Mike: Today's guest isMacLane Wilkison, the contributor to the Threshold Network and founder ofNuCypher. Threshold Network is offering a decentralized approach to wrappingBitcoin. Currently, there is one primary option for wrapping Bitcoin, meaningtaking Bitcoin and then allowing it to be handled on Ethereum in smartcontracts.

We discussed why that's important andwhat the risks of the current centralized model are and where a Threshold is inits launch and future projections. We touched on the current banking crisis andhow the Mad Rush into Bitcoin will increase the demand to have functionalityfor Bitcoin.

As well as the negative externalconsequences of the current banking crisis and much more. I hope you enjoy thisconversation as much as I did. If you do, please share the conversation. ShareAround The Coin podcast. Like it subscribe very much helps us grow and helps usbring on better guests. Without further ado, here is MacLane Wilkison.

Mike: All right, MacLane,I'm excited to chat with you more. You are running an exciting projectThreshold Network and you've been a part of some other exciting projects in thepast. Maybe just to set the table, can you gimme a quick background as to whatyou're currently working on, why you believe it's exciting, and and we'll gofrom there.

MacLane: Sure. So I am acontributor to Threshold Network. Which is kind of a layer on top of Ethereumthat exposes essentially Threshold cryptography as a primitive to developers.The main application that we're developing right now that we actually justlaunched the initial version of at the end of January is something called tBTC

and this is actually the seconditeration of tBTC the first iteration ran on something called Keith Network,but tBTC is essentially, if you're familiar with Rap, Bitcoin or wbt, Tbdc isessentially that same idea where you have Bitcoin on the Bitcoin blockchain,but you want to use it, in the DeFi ecosystem to lend, to borrow, to do all thethe things that we like to do with DeFi.

But instead of a centralized custodianthat holds onto that Bitcoin for you, like in the case of Wppc, BitGo tBTCreplaces that centralized custodian with a decentralized network which is allthe stakers that are running nodes on, on Threshold. . And so it's a decentralizedpermission list and censorship resistant version of wBTC effectively.

Mike: So why would someoneuse Wrapped Bitcoin? And, and, and maybe if you could explain a little bit moreon who is holding it, who, who's holding the actual Bitcoin WrappedBitcoin?  

MacLane: Sure. So the reasonwhy you would use something like Wrapped Bitcoin or wBTC is, let's say you havea bunch of Bitcoin on Bitcoin blockchain.

You're long Bitcoin you, you likeBitcoin, you wanna hold Bitcoin, but you also want to put that Bitcoin to work.You want to land it out, you want to borrow against it, you want to potentiallyLP it and look at the centralized exchange to earn fees or some sort of yieldon top of, of that Bitcoin.

There's no DeFi ecosystem effectivelyin, in Bitcoin because there's not smart contract system on. But there is avery thriving, decentralized finance ecosystem, primarily in Ethereum and, andother layer twos on top of Ethereum and, and some other alternative alt chains.What wBTC or, or any sort of wrapped Bitcoin allows you to do is it has aBridges, the Bitcoin blockchain to Ethereum to other chains.

So you can effectively move your Bitcointo those ecosystems and then participate in, or yield lend, borrow, et cetera.how Wrapped Bitcoin works, which is currently the largest Bitcoin bridge. It'scentralized. So what you do is you actually send your Bitcoin to a companycalled, who is a, a a custodian.

They hold onto that Bitcoin for you, andthen on the target chain, the chain where you want to move that Bitcoin to,they will issue you a tokenized representation of that Bitcoin. And that's justan ERC 20 token called w b. , and then you can use that w ptc as, as you canany other type of Ethereum token.

You can LP it on curve, you can borrowagainst it. You can, you can lend against it or you can lend it out. And so thethe key piece is that you can always redeem it back. So if you have wBTCactually as a individual retail user, most of us can't. They, they have thisconcept of merchants who, who this.

But you can theoretically redeem aWrapped Bitcoin back to the native Bitcoin on the, the Bitcoin blockchain. Andso essentially just sort of connecting these two very distinct ecosystems andbringing all of this value and collateral that lives on the Bitcoin Blockchainblockchain over to the DeFi ecosystem.

Mike: And how do youpersonally think of the risk involved in that whole process? , where do you,where would you actually draw some significant risk?  

MacLane: Sure. I mean, so firstoff, like, I think BitGo is a, is a, a great company. So these are all justlike in principle risks, but I think we saw a great example of the issues andchallenges and, and problems when something goes wrong with centralizedbridges.

Over the last year, particularly aroundsort of the Alameda and FTX collapse there were multiple centralized bridgeswho operated in a very similar. As Wrapped Bitcoin, where you send your, yourcrypto to a custodian, a very good example, this is Ren btc where you would sendyour Bitcoin to a wallet controlled by a small multisig which turned out to beeffectively controlled by Alameda , unfortunately and they didn't issue thistokenized representation, REM BTC on the Ethereum block.

Obviously what happened when Alameda andFTX collapsed is all of those, essentially they ran out of funding. They nolonger funded the bridge, so they had to turn off additional mints, and it'skind of unclear what's happening to the currently deposited Bitcoin there. Itseems like it's getting sucked into sort of bankruptcy proceedings.

And so there's an argument that it's notthe actual Ren BTC holders that have a claim on the underlying Bitcoin, it'sactually creditors of, of Alameda and potentially f. So that's a very obviousrisk, is like the legal status of this custody Bitcoin is unclear. I think it'svery likely that, I don't know the details, but I assume that Dico has, muchtighter sort of segregation of, of funds and things like that than, than, thanthan Ren BTC does.

So hopefully like in the case of ACObankruptcy or acquire acquisition or something to that effect, , the actualownership claims of, of that underlying Bitcoin would be clear. But I, I, Idon't, that is certainly a risk that people are taking when they, they use WrappedBitcoin or any centralized bridge.

The other concern obviously is justoutright maliciousness. So if you're trusting a custodian, and I think it'sprobably valid to trust Bitco, they're a US corporation. . But theoretically,like if a rogue employee or, or the company itself just decides that they nolonger want to, it, it's the value prop for them.

