Episode 294 - State Chains and Copyright Claims
Max describes "state chain" technology, which he believes could solve some of the problems associated with the previous crypto collapse. He also gives an update on the court cases around copyright infringement and whether you can copyright an AI-generated work that are currently make their way through the American judicial system.
Links
The Ticker - US court rules that artificial intelligence generated artwork cannot be copyrighted
ARS Technica - US judge: Art created solely by artificial intelligence cannot be copyrighted
Reuters - Computer scientist says AI 'artist' deserves its own copyrights
Related Episodes
Episode 260 - New Year Predictions: Generative AI, Self Driving Cars, and Web3
Transcript
Max Sklar: You're listening to the Local Maximum episode 294.
Narration: Time to expand your perspective. Welcome to the Local Maximum. Now here's your host, Max Sklar.
Max Sklar: Welcome everyone, welcome! You have reached another Local Maximum Episode 294 after Labor Day.
Sorry for keeping an odd schedule here. I try not to do that but I'm thinking about changing the schedule for the podcast. I don't know exactly how, I set the schedule six years ago, five years ago. Life's different now so we'll see what happens. I just want to make sure that I get this particular episode right because it was quite technical. And I wanted to kind of understand, make sure that I had a good enough understanding of the topic at hand, which is state chains.
But before talking about state chains today, I want to go back a little bit in terms of the development of crypto and the crypto economy. Going into 2022, it was reasonable to expect a crash in cryptocurrency and the drop in prices in Bitcoin and Ethereum and in all of the minor altcoins given the massive gains that took place in the value of those coins and the value of those assets in 2020 and 2021. And remember, 2021 was also that NFT craze that I believe we spoke about on the show.
When did we speak about the NFT craze on the show? Now I'm kind of remembering the uh. Oh man, I don't even I don't think any of my titles were even on NFTs. Digital Art, Tokens, and Rationalists, episode 160. Yeah, it might be that one. All right, I'm gonna post that on the show notes page today.
Okay, yeah, 2021 was was nuts. 2020 was nuts as well. But okay, you go after 2021 such huge gains, there's got to be a pullback, there's got to be a crash, there's always a crash. But what actually happened, went far beyond that. And I'm going to summarize a little bit. I mean, I know a lot of you maybe don't care about the details of this market. But I have to describe what I think is part of the answer and what things might look like in the future. And so that, I think, is the interesting part of this story.
What happened was so many companies and institutions that people trusted, and this is not in the days of Mt. Gox in 2014, where it was some guy with a card trading site who decided to hop on the Bitcoin bandwagon when it was like $1 a Bitcoin or something like that. And then it increased in value to a few 100 and then all of a sudden, the whole thing collapsed. These were massive institutions, backed by supposedly reputable names, and they all turned out to be engaging in unscrupulous business practices.
Now, some of those unscrupulous business practices were outright fraud and outright fraud, and some were just incompetence. And some was cutting corners they shouldn't be cutting. But so many groups got caught with their pants down essentially.
It started with Three Arrows Capital out of Singapore, which amazingly seems to have lost nearly 100% of their assets. If you look into that bankruptcy. Usually, a bankruptcy is they have some assets left and they have to distribute the rest of their assets. These guys seem to have lost almost all of it. I don't know how that happens. Maybe it won't be all, almost all of it once those assets get tracked down by whatever legal system is available in Singapore. But that sounds so stupendously horrendous. I mean, it must have been just some kind of situation where they were so over collateralized that the whole thing just collapsed.
And this was followed by… Okay, some of you know the names and if you don't know the names, you probably don't care. But Celsius, Huddle Not, Voyager, Gemini Earn, Genesis BlockFi. Of course, last but not least, some call it the biggest bs of all FTX. And they declared bankruptcy and straight up lost people's assets.
And they all follow the same playbook of communications, everything is fine. We're liquid, non-solvent, this is just duration mismatch, we're gonna raise more funds, we're going to cut a deal up and it was all lies. And it's hard to hear everyone in the industry blatantly lying. From what I hear in bankruptcy, it's very common for management to constantly make excuses and mislead and what's the term, dissemble, obfuscate? I feel like there is a vocab term that better fits the situation here than just just plain lying but okay, we can argue about that.
And sometimes people believe them and sometimes not. But it's a huge red pill to kind of realize that they are never actually out there to inform you that many of these company communications are there to manipulate you. So I'm not even going to dignify these people by mentioning their names. Some of you, if follow this or if you get caught up in this, you know who they are. Others you might not be in crypto at all so you just don't care. Whatever it is they suck. We're not going to spend too much time talking about them.
