Gavin Birch - Compliance Is Re-intermediation

So yeah, you probably heard this a lot. Don't trust verify. We still say that, right? Quite a bit now. Um, you know, everyone can verify payroll.

Um, so yeah, I'm I'm building Armada. uh Armada's pluggable asset privacy for Ethereum. So yeah, compliance is an import is like an important um design problem um if we're going to be building for a a you know for something that's compatible with the world we actually live in. Um so yeah, we need to we need to like I think we need to elegant designs to balance these if we're going to achieve meaningful adoption for real real organizations. We have a unique value proposition, right?

Um, in this space, there's a reason we're building with this technology. There's like, you know, we have like fast uh we have fast ways of doing things, fast databases and everything, but you know, we decided to build we decided to go on hard mode, right? Um and and that's because building what we're building with like decentralization uh it's it's it offers this unique value proposition um that that only you can only really get from our technology right uh in our space not specifically our motto but like Ethereum you know uh it's it's underpinned by the fact that it's neutral right you just can't get that from from anything else everything else has some sort of like somebody else is controlling it Right. Um, so yeah, like I said, we need to we need like elegant designs uh to balance the the needs of the real like the world that we live in and uh uh you know what we need to achieve meaningful adoption without like sacrificing these unique properties, right? Because um you know there's a reason this tech makes sense, right?

It's for people who want the freedom to associate uh and transact with each other without someone getting in between us. uh hell yeah we want fast cheap transactions but not at the cost of having intermediaries. So disintermediation is literally the point. But yeah, it's been a struggle for a long time, right? Like even though this is like these are our important values.

Um if you're like me, you joined this for the long game. Uh you know to make long-term bets and you know we're all doing that in our in different ways, right? Whether you're putting you're investing your money uh or whether you're investing your time and attention building things. Uh, but the short game has been loud and for a long time. And I think, you know, I realized this the other day.

It kind of feels like we're standing in the casino with with picks and axes and uh irritated that nobody's buying them from us. So, um, but there has been some like meaningful adoption, right? um places with monetary or like banking dysfunction, they've been able to use uh cryptos to be able to do like like you know to get incredible freedom. I've talked to people who've literally experienced this. Uh so that's like important but like still it's you know relative to the economic activity that happens in the world is a very small amount of it.

Um, same thing for privacy. Like there has been some privacy demand. Uh, you know, we but it's it's featured largecale theft and and you know, we've had fearful reactions and and you know, as a result, there not only Yeah. Yeah. There just aren't really a lot of good asset privacy solutions out there.

There are very few actually, even though there is actually some demand. Um but yeah, overall just like not a lot of momentum for our space, right? Uh but and you know, if you're like me, you've been hearing adoption is near and personally I've been hearing this for like 10 years. Uh but you know what's interesting is that um actually it might be true. It might have been uh kind of near all along.

Yeah, actually uh have you heard of Paul Brody? He's he's Ernston Young. He's been in the space for a long time. Um, and uh, you know, there's this uh, you know, he he's been interviewed by Bankless. I think it was in 2020.

I've got quotes from 2020 here. And at that point, I think he, you know, those quotes were three three years old. Um, and this came from an article that I wrote. This was our privacy thesis back in 2023. Um, this idea that actually like adoption's been near all along.

is just missing privacy. And and there's like actually a really good reason for that. And I'm just going to read this right off here. It's, you know, business contracts are complicated and expensive to track. And since business contracts aren't compatible with the business logic, transactions cost about 100 bucks each and take days to settle.

And that's primarily because verification can't be automated. Uh so this is why smart contracts are really attractive because they can secure this almost instantly and for pennies. uh you know and then their business logic is totally programmable and composable uh across you know independent enterprises which means it's compatible with others as well. So why not, you know, like why not why isn't why isn't it taken off still? Like like I said, it's about the privacy uh that's missing because you know public chains expose counterparties timing and relationships.

Um the deals that the they negotiate like enterprises negotiate are like the most secret information that they have. So no serious or will use uh crypto rails without privacy. Um so yeah this was a quote from yeah back from 2020. they want to execute them on neutral distributed public infrastructure just like the internet. Uh but yeah, enterprises are very strategic and they want privacy for their transactions.

