Some Thoughts on ISPOs

hi everybody this is charles hoskinson broadcasting live from warm sunny colorado always warm always sunny sometimes colorado so today is november 29th 2021 and i wanted to do a little bit of a whiteboard video i haven't done one of these in a long time and talk to you guys a bit about some things that are occurring on cardano so first off we we have a lot of people running around and who are saying oh it's a ghost chain nothing's going on rah-rah-rah and actually if you go to this interesting website let me just bring it up here in a second so let me share my screen share screen there we go okay so cardano cube it's right here and i didn't mean to do that [Music] stream guard there we go all right so cardano cube if you take a look at this right here you have a whole bunch of different things that are launching on cardano so you have like space babes and ship and husky token and all these swaps and so forth and you take a look at explore projects and all kinds of projects here's kind of the ecosystem map and these are just some things that are known and people are building they actually reach out to us like for example we've been working a little bit with the sunday swap team because we were curious about what could be done to optimize some of their smart contracts and we found ways by just reducing the usage of higher order functions and by doing some clever things with strict and sometimes lazy evaluation we were able to reduce the size by 35 percent of the memory consumption by about the same really exciting stuff but there was an article recently about meld right here and if you take a look at meld you'll see ispo 1 billion emerging use case for cardona crypto fundraising so it says nearly 40 000 participants take nearly 620 million ada as part of elds melds first ever initial stick pool offering which concluded october 27th and then it kind of interviews the ceo and everything and they're going to make a bunch of money basically do this so what the hell is an ispo well okay we don't have an official definition but the one i understand is basically that you have a stake pool operator so they register a stake pool and normally what happens is that somebody is going to delegate to the stake pool operator okay and then what happens is that person dot dot dot dot and all the other people that delegate to them are basically working together and this increases their percentage chance of getting the right to make a block okay and basically if they have the right they have to do it if they do it then the cardano blockchain will distribute some rewards to each of the people who delegated and then the staple operator gets a fee basically for assisting in the construction of the work okay and that's a pretty established model and we've been doing this since shelley as an ecosystem and there are over 3 000 staple operators so and ispo says well wait a minute here here's what we're going to do we're we're going to basically say we're gonna run a pool and you delegate to us and i'll use a different color how about purple you delegate to us and instead and we'll have a hundred percent fee or something like that some amount of fee maybe a hundred percent and we're going to keep the data that's made so some fee that's large and we're going to keep the ada and then what's going to happen is you're going to get tokens back for that so it's kind of a swap but the difference here is that the underlying ada that's possessed by the people delegating that ada is not lost it doesn't go anywhere it's not an ico where you send a cryptocurrency to an address and receive a token back you basically just bet on a stake pool you keep your delegation preference there for a while you get some sort of cryptographic receipt and then you get your data back okay so that's what i've been able to glean for ispos now there's a lot of debates whether these are good for small stake pools or not and there's an interesting regulatory question that's behind it so some people say well this is not a securities offering because there's no value exchange you're basically getting the other token without necessarily transferring value that doesn't necessarily mean it's not a problem in fact if you take a look at this right here it's an article from august 21st 2018 it talks about air drops and enforcement actions against air drops so the idea there is under certain circumstances however a bona fide gift of securities is not deemed to involve the offer of the sale of those securities and under the no sale theory the registration requirement for security laws do not apply to the purported gift the sec would argue differently okay so when we take a look at a case of airdrops there could be an argument made that an ispo could still constitute a securities offering especially if there's a desire to create project capital to finance the development of that project okay and another thing that's happened right around the same time is that the infrastructure bill got passed and the infrastructure bill has a crypto broker reporting requirement so basically the bill says that you have to report a litany of information about the people who delegate to you and if you don't report that information there could be consequences with the irs including fines potentially criminal charges and you see another thing right here it says another provision opposed by the crypto issue