What the hell is blockchain and how is it enabling innovation?
Outsell for Startups CEO Q&A: Maksim Izmaylov of Winding Tree takes us on a 2,000-year journey to explain the future of transactions
In the past, I have set out to interview founders and CEOs for a chance to discuss what it takes to grow a company, why their business model is disruptive, where the company is going in the next one to five years … so on and so forth. It’s led to some great, exciting conversations, but many of the companies I’ve covered, and a lot of the companies that Outsell’s analyst team have been sourcing, utilize blockchain, AI, and other pieces of technology that are … occasionally a little confusing. I don’t like to admit that there are many pieces of this technology that I don’t understand despite access to the people who do. So, when I set out to talk with Maksim Izmaylov (Max) the founder of Winding Tree, he basically came to my rescue and cleared up a ton about everything blockchain related. First lesson: turns out they’re not blocks on a chain …
Max is a hacker, serial entrepreneur, and a Y Combinator alumni focused on tackling blockchain for the travel industry. Max and I dig into what blockchain is, why it is so useful, and what the implications are. We also touch on Max’s background, why he fell into the travel industry, what uses he sees for blockchain in travel, and where Winding Tree is going.
You’ll notice me jump in throughout the discussion for clarity. This conversation was very eye opening, and I hope you find it as useful as I have.
Q&A with Maksim Izmaylov, CEO of Winding Tree
Max has been highly involved in this space for years. Part of the challenge, and one of his greatest challenges with Winding Tree, is to really get people to understand how blockchain and cryptocurrency works, and how they really function at a core level. He does an amazing job breaking this down for me and our audience.
Max: It’s very simple. So imagine 2,000 years ago. You are a merchant, and you deal with a bunch of other people in your neighborhood. Each one of you has a ledger, where you write down all the transactions and all the financial transactions. Let’s say you gave someone 100 dinars. You write it down in your ledger, and the person who received that money writes it down in their ledger. At the end of the day, everyone has a copy of their ledger, and that’s how they reconcile everything. One day, you go to someone who owes you money, and you say, “Hey, you owe me 100 dinars”. They say “oh no, no, actually my ledger says that I owe you nothing, so sorry, dude.” It’s a problem and now you have to go to the court. The court then determines who was right. Complicated.
So today, we’ve agreed that we have one ledger. Each and every person who is a part of this marketplace has the same ledger. We create rules that would ensure that it’s very hard to temper with this ledger. We arrive at the state where there’s one ledger, and that’s what today we would call distributed ledger technology. Anyone who wants to join this marketplace, can, and can host a copy of their ledger. So basically what we have done is we purposely shared my potentially private information about who I deal with, and how with hundreds of thousands of other people. Why? In order to make sure that no one tampers with it. No one can change the state of the database. That’s the fundamentals of the blockchain technology.
Blockchain technology is this underlying level that allows for the creation of Bitcoin as a cryptocurrency. But it can be used by other industries as well, and that’s what we’re doing with travel of course.
Re-capping the key point that Max just covered. Today, in our world, we’re very used to having a separate entity or third party like a bank, that has a copy of the ledger. The difference between this, and say blockchain, is with blockchain, you have a distributed ledger, meaning that all the users have a copy of the ledger. A bank just has to get hacked, and it’s just that one entity that would be hacked. For blockchain to go down, you have to essentially take down all the users, which is really cool when you actually think about it.
Max: The 3rd party design proved to be not very efficient. As of today … There’s a great article from Nick Szabo, which is one of the gurus in the cryptocurrency world. It’s called “Trusted Third Parties are Security Holes.” We created a trusted third party that we delegated all the information, all the money, and all the power to. Why is this a security hole? Because now all those transactions, and all that money, are only as safe as the security measures of that organization. No one, no centralized organization, can be infinitely secure. It will be hacked, like Equifax had proved not that long ago. It was about a month ago. So that fundamental problem, if you put together information about 140 million entities or identities, you will be hacked. This is a honeypot.
You create a bullseye for yourself.
Max: Precisely. Bitcoin is a financial system, based of course on blockchain technology, or distributed ledger technology. It is a system where there is no one party that you can hack to obtain information about all the users of this system. It’s completely distributed. So yes, potentially if you’re not careful enough with your private key which unlocks your Bitcoin account, your funds will be compromised, or maybe you’ll lose control of your funds. It will never be the case that someone has a master key from the Bitcoin system, and they can get control of all the accounts in the Bitcoin system. That is impossible with this design.
With a bank, theoretically, it is possible. With Equifax, it is possible. With other entities, with other designs, where there is one master key that unlocks the whole database of whatever the information is in that database, it is possible.
So there are two fundamental problems here. One, those things can be hacked. When those things are hacked, it’s a disaster. Again, Equifax, Wells Fargo. Wells-Fargo actually represents a second problem. When in the organization there is a bad actor that can do crazy things, and they control everything, they don’t have to be hacked from the outside. They can do something from the inside, because there is a master key, and they have access to all those accounts.
