

Peter McCormack: Another question on there then, that must mean there are no trading fees?

Erik Voorhees: Correct.

Peter McCormack: I spoke to Jack Mallers recently about this; he was on my show talking about wiping out trading fees.  He said, "Trading fees are a race to the bottom.  Eventually, it all goes to zero and ultimately you make your money on the users themselves", if you operate a business like his; his obviously is a centralised business.  Yours being a decentralised business, and I haven't used ShapeShift in a while because I don't trade coins, but do you allow people to use stablecoins?

Erik Voorhees: Sure, yeah.

Peter McCormack: So, it's a cheap, very cheap place to buy Bitcoin then?

Erik Voorhees: Correct, yeah.  THORChain is offline right now, but when THORChain was online, it was the only place in the world where you could actually trade Tether, stablecoin for a native, unwrapped Bitcoin with no intermediary.  So, that will come back online in a couple of months.  Anyone who cares about Bitcoin immutability, that is the sole mechanism that you can trade at scale, in and out of stablecoins.  I think that's awesome.

Peter McCormack: We'll come back to that. 

Udi Wertheimer: There's still fees though, right?  You've still fees charged by the pool or the protocols?

Erik Voorhees: Yeah, Uniswap, SushiSwap, EnCore, THORChain, they all have roughly a 30 basis point fee for the pool.  You'll pay that if you go direct to the protocol, you'll pay that if you go through ShapeShift.  So, ShapeShift isn't adding any fees, but you're right there is a fee.  That fee goes to the liquidity providers.  That's why people put up the liquidity and that's what gets the markets deep.

Peter McCormack: Do you want to explain that, how that works; who the liquidity providers are, why that's required, etc?

Erik Voorhees: For most of Bitcoin's history, all trading happened on central limit order books; you have a bunch of bids and a bunch of asks.  Wherever those cross, the trade happens.  People tried to do that model in a decentralised way, but because of the blockchain latency and other issues like front running, it never took off, it never got sufficient liquidity.  So, even they were technically cool, those didn't ever get traction. 

Uniswap didn't invent this concept of an automated market maker, but they certainly popularised it and are the biggest one to date.  An automated market maker is essentially a different model from a central limit order book, and what you have is a pool of two assets, call it asset A and asset B, and the ratio of those assets in the pool is what determines the price.  What happens is that if that price gets out of alignment with the "real price", arbitrage will take care of it and get both things back into alignment. 

Liquidity pools work beautifully on blockchains, because they don't require a low latency environment, and they are very good at pulling idle capital that people have and letting them deposit it into these pools and earn a yield with time.  So, someone who's holding $1,000 of Litecoin can deposit it into a liquidity pool and earn a yield on that without any intermediary; there's certainly no KYC and that's awesome, because otherwise that Litecoin will just be sitting in their wallet.  So, it's great for the liquidity, for the asset providers and it's great for the traders, because they get deep pools on all sorts of different assets.  So, it's a different model. Uniswap is the biggest, best example of it.

Peter McCormack: Back to the model, there's no business model here anymore for ShapeShift. 

Erik Voorhees: ShapeShift won't be a business.

Peter McCormack: What's the timeline for that?

Erik Voorhees: Some pieces of it already exist.  We've already set up the DAO, the decentralised autonomous organisation, which is just an Ethereum smart contract holding our whole treasury of assets.  That's set up, we have a bunch of tools set up for governance and blockchain voting and all that kind of thing.  The company today is still fully there, we still have 67 employees, it's still a normal company, we still have our bank accounts.  Those pieces get dismantled over the next six months, so by the end of the year there will be no employees and hopefully, we can terminate the entity sometime early next year.  That's probably our last tax filing that will be the last thing the entity has to do.  So, that stuff is a six-month process.

The open-sourcing of all of our code, that's going to be a three- to nine-month process and at that point, we just slowly transition from something that is 100% centralised to something that is something less than that.

Peter McCormack: Is this costing you to do this, and you can tell me to mind my own fucking business, but does ShapeShift have funds from previous trading to support this or are you having to basically pay for this?

Erik Voorhees: We've got a healthy balance sheet so we can take care of it.