industry essentially requires recipients of transactions over ten thousand dollars to verify the sender's personal information and record his or her social security number the nature of the transaction under information report the transaction the government within 15 days so if you are doing this and you receive more than ten thousand dollars worth of tokens through an ispo maybe you actually have to report the social security number of meld whatever the that is who knows i don't i don't know so there's all kinds of madness that's in this infrastructure bill it was never designed to actually be usable so what this does do is it opens up an interesting innovation because i don't really get involved on the fundraising side of these things i i'm an infrastructure guy and i'm a technology company and we like seeing all kinds of creativity occur and in some jurisdictions you're allowed to be creative sweden you're allowed to be creative switzerland you're allowed to be creative singapore you're allowed to be creative in other jurisdictions regulation is very unclear so what a lot of people are doing is they're ring fencing the united states we saw this for example with etoro they said all right we have all this staking going on we're pretty comfortable with ada we don't think there's an issue there but hey staking ada maybe that looks like what coinbase was trying to do with your tokens and we're we're doing all this stuff so all that stuff that offers yield or we're just going to take a step back from it because we don't know we don't know where the regulations sit who who knows and we'll just wait it out because it's a small part of our business we don't take the risk these types of things so what's going to end up happening because of the infrastructure bill and because of innovations the ispo model air drops other things like that and reporting requirements is that you kind of have to create a u.s standard under u.s law and then you have to create a standard for the rest of the world it's very sad that this is where we're at but unfortunately that's what u.s regulators are pushing us towards unless legislation reverses that and hopefully we can get that done and a lot of people are starting to set up a lot of lobbying and bills are going to be dropping hopefully to harmonize these two things but if they don't we have something called sips so here's the sip repo you see cardano foundation it's their repository and the cip and we have from one all the way up to 30 and actually we've just pushed some more sips that are specifically related to plutus and some are community-led some are led by our engineers like for example sip 30 is a community that led one and that involves a dap connector for browser based wallets and i think sip 13 is the one that we proposed for let's hear proposed uri scheme for a to transfer and this was written by sebastian actually maybe it's sip 19 is the one a structure of addresses in cardano and the shelley era i'll have to look it up maybe 21 but there's one actually for magic links in cardano all right so anyway what we're going to do is write a sip and the sip is going to be for an optional delegation payload so sip x we don't know what number it'll be and basically it's an optional delegation payload so if you're a stake pull operator you have cryptographic credentials which means you have a notion of a public key so what you can do is you can do the following as part of your delegation your bob to let's say alice's stake pool you can take her public key and then you can encrypt a did okay and you can send that did as metadata in the delegation transaction okay so you have the transaction and then you have some metadata with it and basically what happens is that that metadata can only be decrypted by the person with the corresponding private key which is alice so it's kind of a bit message idea alice's private key and then she can look at that did and then she can whoever has authenticated that did look at the kyc information now this accomplishes two things one is that if you want to do an ispo what you can say is unless you include a did that proves you're not us you're not under u.s jurisdiction and somebody has checked that you don't get any tokens so that's one way that you actually can offshore an ispo through a delegation transaction and it's self-serving basically people have to have a did in the metadata and if they don't have it doesn't have that information okay so you can get very rich customer profiles but actually it preserves privacy pretty well because if it's encrypted did the only people who can look at that did would be basically the stake pool operator and you also include some metadata giving authorization for some unblinding because just because you have a did doesn't necessarily mean you could look at the kyc information so you could look at kyc providers like accument and you can include a passphrase or something that gives them the authorization to unblind some of the data that's associated with it so you have two layers of protection you have the encryption of the dead and for whatever reason if those keys are compromised you still could use a did alias and that alias would only be unblinded if the passphrase is given or something like that so you can have multi layers of protection so we're going to write some sort of sip for this because at the moment this is the only way to com for u.

