We’re joined by Sharon Goldberg, CEO of Arwen, a protocol solution for non-custodial trading. From communications engineering to Internet protocol security, to then becoming a Professor at Boston University, she shares her journey into the world of cryptography. Beginning as a whitepaper on eclipse attacks, Arwen has grown into a platform enabling atomic swaps on centralized exchanges. Sharon chats about Arwen’s integration with KuCoin, how it compares to ShapeShift, Interledger, and Lightning, and the exciting new release of the Layer-2 atomic swaps from Ethereum into Bitcoin.
Topics we discussed in this episode
- How Sharon became interested in blockchain technology
- The meaning of an eclipse attack
- Arwen’s co-founder Ethan Heilman
- The backbone of Arwen
- The Arwen protocol and how it uses atomic swaps
- How trading takes place on the exchange
- Arwen vs Shapeshift and Interledger
- Creating multiple orders using the same channel
- Arwen vs Lightning and the use of SegWit
- How the relationship with KuCoin was formed
- Cosmos: Change the future of finance at the SF Blockchain Week Defi Hackathon – $50,000 prize pool for winning teams. Register at epicenter.rocks/sfcosmos.
(04:22) Sharon’s background and how she got interested in blockchain technology.
(07:00) An eclipse attack
(12:06) The story behind Tumble Bit
(15:27) The current makeup of Arwen and it’s protocol
(22:48) Atomic swaps market places
(29:37) Arwen and exchanges
(20:43) Why limit orders are all or nothing.
(43:24) Arwen vs Interledger
(46:13) Mixing and matching arbitrates
(48:43) How Arwen and Lightning differ
(52:11) How the relationship between Arwen and KuCoin formed.
(55:35) Arwen and API’s
(57:40) The business model of Arwen and how it makes money
(58:56) The benefit of settling on atomic swap rather than pegging
(01:05:10) What’s coming up for Arwen
(01:05:51) How does Sharon find being the CEO of a start-up compared to Academia
Friederike: Hi we’re here with Sharon Goldberg, the CEO of Arwen. Hi Sharon. Good to have you on.
Sharon: Hi guys.
Friederike: Sharon. Can you tell us about your background and how you got interested into blockchain technology?
Sharon: Yeah. So so I come from an academic cryptography and security background. I was starting my PhD in 2004 at Princeton and in Communications engineering and then I was working on this project that had to do with Optical encryption and part of the way through the project I decided that I didn’t know what encryption actually was so I took a course in cryptography in 2005 and that was actually a really fun course because a lot of the people in my course are now like famous cryptographers. So one of them is Nadia Heninger actually who you may have seen breaking a lot of factoring keys that were that were used in blockchains to holds crypto assets. Anyway, so I took that class in 2005 and I just loved it and I decided I would become a cryptographer. But unfortunately, I wasn’t a computer scientist and at the time cryptography at Princeton was really theoretical computer scientists, and I was not one at all. So I decided that I would have to find some way to become a cryptographer without being the worst cryptographer out there. And so the way I did that was to combine cryptography with network security and telecommunications, which is what I’d been doing telecommunications at least I’ve been doing for like four years at that point. I did a bunch of work on Internet Protocol security. So internet routing in particular is the thing that I focused on for a really long time and then I expanded a little bit into like DNS domain name system. I did a bunch of work on NTP the network time protocol. That was my PhD, started as a professor at Boston University in 2010. And then you know, it was running a lab there with two other professors and in 2013 I got a new PhD student, which is Ethan Hellman who is my co-founder at Arwen and so in 2013 when Ethan joined the lab, he was one of these people these early like Bitcoin obsessed people, Ethan is just an incredibly knowledgeable and very talkative person if you let him, you know get started and so he was all you know talking talking our ears off about Bitcoin for for basically a year while we were kind of all working together on various projects that were sort of the continuations of stuff I’ve been doing up to that point. So in fact Ethan and I have papers together on routing security that we wrote when he just recently joined my lab and then after about a year of that it was clear that like we had to work on Bitcoin and so we started to work on Bitcoin. And so the first thing that we did together with Ethan was this paper in 2015, we basically coined the term Eclipse attacks in the blockchain world. It was a term that was used outside of blockchain world, but we were the first to think about eclipse attacks in blockchains and we found an attack on Bitcoin.
Friederike: What is an eclipse attack just for my benefit.
Sharon: Oh, yeah. So Eclipse attack is an attack on the peer-to-peer network of a blockchain. And so if you think about blockchain if you read the Bitcoin white paper, what’s really interesting in the Bitcoin white paper is that there’s this assumption that all the nodes in the Bitcoin Network actually can see the same blockchain, right so they can see the blockchain is something and they all have the same view of that. So how do they actually like see the same blockchain? Well, there’s this assumption that they’re all communicating with each other and sharing the blockchain through this gossip network that they have. the Bitcoin like your first nothing about the the the peer-to-peer, you know, gossip N\network that’s used to communicate the blockchain around so that was actually never written down anywhere but it was in the code. And so inside the Bitcoin code there is this part of the code that is the peer-to-peer network that is the block communication cross nodes. And so we started to think of like what happens if you subverted that communication what happens if you put you know, you partition the network so like half the nodes could talk to each other but not to the other half. Right? And so basically what you’re doing is you’re splitting the mining power in half you have like half the miners on one side of the partition and the other half on the other and you can start to think that that’s basically you’re creating a 51% attack, but without actually owning the compute power for the 51% attack your just owning the network and creating this partition. So this whole idea of like owning the network and creating partitions and like manipulating the views of different nodes in the network that really comes from an eclipse attack. So what eclipse means is if you think of an eclipse it’s like, you know, the moon blocks the sun. So essentially what it means is that all of your connections are owned by the attacker and he’s completely owning your view of the world. That’s what an eclipse is your completely owned so there’s not even one connection that you have that isn’t controlled by the attacker. This type of idea which can be also used to like create partitions in the network that sort of fundamental attacks on proof-of-work consensus and we were thinking about that in 2015 wrote a paper about it and then Ethan spent like at least four months basically writing code for Bitcoin core that ended up getting merged in that has to do with the peer-to-peer network and then recently we actually extended that work to look at the peer-to-peer network of Ethereum that was in 2018 with a student of ours Yuval Marcus who’s now an undergrad at BU and actually works at Arwen in the summers. What you’ve all found was actually that the peer-to-peer network of ethereum was actually even more vulnerable than the peer-to-peer network of Bitcoin. We’ve actually found script kiddie level attacks on Ethereum where you could launch an attack with one or two machines and like completely eclipse nodes. In Bitcoin we needed like a botnet of four thousand nodes to actually pull these attacks off. So that’s sort of like where we’re coming from sort of started from the network side, like understanding how blockchains work at this sort of unsexy network layer. And then in 2016 Ethan got really interested in micro payment networks and lightning network and all of these sort of payment Channel layer 2 networks as a way of solving the scaling problem of Bitcoin. And so again, he pulled me into that. So we wrote a paper called Tumble Bits in 2016 that was a way of doing anonymous mixing of Bitcoin and was done at layer 2. So it was fully compatible with Bitcoin at the time pre SegWit and it was at layer 2, so you could instantly sort of mix your mixture coins once you set up channels to do the mixing. That was really the impetus for starting the company. So at you know by 2016, I was already, you know doing a bunch of work with Ethan on blockchain. I was already pretty interested in the topic, generally speaking like in 2016 what was super fascinating for me was like if you come from a cryptography background and you come from a security background, you’re always in this position of like this struggle to get people to pay attention to you to pay attention to security to pay attention to your work and I’d been living that struggle for like how many years like 10 years 12 years at that point. And then what happened all of a sudden was like the whole world got really interested in this blockchain thing, which is really ultimately a cryptographic object that is existing to remove trust right to sort of like have a way of transacting without trusting a central party which is like the fundamental thing that every cryptographer wants to do to everything get rid of trusted parties, right? We want to have mutually on trusted parties transact and correctness enforced by the protocol. So you have this blockchain thing that really solves this trust problem in this fascinating way and it should have been this weird obscure thing that only cryptographers and academics care about in ended up exploding and you have companies being built, you know, you have like massive amounts of funding going into this you have like big companies doing blockchain projects and we were watching all this happen. I was just like amazed like I’d never seen this happen in my entire career that you would get so much attention for really what’s a cryptographic object and so between that and the tumble bit paper getting a lot of attention and actually being implemented and Nicholas Dorier who’s like a really really strong Bitcoin developers started to write an open source implementation of tumble bit and then a bunch of other people started contributing to that. It was all done independent of us just watching that happen was like so exciting. I had a sabbatical and I was like, okay, let’s start a company so we did and so that’s how that’s how Arwen started in the middle of 2017 basically after a year of us watching all this stuff happening around tumble bit and in the industry we’re sitting in the University saying we have to start a company we have started a company and then we did in 2017. So that’s my story of how I got here from Academia.