Just taking that Bitcoin is higher thanthe value prop of continuing to run this bridge. You're essentially trustingthem not to run away with it. And then the other piece which even if you assumethat, these centralized bridges are in good financial shape and they havegenerally a lot more regulatory, a lot, a lot of regulatory exposure.

Mm-hmm. , if you want to use WrappedBitcoin, like it's pretty unlikely that you or I are gonna be able to go Tokoand send them Bitcoin and have them min us wBTC generally the way that it worksis they have the system of merchants who they exclusively work with to do that.And so you and I would have to go to a merchant and do KYC with that merchantand aml.

Compliance with that merchant and beonboarded as a customer. And it's pretty unlikely that, like Vico is gonna beinterested in, having a direct relationship, customer relationship with likeyou and me or another retail investor. They generally only work with a largerinstitutions.

So it's not even generally likeavailable in some cases for like the longer tail of, of crypto holders to, towork with these bridges. . And instead, you have to buy like wBTC on a secondarymarket like curve or a centralized exchange if you wanted to, to actuallyaccess it.

Mike: Interesting. And giventhat the say Bitcoin is in the us, the US government could in theory just comeand shut 'em down and say, Hey, don't send any of the Bitcoin back. And theywould, try,  

MacLane: I assume that that'sgonna comply with, with any, um mm-hmm. new order or regulatory. Request theUnited States governments and most European governments, and, beyond that, whoknows.

And so like that's another thing is likeif you are out of like the, the, if you're not a resident of the West, like ifyou're not in the US or Europe, it's even more unlikely that you're gonna beable to, to do business with some of these centralized bridges like, like wBTC.And so I think that's where the interesting aspect of permission list comes.

if you're in China and you don't have a,an English language, I, ID and you can't onboard with some of these vendors youcan do all that permissionlessly with something like tBTC.  

Mike: So how would thatwork? Yeah, maybe by comparison. So we walked out the example of WrappedBitcoin with the risks there. What would be the analogy now on the permissionside of what you're on?  

MacLane: So, tBTC is, I guess Iroot like the same idea of moving Bitcoin to Ethereum and to other DeFiecosystem.  

Mike: Sorry. I'm sorry, whatis t? What is tbc? Tbdc  

MacLane: Threshold. Yeah,Threshold, essentially. Threshold btc. So that's what we call essentially thetoken is representation of deposited Bitcoin. On Ethereum. Mm-hmm. , it's a,it's ERC 20 token. So tBTC versus wBTC.  

Mike: And so would that bea, a competitive, a competing way to Wrapped Bitcoin effectively offer the samevalue on top of Yeah.  

MacLane: Essentially analternative bridge to Wrapped Bitcoin that is one decentralized. So there's nocentral custodian in the middle that's holding onto all the Bitcoin.

So instead of the Threshold Network,Several hundred stakers who have to bond the native T token for Threshold inorder to run a node. And then the Bitcoin is basically the way tBTC works is ahundred of those Stakers are selected to essentially compose a one wallet onthe Bitcoin side and depositors send Bitcoin to that wallet.

It's cudi across the Threshold Network.And they're minted on the Ethereum side, a tBTC . So even if some of those,stakers, went out of business or decided just went offline and weren'tavailable you're not reliant on, on any single one of them for the the systemto operate and for that Bitcoin to be custody correctly.

And the other piece is it'spermissionless. So you don't need to onboard, with a, a centralized entity as acustomer. You just go and you interact with smart contracts. So if you have youhave a, a self custody wallet on the Bitcoin side. And, and on the Ethereumside, you can do all of this, without the permission of, of anyone.

And then the third piece is that it'scensorship resistant. So there's no, because there's no central, central entitythat's custody in the Bitcoin and minting tBTC there's essentially no way forsomeone to, to be blocked because, they live in the wrong country or, China orsome, some place where, a regulator might, might not want them to have accessto something like Big Go.

Mike: And, and that'sbecause the miners are in living in different countries.  

MacLane: That's because every,from the user perspective, you're just interacting with a smart contract. Soit's an amenable, smart contract. And, you, you don't have to create anaccount. You don't have to register. As long as you have a Bitcoin address, anEthereum address you can use the system.

Mike: Got it. Okay. So yousaid miners bond, native T token. What is, what does that mean?  

MacLane: Yeah, so T is thenative token for Threshold Network. It's an ERC 20 token, and if you want torun one of these tBTC nodes and the tBTC nodes again, like they collectivelycustody the Bitcoin. Mm-hmm. . And they also are responsible for minting thetBTC token on the Ethereum.

If you want to run one of these nodes,you have to stake a certain amount of T tokens. This is essentially like a, acivil resistance mechanism because it basically requires these these nodeoperators, these actors to put skin in the game so that they're economicallyaligned and behaving correctly.

You stake t and then you have to run anode. And the nodes. What they're doing is that they're essentially acting assigners. Mm-hmm. . So, each time a, a deposit wallet is. , a hundred of thosenodes are selected randomly based on stake weight from the network from theentire pool of stakers. And they participate in something called a, adistributed key generation ceremony.

So Dkg. Mm. And that dkg is basicallyhow you create the Bitcoin wallet address that depositors are sending theBitcoin to. Oh, okay. So they participate in the ceremony. There's a hundred ofthese nodes that collectively control any single Bitcoin. . And if a quorum ofthem agree they use something called Threshold signature.

So another acronym TSS, to basicallyspend that Bitcoin. So the only time they would spend the Bitcoin according tothe rules of the protocol is if someone wants to redeem back from tBTC back toNative Bitcoin. So they would go to on the Ethereum side, they would take theirtBTC, they would go to the smart contract, they would.

I wanna redeem this tBTC for nativeBitcoin. Here's my Bitcoin address. And then those nodes would collectivelysign a Bitcoin transaction to transfer the native Bitcoin back from the custodywallet to, whatever the the user's Bitcoin address is that they wanna redeemback to. .  

