Cardano, Crypto, and the Developing World: Interview with Charles Hoskinson, Part 1

Charles Hoskinson is the Founder of Cardano and CEO Input Output Hong Kong. Cardano is a self-described third-generation blockchain, with use cases spanning from credential verification to decentralized finance to NFTs. Its native cryptocurrency, ADA, is the third most valuable crypto asset by market capitalization.

Apostolicas and Qi spoke with Hoskinson and Joel Telpner, Chief Legal Officer at Input Output Hong Kong, via Google Meet. Click here to read Part 2 and Part 3.

What is Cardano, and what are your aspirations for the blockchain?

Cardano is what we call a third-generation cryptocurrency. To understand that, you have to go back in time and ask what cryptocurrencies are and where they came from. Bitcoin was the first cryptocurrency, and the problem it was attempting to solve was being able to move value around the world in a completely decentralized way with no trusted counterparty. And the question was if you created this instrument called bitcoin, would it actually achieve market value, would people treat it like it was valuable, and would that be enough to sustain a completely decentralized network?

It turns out that experiment was wildly successful and by 2013, Bitcoin was here to stay: it had a billion-dollar market cap, exchanges were forming, and infrastructure was forming. The problem with Bitcoin is it’s greatly limited in its capabilities: all you really can do is push around one type of instrument, bitcoin, and you can’t do cold payments, you can’t do contractual relationships, and so forth. It's kind of like the Internet when the web browser came out. You had all these static pages; you could have a pretty page with some flames on it or something and some nice beautiful text, but you couldn’t do Amazon, you couldn't do Facebook, and all this. And then a programming language came, JavaScript, and then suddenly the Web was programmable and you can do all these things.

It's very much the same thing that happened in second-generation cryptocurrencies. So, there we had a situation where you have smart contracts, where you can issue NFTs [Nonfungible Tokens], do security tokens, DeFi [Decentralized Finance], and all these pieces of infrastructure that were enabled by a blockchain and a programming language.

However, the problem with the second-generation is of three dimensions. One, it doesn't scale. So, if you want to go from 1000 to 200 million users, the resources get more and more scarce, the cost of operation continues to rise, and essentially, the system collapses under its own weight. So you need a different class of protocols that are capable of dealing with scale. Second, there are over 8,000 cryptocurrencies, so there's an issue of interoperability: we don't exactly have a WiFi moment in the cryptocurrency space. Take for example your phone: no matter whether it's a Samsung phone or an Apple phone or a Nokia phone, it can connect to a router. And as a consumer, it just works. Yet, in the cryptocurrency space, there has not been this WiFi moment with respect to interoperability.

Third, there's a sustainability problem. Who pays for the development of these systems and who decides how to upgrade these systems? Blockchains are decentralized, so there's no Microsoft to Windows or Apple to the iPhone or Google to Android. You have to figure out a way to govern these cryptocurrencies and pay for their maintenance, upgrades, and innovation so that they stay relevant and useful. But this has to be done in a decentralized way.

This brings us to the third generation: what Cardano seeks to do is build a scalable system, an interoperable system, and a sustainable system, that also has smart contracts and decentralization, just like the prior two generations. As you can imagine it's much more complex under the hood than the prior generations, so more things have to be done. We chose to do this in a very rigorous way, using the peer review process, where we went out and wrote 117 of them [scientific papers] so far. We actually followed engineering standards that you would see in places like Boeing or SpaceX where the failure of the system is the plane falls out of the sky or the rocket explodes. You have to really be much more rigorous in the way that you write code. Ultimately this code is going to be used at a scale of millions to billions of people and control a lot more of people's lives than just their money.

One of the points that you’ve made that’s a bit unintuitive is that the developing world is going to lead the way with adoption of cryptocurrency and blockchain. One might assume that Silicon Valley, Europe, or China would be the leaders in adopting crypto due to its high-tech nature, but you say that’s not necessarily the case: why?

First, let’s talk about systems: systems impact everybody and the biggest system that needs an update because of globalization and the Internet is the financial system. So, when you look at the developing world, there are billions of people that are unbanked or underbanked. As a consequence of the lack of integration of the global financial system, simple things like the movement of money globally (remittances) can be 8 percent to 10 percent. Lending can have interest rates as high as 72 percent a year. That is a pretty remarkable interest rate. And, insurance doesn't work in a lot of these economies.

So you can yell at financial institutions or you can recognize the reason there's a hole in coverage: it's because it's simply too expensive to get a legacy system into these types of economies. The superpower of cryptocurrencies, the superpower blockchain technology, is that you can replicate many of the things that the IS does, SWIFT does, banking institutions do, and you can make it all open-source software. It's expensive to write and think about, but once you've done it, once it’s run once, you can run it everywhere. It's kind of like a smart cow that knows how to open the fence. Only one cattle has to figure it out, and then the rest of the cattle get out, they just follow the open hole.

Similarly, only one person has to write the protocol. Once it's running at scale, their protocol becomes something everybody can use, and we take this for granted. The vast majority of people who use cell phones have no idea how TCP IP works. The vast majority of people who download movies with BitTorrent, don’t know how BitTorrent works. Protocols are powerful in that respect. And so if you can get finance, identity, and other aspects of life into protocols, then you can think of a far more egalitarian, more universal world.