Peter McCormack: Wow.  How does the team feel about this, because you've basically had to sell them a project that I'm winding up the company that you've all worked so hard for to decentralise it, and at a certain point in time you're all going to be without a job? 

Erik Voorhees: Yeah, yeah.  It's going to hurt them.

Peter McCormack: It's all about the mission.

Erik Voorhees: It is.  Certainly with 67 people, there's going to be a range of reactions.  Some people in the company think this is just the coolest thing in the world and they've been wanting us to do it and helping teach us how to do it.  Other people, they're scared to not have a normal W2 salary and a normal payroll, and everything in between. 

Yeah, some love it, some aren't thrilled, but to demonstrate to them that the best way to serve ShapeShift's customers and to bring ShapeShift as a brand into alignment with the crypto ethos, we have to decentralise and that's going to be a new and exciting path for us.  Those who are very entrepreneurial and who are eager and willing to take risks and strike out into new areas, it's awesome.

Peter McCormack: Are they being compensated with the token?

Erik Voorhees: Yeah.

Peter McCormack: That's okay.

Erik Voorhees: All the employees and shareholders got a bunch of tokens to invest over three years.  That aligns them all with the long-term success of the project, even after the corporate entity has gone.

Peter McCormack: I'm thinking on the spot here.  Where are the holes, where are the risks?  The code base itself, is that an attack vector; can the code base be closed down?

Erik Voorhees: Yes.

Peter McCormack: Yeah, because that has to sit centralised somewhere, it needs redundancy.

Erik Voorhees: Some parts of ShapeShift we do not yet know how to decentralise.  We know how to do a lot of it, but not all of it.  This is a case of looking where the puck is going.  The decentralised tools and technologies are rapidly progressing and we do not believe we are very far from being able to decentralise every single piece, including the web app itself.  Yeah, this stuff gets solved over time.

Peter McCormack: It's all done via a browser, I guess, but is there any way of building some kind of node which is the exchange which every person has a copy of the exchange.

Erik Voorhees: Again, we're not an exchange.  We've already picked up decentralised exchanges, so they took care of that.

Peter McCormack: Okay, I'm thinking a bit more like BitTorrent.  Can you create something whereby people can peer-to-peer trade without the need for any centralised code base?

Erik Voorhees: The DEXs already do that; ShapeShift is an interface to those DEXs.  Now today, that interface is centralised.  We're on AWS and that could get shut down tomorrow.  There are ways of decentralising many elements of that web app, and I believe that ultimately we will be able to decentralise all elements of that web app.  There are already websites out there that run on things like IPFS, which become pretty close to immutable, and again none of this stuff is perfect; it's not a panacea, but you can see where the trend is going.

Peter McCormack: Udi, what am I missing here?  Anything I'm not asking?

Udi Wertheimer: One thing I'm wondering about, you mention ShapeShift currently doesn't charge any fees.  Obviously the token-holders will be expecting ShapeShift to make a profit, not as a business but as a DAO, I assume.  How is that going to work out?  How are token-holders going to see profit?

Erik Voorhees: Think about it like this: in a normal centralised organisation, you have shares and the governance of the organisation falls on the shareholders who elect a board, who elects an executive team.  The economic value that accrues to the project ultimately belongs to the shareholders.  In a token world, it's the token that does that; the token is what governs the project.  That's how you know if a decision has to get made, ultimately it will fall and settle down to the token-holders.  If the system generates revenues, it can go to those token-holders and it's up to those token-holders when and how they want to accrue that value.

This is the case currently with Uniswap.  Uniswap has no fees, they go to token-holders, and yet the Uniswap token is a multi-billion-dollar market cap.  Why are people willing to hold those tokens?  Similar to how someone who owns a share of a company that doesn't pay dividends knows that in the future, that company may be able to pay dividends and certainly if they hold enough of the tokens, they can make it pay dividends in the token or the shares. 

In the token world, a platform like Uniswap one year from now, ten years from now, can add a fee that goes to the token-holder.  That's up to them, they can choose when and how to deploy it, what level it should be at, very similar to how shareholders would do that in a centralised organisation.

Udi Wertheimer: Right, so maybe it doesn't make business sense or in that case it doesn't make sense for the product to charge fees now, but it would at some point.  I guess the point is that the token-holders can decide what's the right time to do that?

