In the fall of 2008, a 9-page PDF was published by an anonymous person, with no team or funding, outlining a technology that enabled digital ownership without intermediaries. Twelve years later, after a recent sell-off, Bitcoin has a market value of $850 billion.
While Bitcoin has been useful as a digital store of value, it did not live up to its original promise to “allow online payments” at scale. There are four reasons why Bitcoin does not work well for payments: price volatility, transaction throughput, transaction fees, and privacy.
The price of Bitcoin fluctuates. If I bought Bitcoin at $30k per coin, and pay someone using Bitcoin when the price is $40k per coin, I owe capital gains tax on the transaction. In addition, unless the transaction is instant and the receiver sells immediately, they don’t know the exact value that they’ll receive.
While the Visa payment network can handle 65,000 transactions per second, Bitcoin handles 7. To deal with network congestion, transaction fees (gas) go up. This means if I buy an (analog) espresso for $4, transaction fees could be $20.
And, despite memes of private transactions, all Bitcoin transactions are available on a public ledger for everyone with an internet connection to see. While masked behind a wallet address, it is not difficult to pattern match and identify the sender and receiver. Compliant privacy is an essential feature for payments. Businesses do not want competitors to see payments to their suppliers; traders do not want their trades visible; individuals do not want their net worth leaked; and governments require monitoring and compliance.
If you expand beyond Bitcoin, and look at the current state of Web3, some of these problems have been solved. Stablecoins, with a transaction volume of $500 billion per month, have solved price volatility for payments by pegging the value of a digital currency with an off-chain asset, such as the USD. There are a variety of L1 & L2 scaling solutions that attempt to solve throughput and fees, but the solutions have had to make trade-offs with data availability and centralization. Compliant privacy is mostly unsolved in the industry – solutions are either fully private with no ability for risk monitoring and reporting, or fully public for competitors and bad actors to see.
That’s why I am excited to share our investment in Espresso Systems, which is building the infrastructure to underpin a more scalable and more private future of Web3. I am grateful to co-lead the $30M Series A with our friends at Electric Capital, and I will be joining the board. Co-founders Ben Fisch, Benedikt Bunz, Charles Lu, and Jill Gunter combine some of the world’s leading experts in zero knowledge proofs and cryptography from Dan Boneh’s Applied Cryptography PHD at Stanford, with deep product and go to market expertise.
Zero knowledge proofs are a mathematical technique that enables one to verify that something is true without revealing the underlying data. The classic example is that I can prove that I solved a Sudoku puzzle without revealing any information about the solution. ZK proofs solve two problems for a public blockchain: they enable less data to be recorded on chain, therefore increasing scalability and decreasing transaction costs, and they keep transaction data private. This is an emerging area of research that has not yet reached full commercial adoption, and has yet to be integrated into a layer one consensus protocol.
Espresso is designed to deliver fast, low-fee transactions through an integration of a decentralized proof-of-stake consensus protocol with a zk-rollup mechanism, which uses zero-knowledge proofs to bundle many transactions in a way that reduces the resources needed to process them.
The Espresso team has also released a smart contract application that addresses privacy for Ethereum: Configurable Asset Privacy for Ethereum (CAPE). CAPE enables asset creators to customize who can see what about the ownership and movements of the assets they generate. The protocol also allows asset creators to customize the data privacy of existing assets on Ethereum. As an example, a stablecoin provider can create a version of their stablecoin that enables users to transact privately while allowing the issuer to retain real-time visibility into balances and transactions. This enables the stablecoin provider to balance user demands for enhanced privacy against the provider’s needs regarding risk-management and reporting.
Enabling configurable privacy and decentralized scalability unlocks an entirely new design space for entrepreneurs in Web3. Espresso enables anyone to build private & compliant stablecoins, private and fast DeFi, accessible NFTs and games, and entirely new private applications using ZK proofs.
We – at Greylock – are grateful to be part of the Espresso community and hope you will join us. You can learn more about what is being built at www.espressosys.com. Follow the team on Twitter, LinkedIn, and engage in the conversation on Discord.