The biggest system that needs an update because of globalization and the Internet is the financial system.

Now, on the question of why the developing world. And this is a great area for Joel to jump in around regulation. You have an opportunity to go into a clean slate and innovate, whereas regulation in developed economies has to be much more protectionist. There’s a current state, with trillions of dollars invested in that state, and if you want to change it, there’s a lot of risk to that. So in the developing world, you can move much faster.

Telpner: For example, in Africa, the cost of putting in landline for telephone was very expensive; but then we were able to see Africa leapfrog and implement wireless cell service much more rapidly than developed countries. They didn't have to worry about that legacy infrastructure. In the same vein on the regulatory side, when we've got technology moving so quickly the way blockchain technology does, legacy systems including legacy regulatory systems have to really play catch up. So you've often got a gap with the technologies out here and the regulators are back here to understand it, trying to figure out what to do about it. And so when we go to emerging markets, where they don't have, perhaps, that same clunky legacy regulatory framework, they're able to experiment, they're able to innovate, and they’re able to adapt in a way that sometimes it's harder for us in the United States to do.

Input Output Hong Kong recently struck a deal with the Ethiopian government to create an educational performance tracking system. In a country where just 15 percent of people have Internet access, what’s the role of blockchain in the education system?

One of the biggest problems in the education system in Ethiopia and a lot of sub-Saharan Africa is actually the legitimacy of the diplomas and the credibility of the credential. So, you know you're a human resources director and somebody claims to be a graduate of a university but to know the diploma is real, credential verification can take weeks. That's just a competitive disadvantage for people who are looking to achieve jobs. Imagine you guys went to Harvard. I imagine you probably had to work pretty hard to get your degrees at Harvard, it's not an easy experience, and then the employer says, “Well, we were having trouble verifying you went to Harvard, so we're just going to pass up and go to a different candidate.” So, to have a system where you can get those credentials into storage, where it's very cheap to do that, and those documents are immutable, auditable, transparent is a very powerful thing. And you could do that all throughout K-12 and the secondary education side of things.

You can even extend that to professional licenses. Joel is a lawyer, and there's some bar association that has some stuff to say about that. Similarly, you can apply this to medical doctors or accountants or anything that requires government certification or private certifications, potentially under one unified system where all these things work together is a very powerful way…

Education is a great entry point because it is not controversial and because there’s a huge systemic problem that we see within Ethiopia. It actually can be somewhat running a hub and spoke model, so it does not require internet connectivity, it just requires that certain areas like universities and certain businesses have connectivity, and then people can connect the WiFi to other things to be able to verify that asynchronously. And what’s beautiful is that you've started the conversation of digital credentials in general, then you can reuse that infrastructure to start taking a look at other things like utility payments, which is a huge problem actually in Ethiopia. In some cases, people have to wait hours to pay the power bill. And if for whatever reason it doesn't get reported properly, the power circuits shut off and it's not a good situation. So you can start looking at things like utility payments to start looking at things like supply chain management. Look at the National ID system itself, voter registration remains to be a very typical challenge in Ethiopia. To summarize, the same infrastructure that can secure a credential can be reapplied throughout a nation state.

Now in terms of identity, you could apply this to record ownership or change of property: land titles, water rights, mineral rights, these types of things, which again, in many cases have been subject to problems. For the townships in South Africa, for example, it's almost impossible in many cases to know who actually owns the land, because it's too expensive to transfer the title, a lot of people just transfer it on a handshake and cash, so that the end result is you have to reconstruct the entire history of that transfer of title with oral tradition. In terms of practicality, academia is a great place to start because you do it with counterparties with connectivity, but they also have a large group of replenishing people early in their life. And so once you get a digital credential there, you can reuse that digital credential as they grow up, and interface in the economy, build payment systems into it, a property system that builds into it, eventually use it as a reputation metric for credit scoring. Credit scoring is something that's incredibly difficult, and if you can't get a reputation, it's very difficult to understand the risk of counterparty, when you're doing lending. And, if you don't have credit you can't get ahead in life. You need student loans, a car, a business—these types of things you can't get without credit.

And it's not controversial, you know, if you go into an existing incumbent business, it's a big part of the economy, transforming that industry, there's a lot of discussion about that. If you go into an area with academic credentialing, it's universally agreed this is a good idea. Everybody on all sides of the equation wants the degrees to have meaning and value.

Another example where it's sometimes harder in the United States because of our legacy system. For land title, we're used to an old fashioned system where you record ownership of land, pieces of paper that sit in the county courthouse. If we wanted to all of a sudden take land title and start using blockchain, we'd need a massive effort to go back and retroactively take all of this historical paper trail and digitize it. When you're talking about a country where land title historically wasn't very well kept, we use blockchain to bypass the fact that the old system didn't really exist (at least the way it should have) and go forward with something that's new and effective without having to worry about that legacy regulatory or physical infrastructure needing to be updated and replaced.