Mike: Awesome. That was agreat way to explain it. So when you were explaining the bit go scenario,immediately in my head I'm thinking, how would you possibly design the systemto not have this be just in one company, centralized, vulnerable to thecompany's malicious intent mistakes or the government's intervention?

And so tell me if this is the right wayto sort of simply describe it. Is that. You have to do a couple key steps inorder to Wrapped Bitcoin. And the reason you wanna Wrapped Bitcoin is you wantto be able to use the smart contract functionality that Bitcoin itself doesn'thave. Mm-hmm. . So you have to get it into Ethereum land at ERC 20 land, right?

Yep. And so in order to do that, youcreate a wrapped token, which you need to have a depositing address to putBitcoin in. You have to hold that. And so there's. There's some securityconcerns to make sure that's a safe method for holding the Bitcoin. And thenyou have to issue the wrapped Bitcoin, and then you have to be able to gobackwards.

And so the ceremony is, I love the wordjust ceremony, to create a Bitcoin wall. It's amazing. And so the ceremony is agroup of a hundred, no less than a hundred, and then each of them, you need ahundred. And then they all together work somehow to create a Bitcoin address. .Yeah. Is that right?  

MacLane: Yeah. Yeah. So theseso basically you have a distribute key generation that happens every week.

So each week a new wallet is created.Mm-hmm. . So you, the, these nodes participate, they generate a wallet, andthen that wallet is essentially, it's not controlled by any one of them. It'scontrolled by all of those nodes collectively. And then if a majority of themagree they can sign a transac.

Okay, so the 51 of a hundred, this isactually tunable, so it's 51 of a hundred now we could potentially via Dowgovernance change it to, two-thirds, for example, in the future if the systemscales and, and starts to hold quite a significant amount of Bitcoin. Butbasically assume it's just 51 for now.

So an honest majority if 51 of thosehun, of a hundred of those nodes agree that like a redemption, going back fromtBTC to. Is valid. They would check the Ethereum blockchain, verify that theredeemer has basically sent the, the tBTC back to the contract. They would say,yes, this is good. If 51 of a hundred of 'em sign a transaction, that becomesessentially a valid Bitcoin transaction that can be broadcast to the Bitcoinnetwork in in mind.

And yeah, so that currently happensweekly. A new wallet is created on, on a weekly basis. And right now thecurrent state of the. We launched minting from Bitcoin to Tptc at the end ofJanuary, and we're just basically testing that with a relatively small amountof TBL at the moment. And, and then like redemptions will likely get turned onin, in a, in a month or so is sort of the, the rough target for that.

Mike: Okay. Quick. Twoquestions. One, when a Bitcoin wallet is created, you said it's created everyweek. Are is everyone's Bitcoin held in the same wallet during that week, soyou might have a thousand people that all move Bitcoin in that wallet. I, I seeyou shaking your head Yes. That's a simple question.

What about the question of why would anyof these Bitcoin miners or these miners on the Threshold Network how many ofthem are coming back with different answers? Like, are you seeing anythingless? 99% have mm-hmm. , know you, you designed it to have 51, assuming there'slike some mass attack or something.

People get together and try to flip it.Yeah. But, ha have you seen anything less than a hundred? Or what are, what,what's the Correct, yeah, I mean, what's

MacLane: the, so far after,it's, it's brought I would say, but for about a month and a half everything is,it's been working correctly. Obviously like, it's, the TBL right now is, isrelatively low as we just verified that it's stable and everything is workingcorrectly.

But so far. Knock on wood. So good.There, there's essentially like two ways for a node to become either, eithermalicious or just not function correctly. The first is like a node just becomesoutright malicious and tries to collude with all of the other nodes toessentially steal the, the underlying Bitcoin.

Mm-hmm. . So that's obviously bad. So ifthey sign, if the, if the wallet signs any transaction, it's not a validredemption transaction they send it to. some unknown address that's not,that's, that's not good. That's a failure case. And there are some mechanismsthat we can talk about that, that are, that try to minimize that risk,including like slashing.

So if, if something like that happened,all of the nodes on the wallet would get slashed, they would lose their teasstake. And so there's this e economic disincentive to do that. And then there'salso something called coverage pools, which is essentially like an insurancebackstop that. To the degree that it's able to make that wallet and those usersthat were deposited into that wallet hole.

But then the other main way that a nodecould misbehave is not necessarily like outright maliciousness, it's justnon-availability, right? So if, if a node just goes offline because there wasa, a software failure or hardware failure or something, then obviously it's notgonna be around to sign a transaction.

So as long as 51 of a hundred of thenodes are not malicious and online, then the system will behave exactly as it'sintended. So you would need quite a lot of nodes to like simultaneously gooffline further essentially to be like a denial of service. So if you only had40 of the nodes online and for.

strange reasons. 60 of them, were, weredown until 10 more, 11 more came back online. The system would not be able toredeem back to Bitcoin from that wallet. Mm-hmm. . Um, And then there's, thisis probably getting into more detail, but like, there's some fancy, essentiallywallet rotation and sweeping things that happen to move like very old wallets.

So obviously the system is only a monthand a half old right now, but let's fast forward like three. From now if thesystem's holding a lot of Bitcoin and you have a wallet that's like two yearsold, it's possible that some of those stakers that were on a particular walletmight not be around any longer.

So basically there's this, there'sheartbeat mechanism that just sort of checks the, essentially health of aparticular wallet. And if it falls below some Threshold of nodes notresponding, the Bitcoin in that wallet gets swept to essentially a ER or newerwallet. That is, is more healthy.  

Mike: and why would I, whywould a wallet not be healthy?

MacLane: Well, let's say likeyou're a T taker and you're running a node, and then you decide you don't wannabe a T staker anymore, right? You, you, you start on bonding your steak mm-hmm., and you're just like, I, I'm, I'm no longer interested in crypto, or I want,like, sell T for eth or SDC or, or whatever.