Erik Voorhees: Yeah.  It's also not as simple as you must charge a fee or not.  The stuff in DeFi is getting very, very interesting to the point where you can take collateral back to loans in a stablecoin and then deposit that in a protocol that's paying you interest.  So the DAO could stay, take $20 million in stablecoin backed by its own token, and put that $20 million into Aave and earn a yield on that.  That yield can go up and down but there you go, there's another revenue source.

So, the token-holders ultimately decide when and how to manage their treasury, just as shareholders would decide when and how to manage the treasury of their centralised organisation.

Peter McCormack: Udi, this is the kind of comment that will probably get me cancelled by bitcoiners, but one of the things is obviously I'm a bitcoiner, I support Bitcoin, I make a show about Bitcoin, I very rarely cover altcoins.  I sometimes cover Ethereum because people are using stablecoins to trade Bitcoin, and I think you can't really avoid the fact that a lot of those stablecoins exist on the Ethereum network, so I have to maintain a certain amount of interest in it. 

INX, the other project which I covered before, which I think issued on Ethereum and is meant to move, I'm not sure if it's moved yet, but it's meant to move onto Liquid, I think a lot of bitcoiners accept tokens are a thing and most want them to exist on Liquid, because that's closer to the Bitcoin blockchain; whatever, I don't really care right now.  The point being is, I don't know how you can do something like this without a token. 

Do we have to have a slightly more mature conversation about this at some point and say Bitcoin is hard money, Bitcoin is the best money the world has ever seen, it's the reserve currency for the world, but we have to actually at some point have an adult conversation about tokens, because they do serve a purpose, they are useful; or could this be done in another way?  That is why I asked you here Udi, as more of an impartial voice on this.

Udi Wertheimer: I agree with you.  I think people might have some PTSD from 2017 or whatever, where a lot of altcoins did not really have a clear thesis for why they even exist and what you do with them.  But it's really different now.  At least for some projects, you can really make this comparison to stocks, which I don't know if it might create compliance issues for some people, but other than that it's very similar to how a stock would work for a business and it seems like a perfectly reasonable model to me.  If you have something that resembles a business, you need people to invest in it in order to start it, you want to share the upside. 

Also, people are not just going to randomly -- because people often say about Bitcoin, "Well, you don't need a token, because you already have Bitcoin" and people do support Bitcoin without having another token to incentivise things.  But it turns out, if you want people to participate in a new protocol, a new organisation, a new whatever it is, you need to share the upside with them and that makes sense too.  So, you need to have a token for that, there's no other way to do it; how else would you do it. 

It used to be, that's maybe part of the PTSD thing, it used to be in 2017 that they would present themselves as competition to Bitcoin.  They would say, "Well, it's like Bitcoin, but it's faster.  It's like Bitcoin, but it's smarter.  It's like Bitcoin, but it's more private".  That's not really happening anymore.  I think a lot of people accept, outside of the cryptocurrency space and inside the cryptocurrency space, that Bitcoin is a form of money and there's very few projects trying to compete with that specifically; they're trying to do other things. 

People try to describe the token world as immoral; I don't see anything immoral about it.  It's not inflation, it's a reasonable model people have used for centuries in order to share upside in enterprises.  That seems perfectly reasonable.

Peter McCormack: Tokens collectively can't be immoral.  Each individual one you have to measure and judge individually, and I don't know how you can do this, Erik, without a token, which I'm sure is going to get me shouted at for saying, but I just don't see how you can do it.  It doesn't change the fact the protocol which it exists on might have its own floors.  Ethereum does seem to have certain issues with it and other protocols, and I'm certainly not going to change the podcast to start covering tokens. 

I'll speak to you because you're a friend and I'm interested in your project; I do find it super interesting.  I find it super interesting that you're basically winding up your baby as well, I do find that interesting.  What are the main criticisms that you've had, that you had to field with this?

Erik Voorhees: Certainly, there are some of that variety like, "Well, why do you need a token?"  I think Udi was spot on when he said there's this PTSD from 2017, when everyone and their mother had a token and 99% of it was complete garbage and didn't do shit.  The failure of people observing this is that they saw that and they think no one can figure out how to use these things well.  Tokens are an incredibly powerful tool and humanity is trying to figure out how to use them well.  What they will bring for financial independence from the state is massive.  So, that's been one criticism.