s people to comply with the current infrastructure bill regulation i don't it i don't approve of it but it is what it is and this is why we lobbied so hard we called dozens of senators we fought very hard for these things and the good news is because we future-proof the design of cardano it's actually fairly straightforward on how you would create an opt-in system okay so you can optionally put a did into the metadata encrypt it so that only the stake pull operator can see it and create an unblinding process with the kyc entity so there's some degree of privacy there we're going to explore these dynamics and try to think about these things unfortunately that only solves the problem of the ispo it does not solve the issue of full compliance with the infrastructure bill because basically every single delegator has to provide this information for the stake pool operator to have an audit log to prove to the u.s regulator that they actually have collected kyc information on all u.s citizens it's not possible to do that and there's no way to design cardno to force this on the user without hyper centralization of the system so in other words no cryptocurrency ethereum two polka dot tazos algorand cardano that uses some notion of delegation staking can be in compliance with the infrastructure bill as written even if we have an optional metadata field like this ispos if your goal is to have a regulated an exempt offshore offering a reg ass for these things it does appear that the optional method can do it because what you can do so you only get tokens if you include a valid did and you can go through a registration step like that and you can actually make it pretty easy to do with an identity center so a lot of fundraising innovation can be done here but unfortunately under current u.s law it does it's just not clear everything's very milky so the good news is that we're going to try real hard to undo the damage that the infrastructure bill has done to our infantry which is catastrophic and by the way these reporting requirements go beyond just stake pools under a cursor reading of their definition of broker if you run a full node because full nodes process and validate transactions technically if you read it in a certain way all full nodes of every cryptocurrency in the entire industry including bitcoin full nodes have a reporting requirement to report information on every transaction that they process every single one and there might even be a criminal component with this because you may for bitcoin transactions that are larger than ten thousand dollars crypto transactions larger than ten thousand dollars have to report the social security number of the sender as an intermediary and if you can't do that then basically you've committed a crime under the infrastructure bill this provision that was put in that's what they gave us in the united states it's it's absurd it's absolutely absurd and horrible so we can innovate to allow ring fencing of an opt-in system and make it optional and we're going to write this spec as a cip and include it and i think it'll enable offshore ispos and it'd be a real cool thing to do yeah but we can't really do anything to solve the infrastructure bill problem it's a ubiquitous issue for our entire industry and devastating if it's read in the draconian way the good news is that we're going to try real hard to try to undo it and there's a very good probability that there's bipartisan support to do that take a few months to work its way through but nothing takes effect until 2023 and the irs has indicated that they probably won't have a strict interpretation of the stupid draconian law that's that's in there but it is what it is us but i i did want to make this video to talk a little bit about how you can merge standards optional stuff innovations and fundraising and technology in a way that kind of allows you to have your cake and eat it too so this idea of doing an ispo is very innovative but buyer beware it probably is because the tokens issued are going to be used for project capital there's a good probability that that probably can be used as a argued under the howie test that it's a securities offering unless the product is completely finished and usable from day one in which case it's a little bit more debatable but the the good news is that many jurisdictions will still let you do that or don't care the problem the u.s jurisdiction probably does and if that's the case you need some way of distinguishing u.

s from non-u.s participants and layering things like our metadata standard dids kyc and using clever applications of cryptography you can have a situation that when you delegate to somebody a payload goes to that state cool operator or is visible to that stateful operator and then they basically can decrypt it what's nice is that this is actually something because delegation transactions are on the blockchain you don't actually have to send them to anybody there's no notion of an ip address because delegating the delegatee the stake pool can actually just parse the blockchain and decrypt the encrypted payloads collect all of them parse those if they're written in a standard way and then glean whatever information they need to glean out of that by the way this goes beyond regulatory compliance this can also include sweepstakes addresses to send nfts to other things like for example subscribe to our newsletter you could encrypt an email address inside your metadata payload and if when they decrypt that they can actually parse that and and send it to it so any type of opt-in signing a hash for example so that like signing a contractual relationship with a particular stake pool operator these types of things so i think there's a great use case of having an optional metadata flag that you can encrypt and saturate and then post in your transaction in order to to receive some relationship with the stake pool operator and i think that's a way of bringing the ispos into at least a ring fence around the united states until the regulatory clarity has come it it's frustrating at times i have to admit we're out here trying to innovate we're trying to build and it just sometimes feels like people who don't really know what's going on have a lot of say or things we do but remember the pioneers of the past were dealing with an internet that they had the national science foundation acceptable use policy that forbade e-commerce until 1992.