Sunny: Yeah, I mean I was talking to Dan Binet and he was telling me like yeah, man, I would have never imagined I’d ever see the day where like VCs are coming with me talking with me and they know about the latest like development and BLS signatures and it’s like I remember reading the tumble bit paper back when it came out but I think Ethan, you know, really got a lot of publicity in the space when he was helping with the Iota breaking. Were you involved with that as well?
Sharon: So I can tell you is no I wasn’t, so the story is like the following, in 2017 we basically had finished a lot of different projects we were working on together. So we’ve kind of finished tumble bit, you know even to my PhD students alike at the beginning Ethan and I basically wrote every paper on blockchain that Ethan wrote we wrote them together where he was really like the like ideas man in the driving force and I was the like sort out what he’s saying and make it like understandable and academic and all that stuff. Right? So I was really the click the cleanup crew anything was like the brilliant ideas person. The thing that happened was I went away for a month and Ethan was here and he was just he went out for lunch with someone who showed him this hash function and like we weren’t working on anything. I don’t know what he was working on and it was like irresistible. He saw this hash function. He had to break it. Ethan actually has a really really strong background in cryptographic hash functions and and like symmetric cryptography that has nothing to do with me or anything that he’s done at BU he actually was that’s the reason we admitted him actually was he had actually broken a SHA-3 hash contestant as a like startup engineer, he broke it because you took a class at MIT for fun and then he saw this hash function and broke it. So he actually eliminated one of the competitors from the SHA-3 competition. And he did that unaffiliated like evenings and weekends while he was he was just like wandering around Boston actually and that’s actually the reason I admitted him to the program. I don’t even remember that. I actually looked at what is resume said he just came in and he started telling us about how he had broken this spectral Hash Hash function and I just asked him like how did you do it and he described like walking around at night and thinking about it and I was like, aha. There you go. That is what you want in a PhD student. So that’s that’s how the whole thing started and then the Iota piece really was just like you give him a hash function was so obviously weak. He just, you know started breaking it and that was it and actually the fallout from that was a little surprising I have to say like I wasn’t expecting that and neither was he because we really come from like this, you know, ethical hacking white hat academic responsible disclosure like I teach a class now, actually on Tuesday I’m having a colleague of mine Andy Sellers come to the class. from BU is like our Cyber Law Clinic professor and he’s coming in and he’s teaching a class on responsible disclosure and ethics of hacking and the laws associated with that. And so like I stand there in front of a hundred students every year and I tell them like if you find a vulnerability you have to responsibly disclose it. There was one class that I couldn’t teach that Ethan taught for me at some point in the last, you know five years and that was the class he taught it was responsible disclosure. So we really come from like this responsible disclosure background. I will tell my students that if you plan on like selling vulnerabilities on the grey market or on the black market, you will fail my class, right like that is unacceptable. I’m not going to teach you to hack you can do unethical things, and so he just disclose it and then there was all this fall out. It was really big surprise. It was just like we found a bug like fix it and that was that was the plan that was all that was going on there.
Friederike: So what’s them the current makeup of Arwen and why is it called Arwen? Is this a Lord of the Rings reference?
Sharon: Yeah, so we are currently 10 people at Arwen of the ten all only two of us are from a non-technical background. And the name actually is are like second name. Our first name was Commonwealth Crypto, which was a name that Ethan picked because we like the amount of letters and awkwardness of the name, but then we sort of eventually found that this was not like an effective way to market company or a product. So we had to think of a new name and we actually worked with them an external consultant to help us find a name because we had a variety of like really stupid names that we came up with internally and then this idea of Arwen as the sort of protector and the guide as you go through dangerous territory in the forest. That was that was how we sort of came to that to the name. I guess we just really liked it because it was part. We also you know our companies really built around atomic Swaps. So atomic Swaps in my at least in my head was part of the piece of how we arrived at the name Arwen. But really it is it is what you would expect. It’s the Lord of the Rings character.
Sunny: Cool. So I guess we should jump into the Arwen protocol then. So could you tell us describe to us like on a high level what is Arwen? Like it has something to do with atomic swaps? But what is this project? What are you guys working on?