So that's something they won't compromise on even though you've got that 10x 100x improvement. Uh that's enough for switching costs, but it's not enough if you kind of give up like that really important strategic information. Uh but yeah, I think things are changing now. Um, you know, there's some startling statistics about um, stable coins usage. It's really going up and it's really going up fast.

And, you know, I think that's because they want neutrality. Uh, and this is the thing that Ethereum offers. You know, we've seen a lot of traction for Salana, but I think Salana thrived under conditions that uh, the short game conditions, right? uh a lot of people just betting on tokens and how that value might change without their inherent worth. Um so yeah uh they had a lot of other things to worry about besides uh you know whether it was decentralized uh how secure it was and especially like privacy right uh whether you're exposed on chain it doesn't really matter if your token is going to go to zero in like the next 10 minutes so you know I think things are changing now like I think that the value of the underlying infrastructure the the neutrality of it is is actually really important for institutions and It's because like uh institutions have a huge burden as money transmitters.

They have to they have all these compliance regulations and it's uh it's really expensive. I've heard it's actually their biggest expense. It's paying people to to handle compliance. Uh and you know that would be good I guess in a sense because it's a mode. Uh not just anyone can jump into the game because they have to handle the you know the compliance costs.

But I think at this point it's apparent that the costs are outweighing the value of a moat. So you know because the costs keep increasing and you know why is it so expensive, right? Um and that's because compliance is is always changing and it's context dependent. So it's hard to like make a system and then have to keep changing it all the time, especially if you're a big company. Uh so nobody really wants to own that.

No one wants to no one wants that burden. And if you use public uh decentralized infrastructure then uh you're you know that's what you're using to transmit the money now. So it kind of shifts that burden. Um but yeah I think that's also why uh if you try to put that compliance into the privacy primitive itself I think that's why it'll fail at scale. It just doesn't really make sense because everyone has different compliance needs and they're all yeah they're always changing and so how you keep up with that at the primitive uh just yeah I don't think it's going to work.

Um yeah you have like fragmentation right because you can't have you can't have a policy like a compliance policy for each shielded pool. uh it's hard enough to get uh the right amount of usage for one shielded pool, let alone one for each policy. So you end up with this fragmentation um these these small pools, right, that just really offer weak privacy. And so that also leads to weak network effects. People aren't going to use them.

Uh and then you know that leads to even worse privacy. So I I think they can't they can't get what they need to take off. So you end up with like probably one pool um if you have it at the pool level. So yeah, we've seen this um we've seen you know and maybe instead of calling it compliance like as a policy maybe we should think of this as discretion because somebody's got to decide right like who gets privacy and who doesn't and like you know everything around it who gets to participate. uh if you have that discretion like right inside the primitive like I said it's it's just fra it's too rigid it's fragile uh things change on the outside but you've got a you know a protocol that's not updating so it doesn't actually handle what your needs are.

Um, one of the reactions is to have gatekeepers, right? Uh, it's a pretty, uh, typical sort of solution, right? We've got a we've got a problem, we're not sure how to deal with it. Well, we'll just give someone some sort of special power. So, you know, somebody gets to decide whether you get privacy or not and whether you keep it.

And then you can also put it at the edges, which I think it makes a makes a lot more sense. That's what we've done. um you know we think it should be up to the the people who are offering the service or or the applica or created the application to decide uh you know what customers they want to serve and how they want to serve them. Um but yeah knowing where the gatekeeper is is really important. We see this with like key management stuff uh like in other ways like where your funds themselves are at risk.

But I think we need to see this as well for uh for your privacy when your privacy is at risk from a gate holder. Like I think that like it makes sense for L2B uh DeFi Lama like these sorts of organizations. Web3 privacy now has a great explorer. Uh but yeah, for them to be to to track this sort of thing as well. Uh so yeah, we need it for privacy protocols and services.

So yeah, we've got this like reflexive fix. I mentioned this. Uh, I'm going to move on. Uh, yeah, but anyway, it makes people feel comfortable, right? Because somebody's somebody's in charge now.

It's not a problem because somebody else will take care of it. Uh, so yeah, when we when we think about this discretion, you think about it like it can be in maybe two different ways. You can have it. You can have it as a set of rules or you can have it as a gatekeeper. So you when you go to use a privacy system or like maybe any system like who can deny or revoke the thing you're there for privacy in this case and then also like if you're an integrator uh you know can they keep can they operate if they don't have the power to do that.