But you're just gonna leave the network.There's an un bonding period of 45 days, so you have to just wait this sort ofcool down period. But after that you can withdraw your teas stake andessentially stop running a node. So over a long enough period of time, likeover the period of year, some of the earlier wallets, might have, oh, morestake or churn.

And so we just have this mechanism tobasically prevent essentially any of the wallets from a. Becoming unavailabledue to take or churn.  

Mike: Because the ceremonyto create the wallet, the miners that, that are part of that initial creationof that Bitcoin wallet, they're the only ones that can give that form.

Correct. It's not like new miners comeonline and then they have. The right to authorize old ones. It's only the onesthat were a part of that key generation E. Exactly. Yep. That's interesting.What a good way to design it. What,  

what were you doing before this? Wereyou designing something similar or how, how did you guys, I  

MacLane: mean, I've been incrypto for, for, for quite a long time.

I got into crypto, I think it was 2014if I remember correctly. I went to SF Bitcoin Jazz User Group which is at thislike hacker space called Hacker Dojo in, in, in the Bay Area. and had been likevaguely aware of Bitcoin for like a year or two before that, but hadn't reallydug into it, but then at that point just ended up falling down the rabbit holeand getting super fascinated by, by first Bitcoin.

But then, at the same time, Vitalik wasdoing like the roadshow for, for the ico. And so that was also veryfascinating. And then that initial asset, Bitcoin does user. that I went to,there was I think six people. One was, of course I was there. Michael Ov, who Iended up starting NuCypher, which is like the precursor project to Thresholdalong with Keith.

And he and I ended up starting NuCypherand then he later started Curve Finance, the Disabled Coin Exchange. Mm-hmm. ,one of the founders of Divinity, one of the Zuck, one of the early contributorsto, to cos. So it was like a very small group of people that, turned out to belike, I was very fortunate to like get to interact with a lot of these earlycontributors to, to the ecosystem.

But in retrospect, like a very specialgroup of, of people that it was pretty awesome to, decided to just happen torandomly good this, this meetup. And I'm sure like he went to the equivalentasset, Bitcoin does user group. , it's probably, well, I don't know. We're,we've been in a bear market or quasi bear market for a while, so maybe it's alittle bit smaller, but I'm sure it's significantly more than than six people.

But yeah, after that Michael and I juststarted building a lot of stuff in, in, in crypto, sort of with a focus onprivacy. But we were doing stuff on counterparty and, and mastercoin, whichwere these like layers on top of Bitcoin that tried to add some, some limitedfunctionality to Bitcoin. And then when Ethere.

Launch. We started doing someexperiments there and ultimately ended up starting this project calledNuCypher, which was a data privacy and access control network that usedThreshold cryptography. Basically the type of very similar cryptography towhat's used in, in Threshold. And we ended up building that over the course of,of a few years.

And ultimately that merged with keepinto west Nile t. .  

Mike: And when you sayThreshold is the name of the network, is, is there also a term for likeThreshold?  

MacLane: Yeah, so the,essentially the reason why we call it Threshold Network is because the primarytechnology that powers all of these applications, like tBTC that we talkedabout, so that would be like the distributed key generation Threshold signatures.

That's all like falls under the umbrellaof something called Threshold cryptography. And Threshold cryptography is, is,is very simply. It's the idea that you take some crypto cryptographicprimitive, whether it's like a cryptographic signature or an encryptiondecryption operation, or a key generation, and you split it up across manynodes.

So instead of doing it on, one machine,you split it up across, a hundred, a hundred machines. And hence like theThreshold. So you have a hundred machines, some Threshold number of them haveto essentially cooperate in order for the val for the operation to be. .  

Mike: Interesting.  

And would you call Bitcoin itself aThreshold system? Cuz you need a, you need multiple miners to like validate atransaction?  

MacLane: I guess in a sense Idon't, I don't know that I would describe Bitcoin's. I was described withBitcoin as like a distributed system. Mm-hmm. . And there are some, like aMultisig for example, is like kind of a kind of qua Threshold cryptography,Threshold signatures, like different parts of Bitcoin.

can be Threshold cryptography. Iwouldn't, I'm not sure that I would describe Bitcoin as a itself, as aThreshold cryptography sort of concept. Although, like, I, I don't know. Thereis a sort of an argument there.  

Mike: Yeah, I guess it's abit nomenclature. What are other projects doing something similar? You guyslaunched just a couple months ago.

Is there other alternatives besidesThreshold and the go for wraps, Bitcoin that are, that are really working?  

MacLane: Yeah, so there are afew other. alternatives to or alternative Bitcoin bridges? As far as I'm aware,all of them are essentially centralized in the model of more, more like Renbeat the, the previously existing Ren btc.

So there's there's obviously WrappedBitcoin from Bitcoin, which is sort of the king right now. Mm-hmm. I thinkthere's, like, I, I forget off the top of my head, but I think it's like 2% ofall outstanding Bitcoin sits on the, on the wBTC. There's a few newer projects.Obviously Ren for a time was, was quite large, but now how's sort of gone away?

Post Alameda I believe Avalanche hassomething called BTC B, which is, kind of similar to, to Rapid Bitcoin. There'slike a consortium of of folks custodying the data, or cu sorry, custodying the.. But it's not permissionless. It's not decentralized in the sense that anyonecan, can join that consortium and, and, and operate a node.

And I think there's a few others thatare essentially like Ren clones I think like multi BTC maybe. And I'm surethere's a few others that that I'm not familiar with that maybe are muchsmaller.  

Mike: And

do you think that these approaches. AllowingBitcoin to be functional, say, we'll just take it for granted that people wannause it on Ethereum.

Since the Ethereum is the mostsophisticated smart contract layer, do you think there will be like, likeBitcoin will just dominate the centralized model and then on the decentralizedmodel for wrapping Bitcoin, whether it's Threshold Network or somebody else,they'll just be, they'll just be the best place to get it.

And then there's a, a kind of.Non-linear returns that create, I don't like the word monopoly, but it's asimple way to explain like consolidation in a marketplace. Mm-hmm. , know, ifyou have a marketplace, the largest marketplace tends to have the best prices.They attract more people, the marketplace grows, makes it harder to compete andit's great.