Sharon: So let me let me like pop it up a level actually because I think what I want to talk about is really like in what direction we’re going. There’s I think there’s two currents right now in this industry that we’re seeing and sort of one of them is really this notion of like decentralization and sort of using the blockchain to provide people with the ability to sort of hold their own assets or is this idea of self sovereignty. Anyway, the idea of kind of holding your own coins where you decide you want to hold them without having to necessarily cede control of those coins to a bank or to put everything in sort of the same central trusted party, right? And so this idea which is really like if you think about where I’m coming from I talked about a lot about my background in cryptography the idea that you should want to you know, choose your own place to custody your assets and have that choice and not really have to trust anyone else to custody your assets if you don’t want to, so I should be able to custody my assets like on my ledger or inside Anchorage right? Maybe I trust Anchorage maybe I want to use fire blocks, which is a self custody solution, or maybe I want to use, you know Fidelity which is going to be a custodian and I would have to trust them. There’s like this array of solutions in the industry and really like our point of view is that people should be able to choose they should be able to have the ability to custody their assets wherever they feel is the right place for them and then they should be able to transact trustlessly with others, you know, the reason that I think this is interesting is because if you look on the other hand you have sort of other other solutions and other approaches and in fact, if you even just look at simple centralized exchanges, right if you want to trade on a centralized exchange you have to actually seed custody of your assets to that exchange. So you have to deposit your assets at the exchange and then you can trade right? So alternatively we see sort of like settlement and clearing solutions that are being built in the industry where like if we are all inside the same custodian we can send assets to each other right inside that custodian but we all have to share that custodian. So this idea of like having to trust a single party with your assets and therefore that allows you to transact with other parties who also trust the single party with their assets that’s really the old-fashioned way of doing things. That’s the way we would do things in sort of traditional markets and so from our point of view, what we’re trying to do is break all that apart, right and give people the idea ability to transact with each other without all having to agree on like the same single custody solution. And so it’s not just self custody and sometimes you hear people talk about self custody. Like I want to hold my own Keys like I want to have my Hardware wallet and I want to hold the keys in that wallet. It’s really more than that. It’s like if I want to hold my keys in my Hardware wallet I should be able to and I should still be able to transact with you who wants to hold your coins in Fidelity, right? And that’s sort of the type of financial tools that were building at our when were allowing people to swap assets without having to trust each other and without having to have the same sort of trusted party custody their asset. And so if I bring that down a level, right really the specific problem that were solving here is that when you want to trade on it on a centralized exchange you have to offset your assets at the exchange because otherwise The Exchange won’t really credit you with having these assets and we’ll let you trade right and so we’re really trying to guide the industry in a direction that is to allow for this hydrogenous custody for allowing people to store funds wherever they want. And I think that personally for me that’s what really drives me and I think it drives most of the people on my team. If you were to talk to them about this this idea that like blockchain can do things that don’t exist in the physical world that were not possible in traditional Financial system. And so just trying to build something where there’s a central to trusted party and just giving them your assets and like trusting them to like have a database and track who’s moving what asset to who that’s what we did before like we can go and rebuild that now but we’re not going to sort of take over the financial system if that’s all that this industry can produce and so we’re really trying to produce, you know, something a lot more than that. The other thing that you asked me is what does Arwen do and what are our atomic swaps so I want to sort of just quickly talk about atomic swaps. I’m pretty sure most people listening have already understood what atomic swap is but I’ll just get into it really simply so typical way where you were to exchange assets like in the physical world if Alice has something a and Bob has something b what we would normally do is something called a second send protocol right? Alice would have to give up her asset to Bob and then once Bob has the asset Bob will give up his asset to Alice. And so that’s called a second send protocol because Bob sends his assets second to Alice. And so if you think of the trust model here, Bob gets all the power in this deal right Bob gets to decide whether or not once he has Alice’s asset he gets to decide whether he actually wants to give Alice something back in return or whether he wants to run off with both assets and just keep them both for himself. So in a second send protocol, there’s always one party that has counterparty risk. And in the example I gave it was Alice and so in the real world the way we solve this problem often is with a trusted party, right? So Alice and Bob will give their assets to The Trusted party and then the trusted party will give Alice’s asset to Bob and Bob’s asset to Alice at the same time. So in cryptography this is actually called the fair exchange problem. So in the blockchain world we found our answer to the to the fair exchange problem with the atomic swap. So the atomic swap basically when atomic swap is exactly what I described it’s like giving both of your assets to us trusted party and having it sort of swap the assets for you, but the thing is that there is no trusted party. In fact, what you do is you trust the blockchain to enable you to do this atomic Swap. And so the guarantee is that Alice is asset will go to Bob, Bob’s asset will go to Alice. And so either the swap will happen or there will be no swap. It can never be the case that one party has both assets at the end of the trade. And actually there is a result in cryptography that says Fair exchange is impossible without a trusted third party. This is a really old result. It’s from the late 90s I think I forgot who it’s by and Block Chain breaks through that negative results. It’s a sort of technological breakthrough that allows you to have Fair exchange without a trusted party. And the reason you can do that is because you have this blockchain, which is this distributed Ledger greeted by a lot of different parties and you can trust that basically because you trust The Ledger you can achieve Fair exchange. And so what we’re doing with Arwen is really enabling atomic swaps to be brought into into trading of financial assets.
Sunny: Right and you’re kind of using the blockchain as The Trusted third party and a very highly trusted third party.
Sharon: Exactly. Yes.
Sunny: Atomic swaps has been around since like, you know, very early days like yeah 2013 or so before even lightning. So what does Arwen bring to the table? And well, I guess also before that are there any existing implementations of like atomic swap Market places, so I know like Suma has a version that they’ve been working on recently. But in the six years that atomic swaps have been a known concept have we seen any production-grade peer-to-peer atomic swap Market places yet?
Sharon: Yes. We have seen production-grade peer-to-peer atomic swap marketplaces, but let me take a step back. So what we’re doing with our one with atomic swaps is we’re facilitating trading on centralized exchanges. And so with Arwen you can trade a decentralized exchange without trusting The Exchange, that’s our tagline. Why do you not need to trust exchange? Well, because whatever you do trade it’s an atomic Swap. And so the guarantee is that if you know sold your Bitcoin, you’re definitely going to get some light coin in return. That’s the what the atomic swap will guarantee for you. And so we’re specifically solving the problem of trading on centralized exchanges. So essentially what it is is like a trustless settlement in clearing light layer for transacting on centralized exchanges. So that’s our very very specific use case that we focused on and you asked me you know, what does Arwen bring that’s different from all the other atomic swaps that we’ve seen in the industry. So let me just start with like a history of atomic swaps, which I’m now channeling Ethan again, but I’ll do my best. What’s different about the atomic swaps that we’re doing in Arwen for example from something like the lightning Network or some of the other on blockchain atomic swaps that we’ve seen is the two things. So the first thing is that Arwen atomic swaps are cross blockchain atomic swaps. And so what we want to do is enable the swapping of one asset that’s native to one blockchain with another asset that’s native to another blockchain. So like, you know, the simple example is Bitcoin to Litecoin. Those are two kind of separate block chains. They have some differences Bitcoin block time is 10 minutes and Litecoin block time is two and a half minutes on average and so on different, you know, proof of work and stuff like that, but ultimately they’re very similar kinds of blockchains and you can swap, you know Bitcoins for litecoins atomically using the Bitcoin blockchain to back your trade and the Litecoin blockchain to back your trade. So the actual backing of the atomic swap is both of those blockchains. That’s a sort of the simplest cross blockchain atomic Swap. And those are some of the earliest sort of cross blockchain atomic Swaps that we saw pre Arwen. The reason that everything was Bitcoin to Litecoin was because those two chains are so similar. At Arwen we’re doing you know, we’re trying to support changes that are more, you know hydrogenous than just Bitcoin and Litecoin at the moment we support you can go to use it today for Bitcoin Litecoin and Bitcoin cash and I think by the time this podcast comes out you’ll be able to do at least an atomic swap with Ethereum on testnet with Arwen. So we’re just about to release that I think today will be the day that this comes out, you know, in order to do that you need to actually support these different types of block chains that have different types of scripting languages. So famously Bitcoin uses Bitcoin script, which is a very restrictive scripting language. Ethereum