Bitcoin exchanges or crypto currency exchanges, are centralized systems, so do not store your bitcoins on an exchange. You have to control your private key at all times. If you have bitcoins, and you don’t know what your private key is, if you do not control your private key, you’re in trouble. You’re in no better situation than having money in a bank. You do not understand fundamentally why the Bitcoin exists.
So I’m guilty of this, because when I first started trading cryptocurrency, like Bitcoin, like Ethereum, like Litecoin and all these other coins and currencies, I was using a third party called Coinbase. So essentially I defeated the purpose of blockchain, which is to have a distributed ledger with no third parties. So, lesson learned. I’m still learning a lot about cryptocurrency, but just a good example of how there are exchanges that are still third parties, and blockchain is meant to operate against that principle.
Max: Here maybe, it’s good to talk a little bit about smart contracts. So we were talking about Bitcoin transactions. You make a transaction on the Bitcoin network, and that transaction, by definition, lives on this network forever. It will never be deleted, it will never be changed. That transaction will be stored in that database forever, or as long as the Bitcoin network exists. Other developers went a little further. They said, what about if we store a piece of computer code on that database, and that piece of computer code would have the same property. It will never be changed. No one will be able to change it. No one will be able to remove that piece of code from that database. The system I’m talking about here is called Ethereum.
Ethereum is this giant computer, that you can write programs to, and then you can execute those programs. Once you’ve deployed your program, or what we call a smart contract, will live in that database forever.
So an example of this. Let’s say you and I have a contract for buying a vehicle, or buying a small company. I’d be worried that you would make a change to the contract, or your lawyers would make a change to the contract. We could go back and forth for days, weeks, months, years, and even take it to court. It can get really, really messy.
Smart contracts, like cryptocurrency, where funds are transacted and you can’t change anything on the ledger, the same goes for smart contracts. It’s legally binding, and nobody can change the contract, because it’s engrained in the blockchain. Ethereum, like Max mentioned, is a platform for supporting smart contracts, so essentially the host for smart contracts. If I have a smart contract with you, nobody can change it, and there’s no risk of any form of fraud. Pretty nice.
Max: Now, we can deploy a smart contract. That smart contract will be able to connect buyers and sellers together without an intermediary. If you think about it, that smart contract is a completely automated system. The implications, right?
We can create systems where there is no central party. This is a groundbreaking implication, actually. There are many, many uses of this technology. Okay, so one of them. As Joseph Stalin said famously, it doesn’t matter who votes at the election. It matters who counts the votes. And he’s absolutely right. It’s a problem in many, many countries where the current government controls the election, and therefore they have all the incentives to cheat. Now if we have a system where it’s impossible to cheat, it would be the first instance of an election where all the votes were calculated correctly. With blockchain this is possible. My friend Santiago Siri is working on one of these projects called Democracy.Earth, and that’s the name of the website as well.
Max: What is the problem in the travel? Travel is not a very innovative industry. A lot of people, a lot of executives are saying that travel is at least 10 years behind. We’ve experienced that with my past company Roomstorm when we were integrating with other partners. Travel has many, many, very fascinating problems related to computer science, related to algorithms and all that stuff. Two and a half years ago, I started Travel Tech Con with Marina Janeiko, my partner at that endeavor. And we started a conference in San Francisco to focus on travel startups and software engineers in travel. With this event I was able to see how many monopolies controlled the travel industry and how the monopolies were at the core of the bottleneck for innovation in this space. We realized that the core of the problem is the centralization of power. Blockchain just fit perfectly into this equation, because blockchain is technology fundamentally aimed to disintermediate that power, decentralize these systems.
Winding Tree is a platform, it’s a protocol, it’s a standard, if you will, for connecting buyers and sellers together without an intermediary.
So with Winding Tree the two business models are:
1. Consulting with travel companies on technology in general, and blockchain.
2. Building proprietary extensions for travel companies.
Am I spot on there?
Max: Right. But, think about it. Winding Tree is backed by non-profit. The goal of that non-profit organization is that we’re absolutely convinced that there should be a non-partisan body out there that would drive that type of innovation. This is a systemic innovation. This is an innovation in infrastructure space.
This was really interesting, because most blockchain companies are actually non-profits. Ethereum, Litecoin, Monero. They’re all set up as non-profit organizations. So why?
Max: Why? Because, well let’s say company ABC is working on some sort of crazy private blockchain. Why would they ever open that blockchain to the public? What would be their motivation? If they’re a for-profit company, which they are, the only motivation, the only way their board would approve opening up that system to the public, is profit. Which would mean that they will be taking some sort of commission fee. They will have some sort of crazy legal mumbo-jumbo there, which would potentially harm the participants of that marketplace. This type of initiative has to be backed by a non-profit, or somebody that doesn’t have the intent to be a monopoly.
Exactly. Essentially you’re creating an open-source blockchain-based marketplace then, as a non-profit. Do I understand that correctly?