And it's important to say connectivity is an ephemeral problem. Right now in most of Africa, hanging on the roof deck, connectivity can range from 10 percent to 30 percent. 10 to 15 years from now, many jurisdictions will have ubiquitous coverage. If you look at the McKinsey reports or other such things, over 95 percent of people already have a cell phone. And that's a supercomputer, and it's usually quite cheap but it can easily be retrofitted or refurbished. The cost of computing and the cost of connectivity continues to fall, and the quality of connectivity continues to go up. We even have projects in Africa; we have a strategic partner called World Mobile who's in Zanzibar. They just finished a US$40 billion raise, they're working on community owned 5G, and we'll be in Africa actually next month and visit the facility they have.

In short, you have to think about where the world is going to be in five years or 10 years and you have to think about what systems you need to have to be competitive in that world in five or 10 years. Digital credentials are certainly a huge component of that. And they're a bedrock upon which you can build wallets and so many other things. And once you have those things you have an entirely new economy.

Many developing countries face similar challenges as Ethiopia. What’s your response to skeptics in government that might see spending on blockchain as no better than spending on other, more general projects like Internet expansion?

Well, we closed the deal and they paid us, we didn't pay them. The governments actually have money to spend. I think it's a very western view that governments have no money at all. Instead of having money or not having money, it's about making priorities. And if you're a policymaker, it's not your job to spend money on the things that made jobs in the 19th century or the 20th century. Instead, you have to look at where the 21st century is and where it is going. And so the reality is, would you like to live in an economy where direct foreign investment is plentiful and people want to hire your people, or do you want to live in an economy where maybe the road from the capital to another city is paved?

So these are fundamental questions. Anything you can do to increase your credit rating, your rule of law, your access to foreign capital, the employment of your people, tourism, the velocity of your money, the stability of your currency, the legitimacy of your voting system, the legitimacy of land ownership, and international respect for the country's ability to business and operate—all of this is fundamentally good for your people. If you look at Rwanda and Kagame for example; Kagame is a master case of transforming a country over many decades. At the back of the genocide in 1994, Rwanda was one of the least developed countries in the world and was absolutely shattered. It could have stayed in that state indefinitely—there was no magic superpower that suddenly Rwanda is going to rise from the ashes.

Blockchain is not a superfluous spend or a nice to have. It's a foundational way of viewing the government's relationship with its citizens, and how commercial interactions are going to happen.

But what Kagame did is he went to Singapore and all these other places to say who has the best education, who has the best security, etc. But if you go to Kigali it is actually a very different place than 30 years ago, and it looks a lot like a European city in many respects. There are still problems, but the spending was proactive towards improving the systems.

So that's an example of what blockchain has to offer. It's not a superfluous spend or a nice to have. It's a foundational way of viewing the government's relationship with its citizens, and how commercial interactions are going to happen. And if you can make that personal, programmable, and liquid what you've done is you've created a reality where you will have more investment, you'll have more compensation, you’ll have a lot more dynamism and robustness. Also, you have to ask how do your businesses get liquidity, how do your businesses get investment? If you have a closed economy or economy that's difficult to interface with the global economy, you can't have IPOs [Initial Public Offerings], you can't have a venture capital marketplace, you can’t have risk capital. However, if you have an open economy—if you have an economy where the facts and circumstances on the ground are verifiable—you can have those things, you can have a rich VC market, you have a lot of direct foreign investment. And every time a nation state has moved in that direction, they've been rewarded, and they've got their own Silicon Valleys and they've had very high GDP growth, and ultimately a more free and fair society. Every time they focused a lot on baseline infrastructure…I mean, North Korea builds roads and trains. I've never met a single person who says I can't wait to put some money in Pyongyang.

So you have to think about what levers you pull as a policymaker. We have these discussions on a regular basis with heads of state; on our Africa tour next month we're meeting five heads of state and their ministry, and they're always asking about Industrial Revolution technologies, Internet of Things, what is AI is doing, what is blockchain doing, how do we revolutionize our education sector or medical sector? How do we make sure that we can actually be competitive against the United States, the European Union? What can we bring to the table that is unique? These are the conversations; we have never once had a conversation about, you know, how do we get more cell phone towers, or you know, how do we build more roads and these types of things.

Telpner: That's an excellent point. So, when you're talking about blockchain solutions, we're not talking about necessarily infrastructure-intensive solutions. So, a lot of things that you can do with blockchain, you can do with a much more limited budget, until you actually do a lot of things to help your citizens to bring services to people, to help people integrate with the economy without having to spend billions on old fashioned infrastructure.

Hoskinson: Right, blockchain can offer a lot more bang for your buck. You could spend millions to get billions or you can spend billions to get millions. We tried it with the former.

This interview has been edited for length and clarity. Apostolicas owns small quantities of various cryptocurrencies, including ADA. Click here to read Part Two, where Hoskinson discusses El Salvador’s decision to adopt bitcoin as legal tender and the promise of Central Bank Digital Currencies. Click here to read Part 3, where Hoskinson discusses the politics of regulation blockchains like Bitcoin and Cardano.