uses Solidity which is like the complete opposite of Bitcoin script in every way and you want to sort of let these two blockchains communicate and do swaps between them. And so that’s one of the things that we’ve really focused on doing at Arwen. We actually can do a Bitcoin cash Ethereum atomic swap. You can probably try that today on testnet it if you’d like and and so like, how can we support so many so many chains? Well, what we’re doing is we’re very very focused on the simple use case of of trading atomic swaps. Not sort of the more elaborate use cases that some of these other Protocols are focusing on and so by keeping it very narrow to the idea of trading that allows us to support as many blockchains as possible. So we’ve been very very careful to design our protocol that it’s so extremely simple that you’ll be able to use it on as many blockchains as possible and that’s been our sort of guiding principle in the design of what sort of smart contracts actually need to be used in order to enable these protocols. So that’s the first difference. Generally speaking when you see sort of atomic swap protocols they’re focused on sort of one class of blockchains or even within a single blockchain, like lightning which is really for Bitcoin only. Another key difference that we have from some of the earlier atomic swaps is the notion of doing them off blockchain. And so the earliest atomic swaps like the 2013 is an on blockchain atomic swap. What that means is the swap time corresponds to the amount of time that it takes to confirm blocks on whatever blockchain that you’re using. So if it’s Bitcoin and it’s a tier nolan swap you have to wait for a single block confirmation time on bitcoin at the minimum which takes 10 minutes if you’re lucky, and so the issue with that is that if you’re thinking about atomic swaps for the purpose of trading if you have to wait 10 minutes for your trade to actually execute there’s a lot that will happen in the price volatility of the coin that you’re trading in that 10 minutes and that’s really what we’re trying to eliminate with Arwen. We are doing our atomic swaps instantly. So they happen at the speed of an API call, right and that allows us to avoid this issue of like this swap taking so long that the price has sort of moved in the time that you had started the Swap and the time that you ended the swap. So we are really from day one, you know really focused on layer 2 atomic swaps, layer 2 means that the swap will happen instantly off blockchain and it will be backed by smart contracts on the blockchain. So this approach is the same approach that’s used in lightning. There’s a lot of different Layer Two protocols out there lightning is one of the best-known there are other protocols like the rate in protocol for Ethereum and a variety of other protocols. All of these Layer Two Protocols are in the class of protocols where you put something on the blockchain first you confirm it, but that is not the actual action that you’re taking you may be doing a trade or you may be doing a payment or you may be doing any number of other things with tumble bit we were mixing Bitcoins. You may be doing any number of things but those actions only take place after the first, you know, escrow or Channel, you know Channel open is actually confirmed on the blockchain. So that’s what we do with Arwen we have this notion of escrows where you first setup escrow on the blockchain and then once those are set up you can trade at the speed of an API call. It’s very similar to what you see in lightning where you would open Lightning channels and then you can pay through the lighting Network at the speed of you know, basically API calls as well like you’re just sending payments across this network. The last thing I would say is like the real difference between Arwen and some of these other Layer Two protocols is that we’ve really focused on making it a cross blockchain protocol. And so that means we had to really strip out a lot of the sort of extra functionality that you would see in like lightning Network. We don’t have a network. There’s only like a user and the in exchange. There’s not like a network of nodes that you go through. You know, we don’t have things like relative time locks. We don’t have things like popping up the Channel with more coins because all of that is really complex and not necessarily supported by a lot of blockchains, right? So we’ve really tried to stay away from that.
Friederike: So there was a lot here. So let’s try to unpack this. We talked about custody we talked about centralized exchanges and we talked about atomic swaps. So the way that these actually fit together is you are letting the user retain custody of their own coins while at the same time enabling them to do an atomic swap with an exchange de facto using the liquidity on that exchange while retaining custody at any time, right?
Sharon: That’s right. Yep. So the goal is you can use Arwen to trade trust loosely at an exchange and you would be doing that using atomic swaps. And so what that means is that you’re actually custody in your assets inside whatever your custodian is and you are basically holding your assets in your custodian. And then when you actually go to trade that trade is an atomic swap with the exchange, the trade is basically placed on the exchanges order book. The really interesting and weird thing about Arwen is that the other side of the trade the counterparty to that trade is actually not an Arwen user. It would be a custodial user of the exchange to some regular users of the exchange. That’s what’s matching your order on the exchange order book and then you know, it’s getting confirmed to you through the blockchain protocol of Arwen. What we do if you want to think about Arwen is really you’re holding your assets inside your wallet and your placing trades on the exchange and somehow you’re being matched with a counterparty who’s not an Arwen user who’s placed an order on the exchanges regular order book. And so you’re doing trades basically at the speed of an API call on the exchange of centralized order book, but you’re doing that while holding the keys in your own custody solution and you’re doing that with atomic swaps.
Sunny: So kind of I guess one of the big differences here is in most past atomic swap like marketplaces you usually had some sort of listing service that would list a bunch of potential counterparties and you could kind of like you would open up an atomic swap set up with them. In lightening for example, you kind of you use the lightning routing tables as a way to do this as well. So what’s happening here, you’re not creating an atomic swap with a counterparty, you’re creating it with an exchange, right? You’re trading against the exchange. Does the exchange have to hold positions in all of these assets that it’s wanting to trade that users are wanting to trade?
Sharon: This is a complicated question. So let me take a step back. So the important point that you said and this is the really unusual thing about Arwen that you don’t really see in any of these other atomic swap protocols really anywhere is the idea that when you do an Arwen trade and you’re an Arwen user you’re typically matched for the user who is not an Arwen user, and that is really strange, right. So essentially you’re doing if you read our whitepaper, it always talks about the user and the exchange, the user is doing a swap with the exchange that’s a little bit of an oversimplification. We kind of wrote it that way because we wanted to focus on a two party protocol where there’s two mutually untrusting parties, one is the user and one is the exchange and their swaps happening from the user to The Exchange. If you read our whitepaper, actually, there’s no mention really of order books or how this integration works or what’s actually happening here. You’re just basically saying that users do any swaps with the exchange and so what that actually means in practice is that the user is taking the trade and placing it on the exchanges order book. So how does that happen? That’s really the piece on the integration that we had to really work very hard on to figure out how to actually make that work in practice. The way Arwen works at the protocol. So there’s kind of two worlds. There’s the Arwen protocol which is like what is going on, you know in blockchain messages going back and forth and then there’s the actual like how do you translate it this on to something that’s going on to the exchanges order book. So there’s almost like two worlds. There’s the Arwen world and then there’s translating back into the exchange world. And so we’ve had to solve both problems. If you read our white paper, we really only reveal how to solve the first problem which is the Arwen world and so in the Arwen world what happens is the user will set up an escrow with the exchange she’ll deposit some coins in that escrow and then the exchange will set up an escrow with the user and deposit some coins in that escrow. And then so, you know Bitcoins go into the users escrow deposited by the user like coins go into the exchanges escrow deposited by The Exchange. And then once those are confirmed on the Bitcoin and Litecoin blockchain, you can do instant atomic swaps to do trading of Bitcoin for Litecoin. That’s what the white paper talks about and we go into a lot of detail on like how do you actually build a protocol to achieve those four different types of trading instruments and different types of blockchains. So that’s the Arwen world. And then you have to somehow actually like get this trade done on the exchange. So how do you do that? That’s really like the Arwen go-to-market question that we’ve been working through in the last like year and a half in the different ways of doing that so I can tell you about you know, we’re live right now on KuCoin which is like one of the top exchanges in Asia and I can tell you about our integration there was basically done with the coins that were going into the escrows work with KuCoins. They are KuCoins and they fund those escrows and they enable the trades to be placed on the order book and really when you trace a place to trade on order book you really are just making an API call. However, Arwen cloud is placing a trade on behalf of the user using a call to the API. So anytime a trade comes through the for the Arwen protocol, you know, the Hub receives that and the Arwen protocol translates into a simple API call and places it on the exchange through the API. And that’s the integration with the you know with the way that we did it with KuCoin and we’ve been pursuing that with a variety of different players, but there are other ways to do this too and we’ve been exploring a lot of different ways. I’m not in a position to sort of talk about any of those plans that we have but there are a lot of different ways to achieve this that don’t only involve like taking coins from the exchange and I think that that’s like one of the fun and exciting things that I’ll be able to talk about soon.