A lot of it has just been curiosity, like "How the hell do you do that?" or "What does it mean?", "What does it mean to be decentralised?", "Why are you doing it?", these kinds of questions.  There's been a lot of really genuine interest in it.  I think a lot of people recognise that, especially those who are entrepreneurs that run centralised crypto businesses, there is so much friction and regulatory loss from being a business in finance.  The whole banking establishment just puts up with it because they use that to keep out new entrants to the market.  But you get this whole ecosystem of financial innovation and it's just running constantly into friction. 

By decentralising, we believe we will get rid of much of that friction; we'll certainly have new problems to deal with, but people are curious to understand that model.  It's something that could not work without blockchains, it could not work without tokens and now I think it's being unleashed on the world, you're going to see a lot of DAOs, some of which I think will become the largest economic organisations on the whole planet. 

Peter McCormack: The idea of creating decentralised businesses is what interested me.  If I wanted to create a decentralised business and I wanted to raise funds, that's certainly a way that you could do it, is via a token, which is what people have done in the past.

Udi Wertheimer: Bitcoin is the first DAO.  This is a really critical thing.  Bitcoin is not a company; it's a decentralised autonomous organisation, no one is in charge of it.  It has a token called Bitcoin and that token was designed with certain economic parameters and incentives which have worked incredibly well, and it's created the most important financial technology ever invented.  That's just the first version of this stuff.  So, people are realising that you can actually organise in a decentralised way around blockchains and tokens to do other things and I think that's a wonderful thing and a wonderful testament to the power of what Bitcoin unlocked.

Peter McCormack: What are the risks with this then, Erik?  You must have weighed them up.

Erik Voorhees: The biggest risk is that we fail to transition from a centralised organisation into a decentralised community.  Right now, everyone is on a payroll, I'm in charge, there's a board.  If something needs to happen, there's a clear way that happens in a centralised organisation.  A decentralised community is a little more amorphous and it requires people with less structure to participate.  It requires people to be inspired and interested in something and it requires economic parameters and incentives to be set up correctly.

We don't have a handbook for how to do that, so we're trying to take some best practices that we've learned, but we could screw that up and it may not take off.  That's the biggest risk; there's no guarantee.

Peter McCormack: In terms of these risks that you've looked into, I guess one of them would be that there's enough interest from people to be managing the code, developing the code, working on updates and changes, etc; here has to be enough interest around the project?

Erik Voorhees: Without a token, we would just be assuming people will contribute out of the kindness of their heart.  Maybe some people would do that, but that's not how you make a lasting project that ignites the passions of capitalism.  So, the way this works is that the ShapeShift DAO treasury has £200 million-worth of tokens at this point.  Anyone in the world can pitch to the DAO and say, "Hey, I want to do this for the project.  Pay me X and the DAO can vote on it".  As people earn reputation with time, certain people will rise to the level of known figures that are doing good work. 

The difference between that and a corporation is the ease of entry, the ease of exit and the flexibility.  So, someone can work on ShapeShift an hour a month or 60 hours a week and it's completely up to them.  If there's an amazing talented engineer in France, they can actually work on ShapeShift versus under our corporate model.  We will never hire someone in France because of their damn HR laws there; they are just too atrocious to ever even hire someone in France.  That kind of thing, we avoid completely by being DAO.  Yeah, that's the economic model: you pitch to the DAO.  If you're credible and you do good work, you'll earn money from that treasury.

Peter McCormack: Udi, what about you?  What are the risks that you think exist that maybe Erik hasn't brought up here?

Udi Wertheimer: I think there is of course the big risk of failing to decentralise, which I think a lot of projects didn't figure that out entirely yet, both on the technology end and also on the practical end of how decisions are going to be made, how the website's going to be hosted, things like that.  We don't know yet if this is even going to be possible or not. 