I mean, and there's sometimes downsidesto it, but sometimes it's just is the. Outcome. Yeah. Do you view like therewill just be set, bitco will just win the de the centralized model. You guysare trying to win the decentralized approach and that things will become moreconsolidated even if you have a decentralized approach to it.

MacLane: Yeah. Well, I mean, Ithink there's an argument that it, it's very consolidated now, particularlywith Ren sort of going away where rapid Bitcoin's market share a big bridge,Bitcoin. , extremely high. Probably not, and certainly probably 95 plus percentat this point. I think the Ren experience showed very well why at least Ipersonally would not use any centralized bridge other than the BitGo.

Like if you're gonna use a centralizedbridge, just use bitco, like yeah, don't risk of using some like unregulated,like non-transparent sort of like, yeah, worst version of wBTC effect. At leastlike with Biko, what you've gotten. They've successfully run this bridge for,for several years now.

I would just, if I have to have atrusted relationship and use a trusted party bridge, I would prefer to trustBiko than, some unknown sort of multisig who I have no idea who's on, on, who,who's assigned on that multisig and where the Bitcoin's being cued. . Sothat's, that's one.

And then two, like, I think where adecentralized version of that fits is, and I think actually like what'shappened in this past week with with the, the banking crisis in the US and SVBis actually a very good example of like, why I think it's important thatultimately DeFi moves away from trusted party bridges entirely.

So obviously the demand fordecentralized permissionless bridge right now, There's a ton of demand that Renwas previously capturing that is from people who like, for whatever reason,can't mint and redeem using RAF Bitcoin. So like the long tail of retail userscan't do that directly.

Mm-hmm. . So instead they wouldpreviously use Ren. I think once tBTC turns on redemptions, they'll start toyou as tBTC so that's like the existing market. But I think what happened withSVB near. Collapsing, but like then the deposit is, is also nearly gettingwiped out. And we saw how that kind of pulled in USDC.

So you can almost think of like USDC asessentially like the, the Wrapped Bitcoin of, of dollars of fiat. Mm-hmm. .Mm-hmm . And when it was unclear what was gonna happen to the underlying fiatUSDC had a pretty extreme deep pegging event. Yeah. It's crazy. And like that'sthe risk of. Using these centralized bridges as you're exposed to, regulatoryevents, you're exposed to a lot of what we talked about earlier in the call.

And these things can be censored, right?Like if the US government went to circle tomorrow and said, or maybe the USgovernment, like it's feasible that they could have just said, we're makingevery deposit whole at SVB except for the circle,  

Mike: right? They couldhave,  

MacLane: and so, , then thedepeg is like permanent.

And like maybe there's some sort of, I,I don't know what happens if it would just trade at like the, at a discount orif it would sort of start to desp spiral as people started to redeem. But likethat's, these trusted party bridges are very exposed to that kind of of thing,wouldn't look exactly the same if it happened to a Bitcoin bridge.

But like in principle, the ideas, andthe, the effect is, is very similar. So I think it's important. Like long termthat we just, and that was the reason why I was interested in the space, tobegin with when I went back in 2014 when I went to SF Bitcoin des use group, isthat we can create these like immutable censorship, resistant permissionlesssystems that are essentially unstoppable.

That like no one controls, no one canstop. They just work and they just exist as smart contracts on, on, on theEthereum blockchain or some other chain. , it's transparent how they work.Mm-hmm. . And you don't need permission from anyone to, to interact withthem.  

Mike: What, what do youthink about that? I mean, when you saw U S D C DEG earlier in the week, wereyou like, oh yeah, that's obvious, or were you like, holy shit, this is a verybig deal? What was your emotional reaction to that?  

MacLane: Well, I think on a, ona, an emotional level, it was on a psychological level it was, yeah, a little.I mean, I knew that it, I, I expected that it was going to happen going intothe weekend, especially when, when Coinbase turned off redemptions becauseobviously like with no redemptions, like there's no way to hold the peg.

But it was still like, kind of shocking,to see it, it actually happened because I think I, and a lot of other peopleviewed U S D C from like the three big, like, centralized fiat custody, stablecoins as probably. The most reputable, legitimate, or safest of the three.

And that turned out at least temporarilyto not be the case. Yeah, yeah. And so, so fortunately for, for Circle and forU S D C and saving judgment on whether it's like a, a positive thing overall,but those deposits were, back stopped and made whole. And obviously come Mondaythey turned back redemptions on and, and they returned to the.

But yeah, I think it's, I don't knowwhat's good. I don't know what like, long-term implications that we'll have forU S D C and Circle. I mean, clearly this was a shock to a lot of people and, I,I will see, if circle's able to regain that trust and, and recapture, I thinkthere's been quite a significant amount of redemptions.

But we'll see what, what happens. A lotof the, a lot, I think ironically a lot of that market cap has, has flowed to,to tether But yeah, I think it's, it's okay.

Mike: So, and it's ironicbecause Tether is less transparent, or have they, have they publicly admittedthat they hold less than a hundred percent of the deposit on the balance?

MacLane: I, I'm not sure offthe top of my head if they're under collateralized now, but they have beenunder collateralized in the past. Right. If you remember, like the, with theBitfinex half, like it was explicitly backed by, I believe, like bi X IUsessentially for a while. Mm-hmm. part, partially backed. . So, yeah.

I mean, no credit to Tether. Like Ithink a lot of people expected something bad to happen to Tether Yeah. A longtime ago. And it hasn't. So, that that's, that's according to, to them forholding a peg for quite a long time. And obviously a very adversarialregulatory environment, particularly in the early days when Tether got started,like, I think, U S D C and, and, well not anymore, bsd for, for a while had aclear regulatory framework to work.