Sunny: So in the KuCoin example case, right? So let’s say I’m a user who’s trying to trade some Bitcoin for Litecoin. I want to you know, trade one Bitcoin for 10 Litecoin. Let’s say I send the exchange my you know requests like to put an order in their limit and their order book and now when it’s time for my order to be matched do I have to be online in order to participate in that swap that’s needed to be executed.
Sharon: That’s a good question. So this is really sort of protocol level questions of how Arwen would work. So we have to trading instruments that we support in the paper, at the moment we are live only with one of them which is RFQ. RFQ is really a translation of the idea of an atomic swap into sort of an order type that is familiar to people in the financial market. Right? So RFQ is a very very simple type of protocol. It is not a market order. What it is is that you know, the user says I would like to buy some coin I want to sell some Bitcoin one Bitcoin and then it asks for quote how many litecoins can I get so then it gets that quote and then once it gets that quote it can either execute or not execute on that quote and that is really sort of very very well tied into atomic swaps because the idea of an atomic swap is like Alice has something Bob has something else they agree they’re going to stop to swap these two things atomically. And so that you do the swap fully happens or doesn’t happen. And so the RFQ the quote instrument really lets you say okay this is the amount of coin that we’re going to swap and now let’s do the swap. And so RFQ is something that executes instantly like once the user says let’s do the swap. It happens and we’re done. So there’s this question of like whether it’s live or not is irrelevant because RFQ is really like a taker order on an order book as opposed to a maker or if any if you’re streaming quotes, you’re just taking the quote.
Sunny: It’s kind of like a dealer market. And so I just for context like I guess the most similar thing for people in the crypto space to like analogize it to a sort of the UX of using Shapeshift, so I say hey, I’m going to send some Bitcoin and I want some Litecoin back and then it’s like on the website, you know, they quote prices. I think it updates every like, I don’t know how often but we had Erik Voorhees on the show two weeks ago. There’s no order book here for me to see it sort of just I’m asking the exchange tell me what price and they kind of and then the exchange would have a spread that they’re making.
Sharon: Yeah, that’s right. So it looks a lot like Shapeshift. The real difference is if you’re an Arwen user versus Shapeshift user is that when you actually try to do a Shapeshift you will be sitting there waiting a long time for the Shapeshift to execute. That’s because it’s happening on blockchain. Also at the very beginning of this conversation I mentioned second send protocols in which Alice first ends her asset and then she receives the asset in return. So Shapeshift is a second send protocol, you are first sending your Bitcoin and then you are waiting to receive your Litecoin. But this idea of yes, you you sort of receive your price you agree on the price and we do the swap. That’s what an RFQ is and it fits very nicely in with an atomic swap. So that’s why we started with that. If you read the white paper, we also have limit orders all-or-nothing limit orders in fact are what we have in the in the white paper where you would place an order on the order book and it would either be filled or not filled completely but the cool thing is that no, the user doesn’t have to be online in order for that trade to execute. If you get into like the little details of the protocol what happens is that the execution in Arwen is you just like the final execution is the exchange releasing a random value that we call a pre image or a solution. And so if the user is not online to receive that solution, it’s not a big deal because she doesn’t have to do anything with it. Like she can just get it when she comes online later. And if the exchange doesn’t give it to her and claims that the trade actually happened then she goes into her like you just attacked me. I’m going to do my exit procedure to recover my coins. And so there is no requirement that the user is online in order to sort of see the limit order execute and it’s just because the execution is like the exchange side sending like one value over to the user and that’s it. The user can like be there or not be there when that value’s being sent you could come back online and request that value.
Sunny: And so I assume it’s always in the users incentive that when they come online is it like let’s say there’s a price change between the time that the exchange sends it. Is there any case where the user might want to not like pretend that they never received it and want to actually execute at a at a previous state?
Sharon: Okay. So let me let me just start, the simple answer is like there is no rollbacks you placed an order the trade is done. You can’t just say sorry guys. I want to go back to the previous state that doesn’t happen with the way that Arwen is implemented right now where it’s like a trade by trade settlement. We’re not doing any net settlement where we do a bunch of trades and then you could net out at the end of the day. I will say that we think that’s a really really interesting model for designing protocols in so stay tuned but currently Arwen is not doing that. We are doing trade by trade settlement and you cannot roll back at any point. Think about a limit order when you do limit order you place a limit order and then like you can come back later and change your mind and cancel the limit order. So Arwen does support canceling a limit order but it does not support like just saying like, oh, sorry I didn’t mean to actually do this order. Right. So if you try to cancel a limit order in Arwen what that is is a protocol that you undergo with the exchange to cancel the order and if the exchange sort of like deviates from that protocol you claim that the exchanges attacking you and you go into the recovery procedure. So we do have the ability to cancel orders. We don’t have the ability to roll back orders that have already happened which is what you need for a limit order.
Friederike: Okay, so no rollbacks. So you earlier said that limit orders are all or nothing. Do you have a way of doing partial fill on limit orders?
Sharon: So we haven’t published anything on that at this point. So at the moment we don’t support that it’s currently or All or Nothing but there are a bunch of different ways that we’ve considered actually building out some of that stuff.
Friederike: Can you go into some details on how that would look because I’m super interested in partially filled on atomic world is just because you know, it’s so fascinating.
Sharon: Well, I mean, I guess the best I can do right now is just explain why this is hard and what is so antithetical about this. So maybe that that’s where we can go with that. So, okay. What is an atomic swap? Alice has one Bitcoin, Bob has a hundred Litecoin and they’re going to swap right? That’s what that atomic swap is supposed to do. It’s supposed to fully swap one asset for another asset. And so when you build an atomic swap protocol, what’s comfortable for you is to do a sort of I swap my entire Bitcoin for your full lot of a hundred like coins. But that’s what these protocols are naturally able to do. When you start to get into like a partial fill where like, I have one Bitcoin and I want to buy a hundred litecoins, but I can’t fully fill it so I end up selling half a Bitcoin for 50 litecoins, what you have to do is basically break up that order into essentially into pieces, right? That’s one way you can do it or you can just throw the whole thing out the window and think about other completely new ways of designing protocols that do that which we also have done and are doing but at this point I can’t really explain the techniques that we’re using. You can sort of think I guess at a very high level one way to think about it is you can sort of just write down what the swap was sort of post hoc. Like so we do like a limit order and it partially fills and so, you know, when it partially fills the exchange will say, okay. This is what the partial fill looked like and then there would be some protocol that enforces that if the exchange actually doesn’t give you the assets associated with that partial fill, you could punish them or you could sort of get that asset anyway, but that’s very different from what Arwen is actually doing at the moment. So like looking at Arwen and seeing that protocol is not that easy.
Sunny: Would that work on something like Bitcoin script?
Sharon: It starts to get really fancy when you work with Bitcoin scripts, so generally speaking I think what I would say is like when you think about something like Bitcoin script and these more elaborate sort of partially filled protocols you often need to have a currency pair where one of the currencies is like got a more rich scripting language so it’s more like etherium or Cosmos or something like that that has the ability to write more complex smart contracts. It’s a lot easier to do these types of tricks with Bitcoin when the other side of the trade is not like Litecoin or Bitcoin or something like that.