But on the other hand, a lot of projects are already doing this.  From my point of view, it looks like ShapeShift perhaps looked at the landscape of projects like Uniswap and said, "Okay, maybe we can do things more like they do and have a DAO".  I don't know if it's Uniswap specifically, but a lot of these DeFi projects have a DAO and have the community vote on things, give out tokens so that people can share the upside and have some stake in that, and so it seems like ShapeShift is trying to move in a direction that is not completely unestablished.  People have done that and it is working to certain degrees already. 

I'm not pessimistic about it, definitely not; I think it could happen.  Even those projects though in DeFi, I think, face maybe some regulatory pressures or will face regulatory pressures.  The comments today from the SEC Chairman also mention decentralised trading protocols and lending and so on.  They are clearly aware of it and they clearly seem to want to step in in one way or another.  I guess, how do you see a DAO approaching that, because it seems like it's going to become more of a problem?

Erik Voorhees: Yeah, that's the test and it will become more of a problem.  Absolutely, regulators are not going to be happy that there are unregulatable systems out there.  Those DAOs which aren't really decentralised will just end up succumbing to regulation.  Those DAOs which actually achieve decentralisation, I think Bitcoin has shown that if you get to a degree of decentralisation, you cannot be stopped.  Bitcoin is far more decentralised than essentially all these projects, but these are new things, and they will grow with time, and they will become decentralised with time. 

It's a question of whether you just allow yourself to be consumed by regulation under the centralised structure, which is definite.  Centralised crypto custodians, for example, are going to end up looking like banks; there is no way to avoid that.  Or do you take a chance at learning the lessons of decentralisation and try to see how many of those you can apply to what you're doing?  So, I don't think that decentralisation is appropriate or possible for all crypto businesses, but certainly for a great many of them, it is and I think some of them are going to find success with that model.

Peter McCormack: It's super interesting.  I'm definitely going to keep an eye on it because, as we move to a world of more decentralisation, I don't think Bitcoin is the only technology that people will be using, and I do think people will be trying to decentralise companies; I think it's something definitely to keep an eye on. 

I can't let you leave though without asking about the Infrastructure Bill, because I'm sure you've got some strong views on this.  I'm going to be talking to Jake Chervinsky soon about it with Matt Odell, which I think will be an interesting pairing.  What's your take?

Erik Voorhees: This has been the hot topic this week.  The original language in this bill was such that anyone who is associated with the transactions happening on crypto networks must report them under a KYC regime to the IRS, and this was written broadly enough that even miners themselves would be credibly under it. 

So, first I want to shout out to Coin Center who's doing an amazing job fighting this.  There are a lot of people on the front lines in Washington DC trying to prevent this kind of thing from happening; they deserve your support.  Anyone listening, they're doing great work and they've actually managed to get the language in this toned way down into a much more reasonable place.  The fight is still ongoing as at the time of this recording. 

But the more interesting question here is, let's say the original language did end up in the bill.  You essentially have a world in which these immutable protocols, which cannot comply, are bumping up against politicians and regulators which demand compliance.  I don't know how that gets settled; the Bitcoin protocol cannot comply.  Even if all the US miners were fully compliant, all that would mean is that they would have to shut down their business and they couldn't be US miners.  That obviously doesn't stop Bitcoin; the mining just re-routes around the damage to some other country. 

So, essentially you have these tools that put incredible defensive power in the hands of people, and you have very aggressive regulators that do not wish that to be the case.  That struggle is going to be what defines the next ten years of finance in the world.  Frankly, my money is on the decentralised protocols.

Peter McCormack: We have countries waking up to this.  We all know what's happening in El Salvador. 

Erik Voorhees: Sure.

Peter McCormack: They would welcome any miners coming there to place their business there.  We know other countries are looking at El Salvador.  We're aware of various countries across South and Central America and even in Africa now, so I don't think the Bitcoin Network's at risk. 

One of the interesting things to see how this plays out would be, I did another interview earlier today with Parker Lewis and we were talking about state versus federal regulations, and that during COVID restrictions it seemed like the more republican states, such as Texas and Florida and Wyoming and I think he even mentioned, was it, North Dakota or South Dakota, basically ignored the federal government eventually with regards to their regulations or regarding COVID; they removed mask mandates, they allowed businesses and economies to open back up.  We were discussing the idea that as the Fed continues to print more and more money, destroying the value of the dollar, that perhaps those who want to serve the constituents in their state will actually be more positive about Bitcoin, because it is an opportunity for people to preserve and protect their wealth.