Max: Correct, you’re absolutely correct. As I said, Winding Tree is a non-profit foundation based in Switzerland. The goal of this foundation is to drive innovation in the travel industry. Nothing else. We don’t want to remove intermediaries, that’s not the goal. The goal is innovation.
The first project that the foundation will undertake is, of course, the creation of this permissionless blockchain, which would solve the data problem in the travel industry. Without open data, we cannot have permissionless innovation. Without open data, we cannot have permissionless innovation. The foundation, as its first project, wants to open up the data, in order to enable innovation in the travel industry.
It doesn’t mean that we’re going to stop there. We will potentially find other projects that the whole marketplace will benefit from. It could be open-source projects, it could be databases, it could be software. Again, we don’t even know what kind of projects will be based on top of the marketplace that we’re building right now.
And so, to fund these initiatives, you’re doing a token generation event, or TGE. Is that right?
Max: Correct. Yes, absolutely.
I think that goes into our next piece of this, is I think we first have to describe what a token generation event is. And then, maybe we can talk about the Winding Tree token, which is LIF, is that right?
Max: Yes, so we’re holding that token generation event as a fundraiser to fund these initiatives. What we designed here is, we call it a new token economy. The problem is that, our economy is, or the design of the companies that we have today, is exclusive. That is, just a certain number of shareholders have the interest of the company succeeding. In some cases, they don’t care if some toxic waste is dumped into the nearest lake, and the village that is right next to that lake just dies out. This is an extreme example, of course, but you know what I mean, right? A bunch of companies, maybe in China or somewhere else, dump a lot of CO2 in the atmosphere, and it’s free for them. It’s better for them. It’s more profitable. If we include all the people that are affected by this decision into the governance of the platform, then the situation would be drastically different.
So what we’ve created with Lif as a token, we created a token economy where everyone is included into making decisions, into participating in the platform. What I mean by this, is any holder of the Lif token will be able to participate in the governance of this platform. It’s not just that the Lif token is a carrier of value on our platform, just like bitcoin is a currency on the Bitcoin platform, and ethereum is a method of payment for the computations that are made on top of the Ethereum platform. With Winding Tree, Lif is also a currency, but at the same time, it’s a vote in a sense. Any holder, it could be a company, it could be an individual traveler, any holder of those tokens, will be able in the future to participate, to opt-in into the governance of the platform. This is our solution to the tragedy of commons, of course, where people are excluded from those decisions.
Another Ben pit stop here, because what we just heard Max talk about is a TGE, or a token generation event, which is, as he said, a way for them to raise funding for Winding Tree. Now a key difference that I want to point out, is that there’s also what we call an ICO, which is an initial coin offering. I just want to be clear on the difference, because coins really only have one utility, and they act as a simple store of value with limited to really no other functionality. By simple, I mean, value not represented or manifested through a variety of functions. Tokens are a completely different breed altogether. They can store complex levels of value, and tokens are based off of ethereum, and generated by the smart contract system. They’re highly programmable, and have a lot of functionality behind them. So they transcend being just a coin, and through their array of functions, become something much more.
Max: So we’ve designed this token economy, in order to align the interests of all the parties involved in this marketplace. We align those interests along the lines of just making this platform more successful. So it’s more than just the fundraiser, it’s more than just a cryptocurrency. It’s much more than that. This new system, this new platform that we’re building is quite novel, I would say.
It enables you to really be part of it, is what I feel like when you describe it. I get to really be a piece of this, when I have the token, which is really cool. And very different from, I would say, public investing.
Max: Correct. Correct, yeah. It’s very different.
The next question I would have for you, is what is the greatest challenge that you face, or that Winding Tree faces, in the future?
Max: It’s education. It’s education, for sure. There’s a lot of hype around the technology, a lot of misunderstandings, a lot of private blockchain projects, a lot of companies claiming that they are a leader in the blockchain technology today, which is, to me, a completely nonsensical statement. So education, absolutely. People have to understand what this technology would do, what kind of implications, how it’s going to change the world, which it will, and that’s absolutely crucial. We go to a conference, we walk into a room, and we’re saying, “Hey, we’re building this new blockchain project.” And they’re saying, “Oh, you’re doing payments on the internet? That’s cool.” We’re like, no. This is not about payments at all. It’s much more bigger and deeper. So we have to explain it from scratch every time. So that’s our biggest challenge right now.
And related to that point, what do you think the timing is for more mass-adoption of blockchain and cryptocurrency?
Max: I wish I knew. I think we can only speculate here. It’s not if, it’s when. When you understand the technology, when you understand the implications, there’s no going back. There is a learning curve. It takes time. But when you understand it, when you understand how this technology will change the world, what kind of potential all this technology has to change the world, there is just no going back. That change is groundbreaking.
Thank you for reading this CEO Q&A interview with Maksim Izmaylov. This write-up is only a portion of the full interview. To hear the full interview, please listen to our podcast “Outsell for Startups”. It can be found on iTunes, Stitcher and Sound Cloud. You can also find more information on Outsell For Startups at our website. Thanks for reading!