Sunny: What are your thoughts on like for example comparing something like Arwen to the Interledger protocol where an Interledger kind of make this assumption saying that like maybe the atomicity isn’t that important to this entire system. What they do is just for a reminder for some of the listeners is they use these streaming payments where they say I want to trade Bitcoin for Litecoin. I’ll stream like micro payments to The Exchange and they’ll stream Litecoin micropayments back to me and worst case The Exchange might run away with one Satoshi of mine or something and you know in that case, yeah, you know, I’ll just stop using that exchange and they probably just lost my business how important you think the atomicity is and how do you think about compared to like intellectual solutions?
Sharon: Okay, so I really like the Interledger protocol. I think it’s really cool. And I love that it has this sort of like analogy of everything to like the internet. So there’s this TCP IP analogy and then there’s the BGP analogy which I like a huge BGP person before I started on this whole like sort of second career that I’m in right now. So first of all, I think it’s really cool. But I think there’s a couple of things that we think are really important for the trading use case that are absent from that protocol. So first of all is speed, speed of execution, you don’t want to worry and wait for this long streaming process. And so you said and worst case The Exchange steals one Satoshi for me while if that’s really the case and we’re going to stream one Satoshi at a time like think how long it would take if you’re trading a hundred Bitcoin, huge amounts of money, right? And so if you’re trading huge amounts of money, you don’t want to be sitting there waiting for the streaming thing to do its thing. That’s the first thing and the second thing is that often when you think about trading you are really worried that something breaks down. So if you’re doing a payment and payment doesn’t go through. It’s like not the end of the world. Okay, you couldn’t buy the thing you’re buying right but if you’re doing a big trade, like if you think of a way financial markets work, they’re all these complex mechanisms that allow people to do trades and financial markets without anyone seeing them or without anyone interrupting them because the notion of like interrupting a trade you can actually move the market by interrupting a trade and so using a protocol that has the ability to potentially interrupt a trade or sort of cause it to not completely fill that can actually move the market in a way that you don’t want and so if you want to do is really cleanly I think that atomic swaps are actually the right tool especially when you’re talking about things like it OTC trades are big trades. You don’t want to be sitting there what waiting for something to stream and you don’t want to be sitting there, you know worried that someone’s going to interrupt your trade in the middle, right? Because if you look for example at an OTC trade, like if you do an OC trade and it’s big you’re going to want that trade to fill you don’t want like five percent of it to fill you. Just wasted your time with these people if they’re only going to fill five percent of it, right? So so this notion of like instant and full atomic swap, I think is really important, especially when you’re talking about big trades.
Sunny: And so what about creating multiple orders using the same channel? So can I for example, let’s say I have an escrow with the exchange for, I have an outgoing Bitcoin escrow and I have some incoming Litecoin and Bitcoin cash escrows. So in the limit order model, can I have a concurrent order open on the Litecoin order book and the Bitcoin cash order book or even on the same order book but at different prices but using a single Arwen channel?
Sharon: Yeah. So let’s talk about mixing and matching arbitrates. So there’s a lot of different things you can do. I can set up a Bitcoin escrow and a Litecoin escrow and then I can do many many Bitcoin to Litecoin trades. I can just sit there trading selling Bitcoin and buying Litecoin. I could do that five times and then close my escrows. So that’s the sort of simplest thing I could do. Here’s another thing I could do. I could have a Bitcoin escrow to sell Bitcoin and then I can have a Litecoin escrow and an Ethereum escrow and so I want to buy Litecoin and I want to buy etheorem. So I can use the Bitcoins that I’ve locked in my Bitcoin escrow to buy some Litecoin. Then I go buy some Eth then I go buy some Litecoin again another Litecoin then more Eth, so I can do multiple trades and I compare my escrows with each other in arbitrary ways. Right? So I take my Bitcoin and I buy a bunch of Litecoins with it and then I buy some Eth and then I buy some Bitcoin cash and then whatever else right so that’s all possible in terms of the flexibility of the protocol and allowing multiple trades. The other question was can I have multiple limit orders open at the same time and the answer is yes in the limit order protocol you would be able to do that. You could have a few of them open at the same time. So the only the only problem is like you if you have you know, massive numbers of them it starts to stop scaling. But if you have you know, three or four limit orders at the same time than that will be easily supported by what we do.
Sunny: So unlike traditional lightning channels, they don’t have to be sequential. I could kind of have forks in my I don’t know how to call this, payment channels logical machine where like normally in lightning we have to go like okay, we have these like sequence numbers that were following but here I can execute my Bitcoin cash limit order and my Litecoin limit orders.
Sharon: Right one of them would fill in then the other one would later you could do that. Yeah, there was I mean Arwen and lightning are quite different. There’s I mean, it’s very similar in and like the high-level way but when you look at the mechanics like Litecoin is a much richer protocol. There’s a lot more things that you can do, but we’re also focused on a different use case. It’s a different looking protocol.
Friederike: You just said that lightning and Arwen are very different they also sound very similar in some respects.Would you do a short break down of how they differ, you know, like arwen and multi chain lightning?
Sunny: Specifically for the atomic for the swapping use case of lightning.
Sharon: So protocol wise Arwen does not have a network, lightning does have a network. Arwen is a two party protocol, lightning is a you know, past protocol you have to route through the network. We specifically did not want to have routing through the network because I earlier mentioned that if you interrupt a trade that can be really bad it can move the market so you don’t want to have arbitrary players on the path, you know with the ability to sort of close a channel and interrupt a trade or something in the middle. So that’s the first thing from a tech perspective Arwen does not use SegWit. And so if you look at the protocol, it looks super different because we don’t use SegWit. When you have SegWit you can do a lot of things that you cannot do if you don’t and so we chose that approach because we could support more chains that way, gives us more flexibility on what we could do, you know, and when we were building in 2017, in fact, we were seeing a lot of chains that don’t have the ability to survive malleability attacks on them. So Arwen is sort of ignorant to whether the chain is malleable or not. So that was sort of highly technical pieces of like what what are the differences between them. The other thing is like we think about things like limit orders as part of the protocol. So lightning really is concerned with like movement of value across these paths. So it’s more like a payment use case. So I mean I can go into more and more details. I think in terms of just like being a protocol engineer, the biggest difference is that we don’t have SegWit and so that just changes everything. It just changes the way you build everything. In terms of like thinking about what this protocol does versus what lightning does is like, you know with lightning you’re using it for small payments that move quickly through a network and with Arwen you’re potentially doing big trades that should move just between two parties. So that’s what you know, you end up with a very different looking protocol in that case.
Sunny: How do you do the challenge periods without SegWit because the reason lightning needed SegWit before the relative time locks. How do you avoid the need for the relative time locks in Arwen?