So, I'm wondering with regards to this regulation, because this Infrastructure Bill isn't part of the Constitution, states themselves can ignore it, right?

Erik Voorhees: I don't know if they can ignore it; that's a complicated question. 

Peter McCormack: Can they have the fight?

Erik Voorhees: They often don't fight, because if they don't do what the federal government wants, the federal government will withdraw funding on other programs that the states are addicted to.  So, you get into a serfdom situation.  They wouldn't resist the Infrastructure Bill, because they're just getting free shit, whereas the taxpayers are going to pay for it through inflation and none of them even know that's happening.  Would they resist this crypto rule?  No, because it's an IRS reporting requirement, so it's not even a state issue.  But the IRS can't collect information from people that don't have the information. 

It both reveals how poorly educated some of these regulators and politicians are on the state of crypto, but it is also our opportunity to build and get this stuff more widely used before they catch up.

Peter McCormack: Do you think it's a cash grab or more about surveillance, or both?

Erik Voorhees: It's both.  The reason this is in that Infrastructure Bill is because it's an ungodly sum of money being spent and there are these pseudo-rules where they have to pretend how they're going to pay for it.  So, they make up things like, "Oh, we're going to get $82 billion from crypto transactions which aren't being taxed".  They pull that number out of their ass and they're not going to get that from crypto transactions, but they put that in there and then that lets them justify a massive multi-hundred-billion-dollar infrastructure plan. 

Certainly how Washington works, if the IRS can use that as an opportunity to get more information on people, it's going to do that.

Peter McCormack: Interesting times.  Is there anything about this with regards to what you're doing I've not asked you about that you wish I had?

Erik Voorhees: I think the important point for your audience is ignore everything about other chains, Ethereum, all that kind of stuff.  This concept of decentralising a company is applicable in a pure Bitcoin sense just as well.  You could decentralise a Bitcoin-based company and you could do it with many tools that are just built on Bitcoin.  I would argue those tools are not as well developed, but the principle holds true.

So, to your listeners who care about actually decentralising the entire financial system of the planet, if they care about that, they should be very interested in how an organisation that is trying to build applications for users can decentralise itself.

Peter McCormack: Right, okay.  So, if people want to follow this, Erik, how do they follow it?  Are you live blogging the process?  Can people track how you're doing this?  What the hell are you going to do after this?

Erik Voorhees: I'll still be part of ShapeShift and I'll just be one leader among many at that point.  I won't be in charge of it, I'll have some influence, but not control.  Yeah, it all happens in the open, so we have public Discord forums where the governance occurs.  People can all participate in that and just watch or anything.  It's going to be a saga that unfolds over a while and we may succeed or fail, but we're sure as hell not going to go down the path of surveilling people and violating their rights if I have anything to do about it.

Peter McCormack: Anything else you wanted to add or ask, Udi, before we finish?

Udi Wertheimer: Just, I think it's a very good tip to not ignore those things that are happening around decentralising stuff just because it's using Ethereum or it's using Solana or it's using Binance or whatever it's using; that's not a good reason to ignore them.  I have my reservations about Ethereum, but that doesn't change what people are doing with it.  I think there's a lot to learn from it.  Don't just wave it away, it's probably a mistake, and there are actually interesting things going on.

Erik Voorhees: Right, yeah.

Peter McCormack: Well, listen, I appreciate you both coming on to talk about it.  I'm going to be in the States for six weeks from around 24/25 August, so let's try and meet up.  We didn't get to hang out and properly catch up in Miami, because all the Bitcoin bros were going crazy.  I'll try and come and see you.

Erik Voorhees: That'll be fantastic.  Hopefully your stuff doesn't get seized at the border!

Peter McCormack: Yeah, hopefully; I need that! Udi, hopefully I'll catch up with you as well soon, mate. Appreciate you both coming on to do this. It's definitely interesting, I am really interested in it. I usually avoid most of these projects and just focus on Bitcoin, but I'm definitely interested in this. If I get cancelled for this by the plebs, then so be it, but definitely interesting. Good luck with it, Erik, and we'll catch up soon. Udi, well I'll see you when I see you, man.