Um, so yeah, if if if privacy can be denied or revoked, then then it's actually then it's in the architecture and that's like a really important distinction because it's it's it's attacks, right, on neutrality, which is literally the point. We're here for disintermediation, right? And if you have a gatekeeper, they become a target for sensors, for regulators, for capture, basically a lot of pressure on that. um and whether you know whether the they give into that pressure and it affects your users or the service you're providing or whether the pressure is just too much and then they stop providing the service like it kind of it causes these downstream effects that you can't really predict as an integrator. So, it's really hard to build on this sort of thing.

And she's, you know, very familiar familiar like with the custody problem, right? It's the same problem. It's just whether or not you get like the gatekeeper for privacy instead of like custody over your privacy instead of custody over your assets. Um, so but yeah, so we all know this because disintermediation is literally the point. Um, and you probably also recognize this as well.

uh in the earlier days of Ethereum we talked a lot about the scalability trillemma where you can only kind of pick two and there's always this tension right and you know I think we see this same kind of tension in in uh privacy design um you know uh I think it's also interesting because like as a you know as a reaction to uh something like tornado cache, right? Where we say, "Oh like we don't want that to happen." Um, and and there then we put like an intermediary in because there's this idea I I've heard this idea circulating. I should have the freedom to with who who to associate and disassociate from, right? But like we all use Ethereum but and like Ethereum hosts uh all kinds of stolen funds and you know do we're not I don't hear anybody calling out uh you know forking out Lazarus or forking Ethereum right uh because I don't want to associate with uh with these you know these entities or these people uh we don't do that because we know it would degrade the the the value of the thing um you know it would degrade the very you know the properties of the and the value of the thing that we that we actually want right uh Ethereum there's like a lot more wanted activity uh than than the unwanted activity and I think that we see we need the same thing for like privacy protocols privacy like asset privacy services um so yeah uh you know again there's always that temptation to put that to solve like abuse with an intermediary, like a trusted actor with broad discretion.

Um, you know, and it feels like maybe it's the responsible thing to do in the short term. Uh, but if the thing we're building is valuable because it's neutral, we shouldn't destroy the property that makes Ethereum socially valuable to prevent any, you know, every misuse of that infrastructure. And it's the same thing with privacy technology. It like defeats the point of building it, right? and and disintermediation is literally the point.

So yeah, with with um with what we're doing with Armada, the the goal is to is for it to be like, you know, boring by design, good for normal use, bad for abnormal use, right? So we use like a rule we'll use like rule rules based and and what we do is um you know at the application layer we can we can um we can shape behavior right and we can also attract the kind of use that's normal so I think if we design not just for attracting you know regular payment activity you know there's a big difference between paying out 10k and you know trying to move $30 million out through it. Uh I mean I actually that was tornado cashach's probably biggest flaw and it was totally understandable because at the time like the tornado cash has like buckets like for amounts for deposit and withdrawal. So there's like 0.1 one ETH 10 ETH 100 ETH and at the time 100 ETH wasn't worth a terrible lot.

So it made sense that they had that as a bucket. But then ETH increased in price substantially. Uh and so now then it made it easier to move large amounts of money uh using ETH through it, right? Um so yeah, if we uh you know you don't have to control that at the at the protocol level, you could do that at the application level because vast majority of your traffic is going to be using these frontends. So that's what that's a way that you can shape the activity.

So it's not just controlling the size of the payments at the application level that come out the withdrawals you can also have amounts for the amounts going in. Um so that's one way of shaping it and then the other way is by who's using it. So attracting the kinds of integrations that are that this sort of thing is like that it's normal to pay like normal activity, right? And so like if it's socially valuable then it'll become part of society and then it's just too damaging to destroy it. You don't want to pull it out because like you find other solutions, right?

Just like we don't fork Ethereum. But like you know if the primary like value that you do is to move stolen funds then like yeah it makes sense that everybody calls for the end of it right. Um so yeah neutral tools give us more power as individuals uh freedom from intermediaries in our relationships. Freedom to transact and associate without needing permission. And if we design for that kind of adoption that society wants, then our tools will become become part of our society and without sacrificing neutrality.

And yeah, that's what we're focused on uh with Armana. You know, if you're if you're running a company that that needs to do shielded payments uh that that wants operational privacy, selective disclosure without a gatekeeper, um yeah, find me, talk to me. We'd love to learn more about what you need to integrate. Thanks.