Welcome to the Future of Finance, where Fortune asks prominent people at major companies about their jobs, how their firm fits into the crypto ecosystem, and what it all means for how we use money.
Tezos, an open-source blockchain launched in 2018 as an alternative to Ethereum and other layer-1 blockchains, uses a governance system to enable those who own its tokens to vote on the future of the blockchain. This move, it argues, makes it less susceptible to forks that have affected other protocols like Ethereum and Bitcoin.
Arthur Breitman cofounded Tezos with his wife, Kathleen Breitman, in 2014. Since officially launching its blockchain in 2018, Tezos has become one of the most popular networks in the crypto space.
Arthur Breitman spoke to Fortune about the increased presence of traditional financial firms in crypto, the pitfalls of Ethereum and Bitcoin, and the blockchain’s future.
(This interview has been edited for length and clarity.)
Can you tell me about your background?
My background is in computer science and applied mathematics. I worked for many years in quantitative finance but also a bit in robotics. I got super interested in the solution of new technologies around blockchains, ways to make them better, smart contracts, proof of stake. There lacked a formal governance process in blockchains that would allow them to incorporate those innovations while remaining decentralized. And so that got me into the rabbit hole of thinking about governance on blockchains. Tezos is an incarnation of that: It’s a blockchain that essentially has a governance mechanism that lets participants in the network vote and accept or reject or proposed amendments, which improves the blockchain overall.
What do you think has changed the most in crypto over the past 10 years?
The ecosystem has become a lot less ideological over time. It started by being strongly about world affairs, and ideology, and ideas, and it’s evolved way way out of that. I think we should get back to that because that’s the real value prop. The reason that decentralized blockchains exist is they solve a social problem, they solve an institutional problem. And we’ve seen an explosion of solutions that attempt to solve noninstitutional problems, but I think those are overhyped and will fade over time.
Do you think that the entry of traditional financial firms could be a positive, bringing more people or investments into crypto?
I don’t see it as the primary driver of growth. It’s a driver. Fundamentally, where these systems shine is in providing alternative institutions. I think they are more about disruptive innovation than they are about incremental innovation. If you’re a big institution, and you’re trusted by your customers, you’re well established, you know, yes, I would say blockchains can solve some problems for you. But if you’re not established, and you don’t have the trust of your customers, then being able to create systems that do not rely on that trust is very interesting. So for large financial institutions, I think it boils down sometimes more to efficiency or distribution. But if you really want to see where those networks shine, it’s going to be with players who are not established.
How did your background in finance influence your work on Tezos?
As a quant I would say that I have some skills in financial engineering and an understanding of microeconomics. When we look at the systems, you see a lot of people who are ignoring basic financial principles. You can see this with Terra Luna, for example. If you have a background in financial engineering, I think it’s pretty obvious why this thing was going to collapse. But you know, for some reason, we saw even people from traditional finance get fooled by this, and it’s very bizarre.
It helped me avoid a lot of basic mistakes that people are making in the space because sometimes they don’t have the background to understand how financial systems can work. I’m not talking about existing financial infrastructure. I’m talking about general principles, you know, “What is an asset?” “How do cash flows work?” “What’s an interest rate?”—very basic financial principles. Designing a blockchain is a very multidisciplinary thing. You need to understand cryptography, you need to understand distributed systems, but you also need to understand finance and economics, and a lot of people do not.
It seems like sort of a recurring issue, this lack of understanding of basic economic principles. Do you do find that’s been the case with some of the disasters that we’ve seen in crypto over the past few years?
I think some people want to turn a blind eye to it, because I remember—you know, the idea behind Terra Luna is not new. The idea started with a project called Basis, and I remember being emailed by a venture fund asking me to do due diligence on the project, and I told them exactly why it would collapse, and they still invested anyway. So, you know, I think there’s also some cynicism in the industry that is unhealthy.