But where are we now? As of this date, this is September 2023. Most of these bankruptcies are still pending in approval of a bankruptcy restructuring plan by the courts. Some of these plans have gone through and some amounts have been returned to some consumers. The vast majority has yet to be approved or returned, especially in that last FTX hairball. And of course, due to dollarization, which in bankruptcy the idea of dollarization if you owe someone Bitcoins, you owe them Bitcoin, or you owe them dollars, it's not straightforward. I've been told online it always gets dollarized. Turns out, it's not that straightforward. But because of some dollarization, they went bankrupt at the bottom of the market, it's doubtful that anyone will be made close to whole in their crypto investments.
But over the next six months, it is likely that many of these plans will be approved. Hopefully, the majority of them. Maybe investors will get chunks back before the next Bitcoin halving, which usually causes the next bull run. And that would mean that not all is lost. For sure, some will, some won't.
But what about the future? There's a lot of different talks about how to analyze this. The so-called Bitcoin maximalists, who say that you should only have Bitcoin, believe that they have been vindicated, because most of the smaller cryptocurrencies have done poorly with respect to Bitcoin. And so if you hold Bitcoin, you're going to gain more. And also a lot of the smaller currencies were kind of backed by these horrendous companies and so now a lot of them are gone or have gone to zero.
And some of them you know, like Z-cash, I've talked about it, this amazing tech, for some reason, is just not getting into adoption. Maybe they haven't gotten the tech to work as well as they thought. That's been going down with respect to dollars. Not even talking about with respect to Bitcoin and Ethereum. And then something like Library which was, I thought a very innovative company, but got attacked by governments. That's gone down with respect to Bitcoin. So Bitcoin maximalist looks at this and they say, only hold Bitcoin.
So furthermore, they also say that anyone who got their money wrapped up with these external forces, even if denominated in Bitcoin, wasn't actually holding Bitcoin because it wasn't in self-custody. So in all this, I think they they turned out to be partially vindicated, maybe not as vindicated as they would, as they would claim. Because first of all, some cryptos actually do outperform Bitcoin. Lots do in the short run. And Ethereum, for example, has outperformed Bitcoin over many years.
And there is an argument, and I think I gave this argument at the beginning of last year, I don't know if it was the prediction. I don't know if it was New Year's thoughts, or if it was. No, I think it was a different episode. Let's see, did we do a-? I definitely did a predictions episode with Aaron. No, okay. It must be the New Year's Predictions, episode 260, where there is an argument for Ethereum continuing to outperform Bitcoin. Now maybe that works, maybe it doesn't but there's an argument on this.
So like in all new innovation spaces, most of the entrants die off so it's not crazy for the Bitcoin maximalist to be right in that sense. So if you have a basket of cryptos, it'll likely perform worse than Bitcoin unless you've picked them and have a strategy for trading them exceptionally well. So I think the winners here are not necessarily the Bitcoin maximalists who, you know, obviously you might want to diversify but kind of a self-custody maximalist.
The original idea behind cryptocurrency was that you should be able to be your own bank. You should be able to hold on to the crypto yourself. It's uncensorable, it's very, very hard to steal or nearly impossible to steal if your security is done right. But that's a scary thing for a lot of people to take personal responsibility, which leaves open space for other companies to quote, help out. And there's a good way to help out. You could be a kind of a crypto security company and sort of help people with their personal security. Or you could keep passwords and private keys safe or just general privacy and security protocols for people to follow when they're online.
But it sucks that most of the people that actually do step forth to help out and claim to want to help out are the most odious and unsavory business characters in the world. But so there's kind of that problem there where it's kind of scary for people to do self-custody. Now, for many people who have tried it, it's not as hard as it seems. But I think it's the idea of it that it's hard to get used to. And the people who are self-custody maximalist some of them have a hard time understanding why it's a big deal for people. I think I do. We're not used to doing that kind of a thing. But that's one problem people people have.
And it's another problem, a secondary problem, is that these on-chain transactions that people do are expensive. So if I want to send Ethereum to someone else, I want to send Bitcoin to someone else, I want to send any of these things to someone else. Maybe the smaller coins are cheaper because there's not a whole lot of people using their blockchains. But for Bitcoin and Ethereum, it gets expensive, because there's only one blockchain. There is only so much space on that blockchain, there's competition for that space, and you have to pay a transaction fee. And it's a flat fee. So the percentage of the transaction gets less if you're doing large transactions. But if you're doing small transactions, you don't want to pay a $5 transaction fee. And it's kind of unclear how high it is. Sometimes it's a few pennies, which I think is fine for most things. But when it gets to be a few dollars, you don't want to be stuck with that.