Than than Tether did. But yeah, I mean,like, I think it all just goes back to like these things. I, in my opinion, anytrusted party bridge is exposed particularly to like, a real world entity isjust gonna be extremely brittle. And I think the vision for, for DeFi and, forus at tBTC and.

and other, other projects like I thinkliquidity is, is a good example of like a, a, a less censor, stable Coin. Ithink what's interesting and compelling about blockchain is like we don't haveto rely on these sort of brittle intermediaries. And we've just seen over thelast year time and time again, like what happens when we do fdx?

We meet up svb. No, I think it. ,hopefully, like, I think like the optimistic side of me says like, these aregreat examples and we'll start to learn a phenomen and improve and, and buildmore robust systems. That's, that's my hope at least. Yeah.  

Mike: I feel, I have acouple thoughts on this.  

I'm curious to get your feedback.

I, I feel like there's a recognition nowthat free social networks have an implicit cost and that you are the customerand that because you're the customer and you're not paying up upfront, there's., non-obvious price you'll pay later. Right? The social network, TristanHarris, like there's a lot of, there had been a lot of talk about that maybethree to five years ago and mm-hmm.

I feel the same thing as in banking.When I sign up for a bank. It's SVB and I pay them nothing. In fact, they payme to hold my deposits in there. Where, where is the price for that service?And the price you pay is like a, a 1% risk point, 5% risk that theirinvestments are gonna. Default and, and it happens once every thousand banks oronce every 50 years.

It's a rare occurrence, but I thinkpeople, even now on Twitter, I see the rhetoric is like these depositorsthought with 100% certainty they were putting their money in. But if you knewthat this bank was allowed to take the money out and put it some. Anywhereother than U S D in which you deposited, then there, there obviously is a risk.

And so where's the bank that just says,okay, I have $10 million. I wanna put it in a bank. I wanna pay that bank to besecure. It's 200 bucks a month, you have to pay 200 bucks a month for thatservice. It's like then, then the bank can be profitable, then you could beguaranteed. They're gonna, they're gonna keep the money there, that you're notgonna have the default risk.

It seems like it's, it's almost a, afault of the implicit business model inherent in banking itself. And I know theFed wants to keep that cycle going. They want to keep banks moving money. Soit's almost by design. But that to me seems like the root of it in which verylittle discussion gets brought up about,

MacLane: yeah, I mean I thinkthat's a lot of interesting points you brought there.

Like, I guess fundamentally banking.About maturity transformation, like right. Taking short term deposits asliabilities and, and lending those out longer term to, to earn a yield. And Ithink that historically has been very important for just, economic developmentand activity in, in, in this country and others.

But I don't, I think you're right thatmost people. And we, we're, you're definitely right because this is the, thisis the expectation of the vast majority of depositors and like tech startupsand small businesses that we're depositing over the F B I C insured limit at se. Like, they're, I think they're like in principle aware that this ishappening, but they don't fully grok like the implications of that.

Like you just assume like you're pausingyour cash and SVB, it's, it's safe a hundred percent. Like no worries, you'regonna be able to access it whenever you want. , but you know, that turned outto, to very nearly not be the case this past weekend. And it is interest, like,I think what there is a huge amount of demand for something like you describedwhere it's just, it's a, a quote unquote bank that's not, lending it out.

It's not in the business of maturityinformation, it's just taking deposits and potentially charging a fee. I think., there's probably like some resistance, or maybe not after, after the, therecent events, resistance to like char paying for a bank account or likeearning like a negative interest percent, a negative interest rate essentially.

But I think like there's clearly thedemand for something like that. And it's, I think partly the reason why thatdoesn't exist. I believe, if I'm not mistaken, that, that Kaitlyn long's ,company, I think it was like custodian or something like that. They wereessentially, that's what they wanted to do and they, but they got their bankcharter application rejected.

Mm-hmm. . So I think they were justgonna literally just hold deposits and, charge like a negative interest rateor, some, some subscription fee essentially. But the regulator said, no, youcan't do that. It's too. Which is kind of ironic given, given what happenedwith with Sev and now like, increasingly in more banks over the last few days.

Mike: Yeah. That feels likeit should be a, a new a reconsidered idea. Too risky as crazy. I mean, probablythere's some political stuff  

MacLane: there. I think theaspect was that it was like gonna cater to crypto directly or something. Butyeah, very, very ironic. After. After what happened the last few days.  

Mike: Yeah. And there feelslike there's a game theory happening where even if you're at, USDC, you can seeit where they had 3%, I believe it was three out of roughly a hundred billionmaybe, of U S D C and Circle had it in s u. So for that time duration between Ugoes declares bankruptcy and Sunday afternoon the Fed says we're gonna backstopall depositors that time window.

Rationally, the USDC de pegged andmm-hmm. , it seems to me that it's worth, it's, it's not that it's worth 3%less, but that it's worth nothing and that it's, it, it is a race to the bottombecause there's no incentive to stay in U S T C if there's another option that.Is fully back stocked. Is fully deposited.

And it's like, it's like you walk into,you have a choice of two restaurants, right? And there's a hundred peopleoutside each restaurant. One restaurant has enough food for 97. And onerestaurant has enough room for all 100, why go to, why even take the chancethat you're gonna be the last one and not get any food?

It's like, so I, that's how I view it,is like, it would make sense if they, if they, if the Fed said, Hey, sorry,that's like, that's capitalism for you. You guys figure it out. We're not backstopping that. It would've just, I mean, how would it not? And everyone wasjust rushed to get out. And who's buying at that point and price collapsed likeLuna was.

I mean, sort of an example of that wherethey had, it's not like they lost everything, but they just had less than thedepositors had.  

MacLane: Yeah, I think, I thinkyou're right that I'm not sure what would've happened like that would've been,is that if U S D C had lost their 3% or whatever it was, then, then U SCC wouldjust trade it, whatever the, the discount was.

But I don't know. , I'm not sure if, Ithink you're, I think something different could have happened where likeeveryone is in this sort of prisoner's dilemma where like, wait, I need toredeem first. Cause if I redeem now I will get right. $1 of $1. Right. And I'm justgonna try to stick everyone, like the people that redeem after me with thefull, loss.