Sharon: Lightning needs SegWit for so many things. I mean I can go into like, you know, so I’ll just answer this really simply like if you have SegWit you can do really cool stuff at the protocol level. If you don’t have SegWit you can basically do nothing and so you have to build this protocol that’s super super simple that survives despite the fact that you can’t do anything. So that’s what Arwen is. Relative time locks versus absolute time locks is if you’re building across blockchain protocol think about time. Okay, so think about time in like different chains that are running by different nodes and different software in different places and different clocks. Right and I’ve actually done a bunch of research on clocks in my other life. So we really want to have absolute time because it’s hard to sort of think about like how chains will evolve when they’re different chains and you’re doing swaps across them. And so the notion of sort of absolute time is actually very appealing because you don’t necessarily know what’s going to happen in the blockchain like one block chain in the other blockchain is the evolved separately. So that’s the approach that we took. But if you think that it’s just time locks that are creating the differences here like no like as someone who’s been designing a SegWit free protocols for a long time. Like if you don’t have SegWit you really are limited in what you can do. SegWit is just so easy. You can do so many things. It’s amazing.
Friederike: This is fascinating but I feel like we’re getting sucked into a hole here. So maybe let’s switch gears and talk about higher level stuff again. So you’re currently integrated into one exchange KuCoin. So how did that relationship form?
Sharon: So it was just an introduction that was made and we had a couple of calls with them and talked to them about the sort of the vision that we had for non-custodial trading and that really resonated with them. And so we just decided that we would start to integrate this product into their platform and it was actually really easy and really smooth. The only two challenges that we are in different time zones. And so there’s like a particular hour of the day where we will talk to each other and also like if someone from KuCoin pings me at any time of day, I will like drop everything I’m doing and make sure I’m talking to them because it’s probably like 11 p.m where they are and 11 am where I am or you know the opposite so that was the real that was the real challenge, but I think the time zone challenge, but that’s fine because if you’re an insomniac it’s no big deal. The really interesting and exciting thing about the partnership was that they really see this idea of like non-custodial trading or self custody as really important and and sort of like that’s the important direction for the industry and that’s sort of how this relationship started. What I wanted to add to that is sort of if you if you look at like what’s going on in Asia and with Asian exchanges, there’s a lot of thought being given to this notion of custody indexes and self custody. I thought it was really interesting for instance when the CEO of coin of liquid was interviewed by TechCrunch and they asked him you know, what is your dex strategy? What are you going to be doing about decentralized exchanges or self custody for trading on your exchange that was asked of him as he was sort of like doing his interview on, you know, closing a like a series a or I don’t remember what funding round it was and so like if you look at like all of these exchanges in Asia, they were they’re all really thinking about this this issue of how do you allow users to self custody assets. And so I think that we just really resonated with what the way they were thinking about this and kind of what’s what’s going on in Asia. And then you know, this is the second segway into a longer conversation about the difference between Arwen and dex’s and how they operate differently in the difference between Arwen and like a pegged approach to trading assets that I’d love to go into but I think what I think is really interesting is that the notion that like even centralized exchanges or sort of thinking about self custody and how you support that and we do see more of that sort of discussed. At least if you look at the media, that’s that’s talking to the Asian exchanges.
Friederike: Why do you think this is a thing that’s big with Asian exchanges. I assume you’ve approached a large number of exchanges to actually integrate with them as well.
Sharon: I mean, I think it’s probably coming from Finance. So the finance dex when it was announced and there’s a lot of you know discussion by CZ on Twitter and like, you know, we’re going to I don’t remember what he said something like we’re going to allow you to self custody and we will disrupt ourselves like you said something about disrupting himself and I don’t think he’s doing by the way but building this dex that Finance has launched is a sort of new way of trading and that would be disruptive to their model as a centralized exchange and I think then all of the other exchanges kind of looked at that and said like what are they doing? And should we be doing this and what does it mean for the industry and that sort of got a lot of attention in Asia from all the exchanges
Sunny: And so when an exchange wants to sort of integrate into the Arwen protocol, so, you know, I installed the Arwen application. Do you have to go sort of custom build into their APIs or do they sort of is there a standard Arwen trading API that exchanges have to integrate into their systems.
Sharon: So we went through a lot of evolution of how we did this and we’ve done it all we thought about all possible ways. We thought about having our own APIs. We thought about using the exchange’s existing API’s, generally speaking, you know, it’s better not to have to have people terminate to your APIs if they don’t have to so I will leave you to guess what we converged to at this point after sort of a lot of thinking about the right design of an API. It’s one of the things that for me was really interesting coming out of Academia is like and I’m saying this, you know, people listening have done startups before and like this is the most obvious thing but like your API is like one of the most important things you could ever design and we’ve put a lot of thought into how this whole thing works with, you know, existing APIs or our own APIs and how to structure this. It’s really like the number one thing you need to be thinking about sort of when you’re building at least something that’s integrated by API.
Friederike: Are there any upcoming Integrations you can talk about?
Sharon: I think the thing that I’m going to talk about today is really our Ethereum testnet launch. So basically I think but I’m not sure I think this might be the first time you can do layer 2 atomic swaps from Ethereum into Bitcoin. I’m pretty sure it’s the only way you can do a layer 2 atomic swap from Ethereum into Bitcoin cash. I don’t think anyone else has even attempted to do that. And so that’s the key thing I want to announce. I want to say that on the back end I was highly unprepared for this podcast actually this morning. I had to run around looking for headphones and stuff and part of the reason for that is because we’ve been working on a whole bunch of other really interesting, you know, go to market items that I’d be very excited to talk about but unfortunately can’t do today.
Friederike: One more business item. So what’s the business model of Arwen like, how do you make money?
Sharon: With Arwen when you set up escrows what’s happening is that you’re getting coins that are locked up for your use in order to trade on an exchange. And so this doesn’t come for free because otherwise we would end up with griefing problems where the user is requesting escrows from The Exchange and they’re just sitting there and she’s not trading and these coins are being locked up and not used by so we charge an escrow fee that’s associated with holding the escrows open for the users. And that’s basically where we make our revenue it comes from that part.
Friederike: How high is the escrow fee?
Sharon: So at the moment it’s pretty low. We’re experimenting with a variety of different business models for the escrow fees ranging from basis points on the escrow to sort of a flat fee on the escrow ranging from having it depend on the amount of time that the escrow is open to having it basically be like you get six hours with this fee of escrow time. So there’s a variety of experiments kind of we’re working on right now with this but at the moment it’s very very low in the sense that it’s just around like one basis point I think per day so very very low and this is just to get people started with this product but there’s a lot of sort of innovation going on on that side as well.
Sunny: So one of the things that you mentioned about sort of the finance kind of system as well is what finance is sort of doing is they’re allowing it currently most dex’s have been pretty limited to using like for example, most dex’s are currently on Ethereum and they’re mostly limited to trading Ether and Yoshi 20 tokens. But as we see more pegging solutions coming into play so, you know, for example in Ethereum we see this TBTC which is using like, you know, it’s a pretty trustworthy. I hate the term decentralize or trustless peg, but I like to use the term pretty trustworthy peg and things like IBC, which is like, you know, what kind of what I work on at Cosmos where we can make it very easy to peg between chains. What is the benefit of settling on an atomic swap rather than doing something similar to 0X and settling on a single state machine and yeah, so, how do you decide how do you compare these?