I read an interview recently where you mentioned how Bitcoin was stuck in the past because of technological limitations that Tezos isn’t affected by. You’ve also criticized Ethereum for dragging its feet on proof of stake. Could you tell me a little bit more about how Tezos has an advantage over the two biggest players in crypto?
The technology on Tezos is superior to the one that is on Ethereum—it’s faster, it’s more scalable, it’s more robust—so there’s many advantages. Obviously, there’s other considerations, and both Bitcoin and Ethereum are much bigger than Tezos in terms of brand perception and market reach, and obviously those things matter. But purely on a technical perspective, Tezos has an existing static advantage over Ethereum, but it’s also a dynamic advantage because there’s a culture of innovation in the Tezos space that’s been bolstered by the governance model. As a result, Tezos has had 14 successful upgrades, each by votes of the community. You might think of governance initially as just something about safety, but it turns into a powerful engine for innovation.
Why do you think Bitcoin is stuck in the past as you have said in a previous interview?
Bitcoin, I think, understood very early on that if you’re willing to fork willy-nilly to implement innovation, you risk being captured—you risk social capture of the protocol. And to avoid that, they created these very strong cultural norms against ever changing Bitcoin. They’ve succeeded at that, they’ve gained a lot of stability from that, and there’s absolutely value in stability and predictability. But the tradeoff that they made is that Bitcoin basically doesn’t move anymore.
There’s a lot of applications that people have found very, very useful on other blockchains, such as having marketplaces for collectibles, that you cannot build on Bitcoin. Bitcoin also doesn’t have a good story for how to preserve its security as the reward dwindles. Bitcoin wants to maintain a 21 million Bitcoin cap. Unfortunately, without a block reward, you don’t really have a good way to incentivize miners, and as the block reward goes down so does the security budget of Bitcoin. So there’s a lot of real issues, and there’s a refusal to tackle them inside the Bitcoin community.
Why is improving throughput important for Tezos?
No blockchain has really scaled, and there are use cases which really depend on a very large amount of throughput. We haven’t really been able to see them, because we don’t have the technology, and when I say “we” I mean the industry in general. There hasn’t been the ability to support these use cases.
The other thing is, Tezos has had some success having much lower fees than Ethereum, but a question that often comes up is, “Well, if Tezos has a lot of adoption, what will happen to the fees?” And so even if you have low fees, people may be reluctant in using your network because they say, “Well, you may have low fees now, but if and when you have more success then your fees will go up, and as a result I don’t want to deploy my application here. I may as well use an incumbent, which has high fees now, because I can’t avoid the high fees in the long run.”
Right now, it costs pennies to do a transaction on Tezos and actually $2 to do a transaction on Ethereum, so it’s already cheaper by orders of magnitude. So it’s not about being even cheaper. It’s more about being able to say that it’s going to stay cheap.
What do you think about the future of finance?
I think we’re very limited in the assets that are traded today on markets. We have public markets for public equities, which are fairly large and liquid for developed countries. And then if say you want to invest in a smaller country today, you look at an ETF of a developing country and inside you’ll find a bank, a big family-owned conglomerate, and a mining company. It doesn’t really reflect the economy. There is a very long tail of businesses that are very hard to invest in. There’s a very long tail of alternative assets that don’t really have liquid markets. And sometimes it’s for good reason. A reason it can be hard to invest in a smaller business sometimes is that for external investors you need to have a certain amount of transparency and adequate overhead that smaller businesses can’t afford.
Sometimes it has to do with the financial infrastructure being immature, and to the extent blockchains can improve financial infrastructure I think we can have a wider array of businesses. It’s also possible, for businesses that run more of their operation on a chain, bringing transparency and making it easier for them to have external investors, because all of a sudden their accounting is more transparent, because all of a sudden external investors can see their ledger.
We’ll also, I think, see a more global financial system, one that’s not necessarily as focused on developed markets. Like I said, there’s a lot of interesting assets outside of developed markets.