So there could have been some, I mean,I, I think like it's different than, than Luna because there was like actual.Non exo non endogenous collateral where Luna was like essentially programmed,programmed,  

Mike: maybe not a goodexample.  

MacLane: Yeah. But like, Ithink you could have seen like something maybe not quite as extreme, but like avery similar impact where like everyone's rushing for the exits to redeem andthen like whoever's left is stuck with the full 3.3 billion loss or whatever itwas.

Right. Or like, theoretically more iflike Depo if there had been contagion and, and the other, other banks wheresome of that cash was deposited. Had also gone down.  

Mike: Yeah. Yeah,

it feels like some of these things, while inmy lifetime I have not seen bank runs and collapses, there were something like102 hundred and 70, somewhere in that ballpark of bank failures in the year1930 I believe it was 1933 alone.

Once it, once it does snowball, thenwhat we're talking about becomes just like dominoes. It just is why, why peopleare, are saying this, but why put your money where anywhere other than the mostsecure place possible. And so every massive consolidation happens across theboard. And I, I mean, that does not seem like a good thing for the bankingsystem.

It gives more control and influence tothe federal government to to have oversight into. Those centralized banks, andit, it effectively takes the guardrails off of inflation. And, I mean, are wein that situation? Like there's always a price you pay. You could let all thedepositors at SVB go bankrupt.

That would've sucked. Mm-hmm. for sure,but you're, you're paying the price. Then if you backstop everyone and youprint trillions of dollars to do that, well, you're paying the price tomorrowin that. Now everyone, now there's way more money in circulation. Everyone'smoney is worth. And so everyone that holds U S D DC is the, those are the oneswho all pay the price.

Is that how you see it? I mean, do you,is are we seeing mean middle of this?  

MacLane: Certainly once thebank runs started an SVB, like there's, there's no good options, right? Like,as you said, like ultimately they ended up back stopping deposits and,preventing a lot of startups and small businesses from getting like, wiped outover.

And like I, I think there's been, somechatter on like Twitter and other places saying like, Hey, like as a businessyou need to essentially like diligence very closely like your, where you'redepositing your money, which I mean, in retrospect was, maybe good advice with,with SV V in particular.

But fundamentally, like that's not, ifyou're a startup or a small business, like that's not a good use of your timeto have to, like, that's such. Huge friction and overhead that's likedistracting from whatever your actual business is of like ding, like whereyou're just depositing your, your capital. So that's gonna, like, if that waslike how we went forward and said, okay, these deposits got wiped out, that'scapitalism going forward, everyone just diligence your bank, like that's just ahuge amount of economic friction that you're introducing to essentiallyeveryone.

And I think you're right that, likeeveryone just said, I'm not gonna do that. I'm just going to withdraweverything and put it in. Chase, Wells Fargo, bank of America, wherever. Iknow, like for, with full certainty, like the government's gonna definitelybackstop that. That was like sort of the, the one option.

And then the other option is what endedup happening where they did backstop deposits. And I, I think effectively theway that that happened was they basically, obviously explicitly backstopdeposits, fdb and, and, and s. But they also I think, are allowing most of theother banks are in a very similar situation where they're underwater on liketheir long term government bonds and mortgages.

And now the government's saying that youcan borrow against the nominal full value of those of those long termsecurities will lend, will end the end against that as if it was. Trading at,par even though it's fully underwater, so that there's this like sort of likesteal quantitative easing that just happened effectively with that.

And yeah, I guess the risk there is likethis could, obviously work against the, the, the fed's goals of, of trying tobring down inflation and sort of, cancel out the, the efforts that they,they've been doing there so far.  

Mike: Do,  

do you see an inevitable conflict thatthe Fed will recognize? Crypto Bitcoin, maybe in particular as like the targetbecause everyone. When they recognize that there is an insane amount of moneybeing printed, and they have options, they don't have to hold it in u s D, theycould hold it in Bitcoin and they could own it. And so they're primarilyconcerned about two things, the security of the deposits, which naturally theyhave some concern over, and then the inflation, the, the value of the actualcurrent, the underlying currency.

If people start really moving toBitcoin, I mean they, the government even stopped in the resale or thebankruptcy proceedings with Signature. They said in Silver Gate, you can't,whoever acquires this business, can't operate the crypto aspect of it, whichwas like, that's their main value proposition.

That's like what, I think of thesebusinesses as being specifically catered towards crypto companies. Mm-hmm. ,does that have a, the obvious implication would. Okay. The government isrecognizing and they're putting they're starting to block the exits, from U sD, it's a btc, but maybe are there other externalities here?

Like are there large crypto companiesthat use banks like. and they would start to fall. I mean, I think of U S D Cas a crypto company, cryptocurrency, but it's really not. It's, it's just a,like you say, it's wrapped. Mm-hmm. , what are your, what are your thoughts? Doyou think there are unforeseen negative externalities if these banks are justnot allowed to touch crypto at all?

The obvious would be, it's really hardfor me to move money from SD into btc, but I think like, what else comes ofthat?  

MacLane: Yeah, I. , it'scertainly interesting that like, effectively over the course of a couple weeks,like the two like explicitly crypto friendly banks signature and Silver Gate afew weeks before are now gone.

I don't know that SVB was, known forbeing as like sort of crypto friendly as, as those two, but they were, they diddefinitely bank a, a decent number of crypto companies. And so those optionsare, are now gone. It's historically not been easy for, for crypto projects andcrypto companies to, to get banking.

Yeah. Probably not gonna be any easiergoing forward. But the other interesting thing that I think has happened thelast few days is like, maybe for one of the first times in its existence, we'veactually seen well, that's maybe not true, but like, I think a very stark. Ofwhat happened to Bitcoin and to a lesser degree, some of the other crypto coinsthe last few weeks is in response to this essentially monetary deba de basementthat happened when the Fed backs up to all these deposits and said banks canborrow against the nominal value of their long-term Lilia long-term assets.