Sharon: So let me talk a little bit about what a peg is. So everyone listening to this podcast has probably heard of Tether, USCT. USCT is a coin that is tethered to the U.S Dollar and so the idea is one tether should be worth 1 US dollar and so there should be like some US Dollars sitting somewhere and if you take your tether and you go to that place you should be able to get a dollar for that tether. So that’s the idea of a peg, that’s sort of an idea in the tether case that’s the idea that you basically have to trust the issuer of tether to really actually have those dollars there and not be just making that up. So that’s the biggest risk that you have that comes from that type of basically I might call it a trusted peg like a peg in which you have to trust the party that’s issuing Tether. There are other assets that are just like that all over the place in this industry. So for instance BTCB it’s the Binance Bitcoin is essentially a coin issued on the Binance chain that is tethered to bitcoin. So you basically have to trust finance that there’s a Bitcoin available for every BTCB that they issue and so that is sort of like this very simple peg and that comes with pegging risk. Right the risk is that someone gives me a BTCB or someone gives me a Tether and there’s actually no Bitcoin there to back that BTCB there’s no US dollar there to back your Tether. And so that’s sort of like the very simplest level. That’s the issue with pegs. It’s essentially the same risk that you have when you’re trusting a centralized exchange with your assets, right when you trust the centralized exchange with your assets I put my Bitcoin in I do a bunch of trades. I bought some light coins and I’m done trading at the end of the day. I want to withdraw my litecoins but oops the exchange is insolvent. There’s no light coins to withdraw. Same risk with a peg asset. You know, I’ve got my BTCB and then I’m ready to convert it back to Bitcoin and oops there’s no Bitcoin here because the gateway is insolvent, right? So we see these types of assets all over the place. We see them like BTCB as an example. If you look at etoro they have on their exchange they have pegged assets like this they have it even I think for gold. What was the other one Waves.
Sunny: There’s also Rap BTC on ethereum on which is custody by Bitgo mostly right now.
Sharon: Right and then if you look at the Waves platform, they’ve also got this colored coins. They were one of the first to do this they were doing this back in 2017, right? So there’s this like this notion of pegging sort of all over this industry and it makes sense. We have a blockchain we can issue these assets but we can actually tie them to the real assets. So we just like assume that that trust is there and that the real asset, you know, the US dollars really there even though all you have is Tether. But you know, I don’t need to tell the listeners like, you know that there’s all kinds of security issues and risk issues associated with that sort of peg.
Sunny: What about more modern pegs like TBTC where actually, you know, you have a relatively decentralized custodian or in the IBC Cosmos scenario we kind of you know, both chains are running on chain like lines of each other. What about in those cases?
Sharon: So those are the sort of like the old fashioned peg and then there’s the newer peg which has some sort of cross blockchain protocol where let’s say you have your I forget what you would call it in the Cosmos world, but you would have some sort of acid pegged to Bitcoin on the Bitcoin blockchain and the Cosmos blockchain can verify that yes indeed there is something locked on the Bitcoin blockchain that corresponds to this coin that we’ve issued in the Cosmos world. Same idea with TBTC, you would have some Bitcoin locked on the Bitcoin blockchain that really you can validate from the Ethereum blockchain that’s really there. So you have this wrapped Bitcoin are this is a trusted Bitcoin whatever it is called on the Ethereum blockchain. You can verify that there’s a really a Bitcoin on the Bitcoin blockchain that’s there backing that peg. So that’s the other approach. I will in a minute go into sort of the issues that we see with that approach, but I want to say that with Arwen all of that goes away. There is no pegging. We don’t use pegs. Right? So really the main thing about Arwen is when we say cross blockchain atomic Swaps, if you’re swapping Bitcoin for Ethereum you are taking an actual Bitcoin and soft swapping it for an actual Ether. There’s no peg. There’s no sort of like pegging risk associated with any of this it’s just a native swap of the asset. And I think that the real advantage of that is that I don’t have to sit here and explain to you what the pegging risk is or is not, it just doesn’t exist. We don’t have it at all. We just use the native coins and there is no pegging risk. I spent at a little bit of time telling about the pegging risk associated with tethered coins like tether or BTCB. The bottom line is like anytime you have a pegging approach and you have like the raft Bitcoin and the actual Bitcoin if something goes wrong and that actual Bitcoin isn’t there you have to run some procedure to recover from this and there’s all these cases of like well what happens if the real Bitcoin is there what do you do isn’t there a what do you do all sorts of protocols that you have to go through and they’re sort of varying levels of assurance as you can get that you really will get your Bitcoin back. We can go into like individual sort of discussions on each different protocol. But at the end of the day like you have to worry about that when you’re working with a peg. Arwen just never had a peg there is no peg so there’s nothing to discuss here. You’re trading a Bitcoin for an Ether and that’s it. You’re done.
Friederike: So Sharon. Can you tell us about what’s next for Arwen, so in the next year, where would you like to be ?
Sharon: I would like to be the sort of chosen way for people to trade assets, especially for institutional players to trade large blocks of assets. And so we would really be taking advantage of this atomic swap property and the instant property where we’re fulfilling the ability to trade and settle instantly and trustlessly between mutual and trusted parties and we’re really exploring like a large amount of different ways that we can take this to market with the protocols that we have and the additional protocols that we’ve designed as well internally that we haven’t really talked about publicly yet.
Friederike: So I have a last question I think maybe Sunny has another one. So you have spent most of your professional life in academia and have been actively involved or you know involved as the CEO of a start-up for the past two and a half years. How would you say do these two things compared to each other? And would you be returning to Academia?
Sharon: First of all, I’m not going to answer the will you be returning back to Academia question because no matter what answer I give I will lose so you will have to see what I do. But you know the differences and the similarities are it’s very interesting to go from being a professor to being a CEO most people typically go from being a professor to being a CTO which I think is an easier transition then going to being a CEO but I really am a CEO and I do the job of a CEO and it’s quite different from being a researcher or a professor. I do think that there’s a bunch of things in common between academia and startup life. Number one is randomness. In academia you write a paper you spend three years on it gets rejected, never gets published. I can tell you about this has happened to me over and over and over again as an academic, papers I loved, papers that actually for example a paper we wrote that includes the design of a verifiable random function or VRF that is currently used in Libra and in Al Gore and and in a number of other like commercial things and I’ve never been able to publish that damn paper it keeps getting rejected and it’s been like five years, can’t publish this thing. It’s an ITF standard now, but I still can’t publish the damn paper. So, you know that that will happen and you can be in this world. You can work really hard and every sort of deal you try to do fails because something and you just can’t get it done. So this sort of like randomness and living by the roll of the dice I’ve been doing for a while, and so that’s similar. I think some of the really big differences in Academia is just sort of as a researcher, I am a professor and I have run a lab, but there’s still this ability to just like close your door and not talk to anyone for three days and work on something and as a CEO that just goes away. So the ability to just like sit and like think for three days or write for three days is like a massive academic luxury that I don’t have anymore as a CEO. On the other hand, you know. the reason I left Academia was not just that like this paper that I loved couldn’t get published for years and years and years and it drove me crazy which it did, but the sort of like as an academic I spent more and more of my career on more and more applied aspects of my job. So I spent a bunch of time working with the internet engineering task force, standardizing crypto protocols, working on solutions for securing internet protocols. And we sort of kind of like . I got to the point where like I was more excited to go to the ITF then to go to an academic conference and at that point I said to myself like, okay, maybe I need to really be an industry in building something because I’m just more excited about really getting product out into the market now and getting my technology used and so that’s how I ended up in this in this space now, you know after about 10 or 15 years in Academia.
Friederike: Thank you so much Sharon. This was very fascinating thanks for coming on.
Sharon: Thanks guys,