We saw like Bitcoin very explicitly likerise in, in price and in value as a response to that, which is. kind offundamentally what, what Bitcoin is, right? It's like a hedge against, monetarydebasement. Although like the last few years it's, it's traded much more inline with like tech stocks and, and other mm-hmm.

Risk assets. So I think that was, thatwas an interesting that was like an interesting side effect of, of, of whathappened in the last few days. Yeah. Yeah. I don't think  

Mike: up until,  

MacLane: it'd be interesting ifthat continues.  

Mike: I, I think you'reright that historically it has been looked at as just another asset class andnot any. Alternative to escape inflation. But it feels different now. It feelslike with bank failures and really significant bank failures and the threat ofmore bank failures and the massive amount of printing happening, that people, Ithink before they're like, oh, bread's gonna be, $6 instead of $4. Oh, gas ismore expensive.

I could bitch and moan, but you know,I'm not doing too much differently. There's a certain like amount of. Kineticenergy that you, or static energy, static friction, you have to overcome. Andit feels like this is the kind of thing that could do that for better or forworse. I, I don't wanna say it's good or bad, but it just, it is what it is.

MacLane: Yeah, yeah, I mean, I,I, I, I try to be, I'm like a technologist essentially, and, and very like,optimistic about the future, I think by, by nature. So like, my hope is that, ,all these bad things that happened the last year we, we learn the correctthings from them. So like we learn that we should build robust, decentralizedpermissionless non or censorship resistant primitives and not rely on the sortof like things that brand themselves as DeFi when they actually aren't.

Hopefully that's like the, the learningand the takeaway that. , we as like a community take from, from all of theseevents.

Mike: It has to be, I mean,it's not gonna be unanimous. Some people won't pay attention or they'll forget,or they'll be, biased by greed or something else. But the vast majority ofpeople witness what's going on.

Either they lost directly or they knowsomeone, or they just are watching them sidelines. So those, those lessons are,are absolutely penetrating the, the psyches of people. So I that's, that'salways the plus sides, like FTX collapse. Oh, that's sad. That's a tragedy.Mm-hmm. It is. But we also learn from it.

It's like, do you wanna get sick? No.But when you get sick, your immune system gets stronger. So I, I'm like there,there's always some price you have to pay to be alive and to do things. So Iview it's better to, it's better to get like scratched and bruised andoccasionally break something than to like get something that just takes you outcompletely.

That's my philosophy. Um mm-hmm. , rightBefore we wrap up,

Iwanna make sure, so a Threshold, you guys have this this t Coin right?Threshold Coin. Is that the, yeah. Is that, is that the method for structuring.Monetary growth of the projects. I mean, do you look at this as like, okay, Iwanna build this. So our developers who own TCO become wealthy for all theirhard work by the increased value of, of the Coin. Is that like the structure offinances you look at for the project?  

MacLane: I mean, I think what Ithink the primary goal is for this, like I think it's very important that adecentralized Bitcoin bridge exists. Like I think it would be, we would'vefailed if. Five years from now, everyone's still using Wrapped Bitcoin or someequivalent trusted party bridge.

And I think the role of t of the T tokenis to make that sustainable. So obviously, like you need some sort of economicalignment so that you ensure that these nodes are behaving correctly andthey're not running off with Bitcoin. And that's where, the, the tee tokencomes in. So the way that the bridge works there's essentially a bridge fee.

So every time someone crosses, they,they met tBTC or they're reading back for native Bitcoin. The network takes asmall percentage of that. So right now it's 0.2%. This is ultimately like aGovernable parameter, so the daab could vote to adjust that rate. Mm-hmm. , uh,up or down. Um, but it is important that like, you know, I think this is likeone of the core tenants of crypto is like, we wanna align incentives. We don'twant people to just do something out of like altruism because like, ultimately,like somewhere along the line, maybe that's going to fail.

So you need the incentives to be alignedcorrectly. Like this was like the sort of core innovation of Bitcoin with proofof work is like how you do that to solve the double spend problem. Um, andthat's, you know, in a somewhat of a similar sense, like aligning thoseincentives. So everyone who is an independent economic actor that's involved inthe network is incentivized to do the correct thing according to the protocolrules.

That's where like you can do someinteresting things with, um, you know, with, with Yoshi 20 tokens and othertokens.  

Mike: Got it. To, so whenyou think of like designing this, it's not, somebody shouldn't look at the teatoken and be like, I wanna buy this because I think it's. Project, and it'ssomething that would grow in value.

It's, it's not that, it's more you makemoney by being a miner.

MacLane: The, the function of Ttoken is, is primarily to operate a node and essentially do allow you to dowork for the network. Um, and you always get compensated for that work, um,through fees. And, and then the second is, uh, governance over the Dow and, andthe system itself.

So there are a set of governableparameters like the bridge fee and a few other. Where token holders are able toessentially use their, um, their tokens to vote on on mm-hmm. any parameterchanges or, or modifications to the system.

Mike: Okay. So it would bemore like miners make t tokens and then they would trade it right away forBitcoin and use that as the, use some other method of stored value.

This is just like a t uh, or they,  

MacLane: or they add it totheir steak, you know? Mm-hmm. , and they just have, um, they get, they,they're selected more often, essentially for, you know, for a wallet.  

Mike: Gotcha. Yeah, there'ssome benefits to it. Interesting. I wanted to touch on that, and I know wedidn't get to it earlier. Uh, I love our conversation, MacLane.

We, we, we tackled, I, I think weobviously spent a lot of time talking about threshold, but I feel like it wasreally useful to describe what you guys are doing and. not for the purpose ofjust promoting your project, but for the purpose of understanding now thatthere's a lot of economic pressure to move into Bitcoin.

What do you do when you're in there? Canyou put your money to use mm-hmm. and kind of mapping out these two centralizedand then decentralized with, uh, threshold projects. It was really useful,really interesting, and I hope people dive into it and I wish you guys nothingbut success. So, uh, hope to have you back on today.

MacLane: Thank you, Mike. Yeah,it was a great conversation.  

Mike: All right. Cheers.

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