So these on-chain transactions are expensive. That's why these kinds of centralized systems come about a company that has done this without going bankrupt and losing everyone's funds, is Coinbase because they hold all of their, or supposedly hold everything on a one to one basis. Bit Binance claims they do it too but we'll see. There's some questions about that.
So are there any solutions here? Are there any solutions where people can do self-custody while solving this problem? And I'm going to propose the industry take a look at a solution that's currently being worked on by several companies. The solution has been floated several years ago, a lot of really smart engineers have been looking at it. But I think in the last round, it was shelved by entrepreneurs who wanted to move fast and break things.
Now, move fast and break things in social media, like when I worked at Foursquare, move fast and break things might be like, ‘Oh, okay, people were using Foursquare one way? Well, we're gonna change it, we're gonna see if people want to use it another way.’ And then consumers might get a little mad. And that's breaking things. But in the case, when you're holding people's money, you don't want to break things. That's that. And break they did.
And by the way, one of the problems that I think will come up over the next kind of crypto cycle might be that the custodial forces could be, now it's going to be a rung higher than what it was before us. It started with Mount Gox, shady as heck. Then it goes up to the FTXs in the block fires of the world, where it seems like they are more well-established. They’re, in some cases, public companies. They're endorsed by well known business leaders in the US. And then no, it turns out that they’re not good at all.
But now it could be transferred to some well-known banks like JP Morgan or an ETF. And will they then be the next group to break everything? I mean, I hope not. I hope things work out for them. But if they don't want to break things, if they want to do it properly, this solution that I'm about to go into, which, I'll probably put it in the title of the episode, state chains, might be a good way for these large institutions to handle these funds. And sometimes these large institutions might just be custodial and not trading.
If you want to make a large trading system or a large exchange, then state chains might be something good to look into. Because with state chains, I think the great idea behind it is that you are not going to be able to kind of, it's sort of like a halfway solution between full self-custody and no self-custody.
So here's how it works. You interact with a state chain server. If you're the user. Let's say, I want to hold some Bitcoin. I kind of have to work with a state chain server to do this and to do my accounting and my interaction. So in that sense, I imagine using a state chain will feel like using a centralized exchange. It might feel like using Coinbase or something like that, or Binance.
But underneath it's not that at all. The coins, let's say it's Bitcoin, could be something else. They're broken up into different denominations, let's say like point ones, and the point twos, and the point O fives. Or maybe in Satoshis, 100,000 Satoshis here, 200,000 Satoshis there. So they're in kind of just like bills. They're sort of broken up into meaningful denominations then put into little accounts in the blockchain. That's kind of a one-time thing, one-time transaction fee.
Then these accounts are two of two, meaning that two signatures are needed to spend it. So let's say one Bitcoin is a lot of money now. What is it like today, it's $25,000. But just to make it a nice round number, let's say I have one Bitcoin. That means that I need to sign in order to spend it and the state to chain server needs to sign in order to spend it. So if the server cooperates and the server is a valid counterparty, great. But if not, what happens is when you gain control over this entity in the state chain that represents one Bitcoin that you can see on the blockchain, what you're doing is you're actually signing an off chain transaction with that server. And when you receive it, you could actually use that off chain transaction to withdraw that onto the chain yourself, that one bitcoin onto the chain yourself, in the event that the server is either unresponsive or turns evil.
Now, in reality, this server is probably going to be a large company that generally follows the law. It's not going to randomly decide to steal everyone's coins. Although, what could happen is that a government come in and say, ‘Oh, we want we want these assets frozen, or we want these assets seized.’ And that company would not be able to comply. Furthermore, the way it's set up, a lot of these state change servers are really federation, since probably lots of different companies all over the world that are kind of expected to act in a certain way.
But let's say they're unresponsive, they don't want to give you control of your Bitcoin, you have that off chain transaction to take it yourself. Okay, great. And if they turn evil, then then you could use that to take it yourself as well.
So then what do you do to trade these? Do you have to then get this state chain server’s permission to trade with someone else? And it turns out, no. Engineers have worked this out. To trade these, you don't need to do an on-chain transaction, you don't need to do a transaction fee. I mean, after all, if you have one Bitcoin in there if you do an on chain transaction, it's no longer going to be one Bitcoin, it's going to be point 999, or something. So what you do is, you hand over your private key to the new user, kind of like handing over the bill. Then you simultaneously invalidate your old transaction that allowed you to withdraw that with the state server.
And that one kind of was complicated for me. I wasn't exactly sure how that was going to work. But I sort of looked it up. It's quite technical, but it can be done. That's possible. And then it makes that transaction with a new user and the state chain server says, ‘Okay, I will only act with that new user. We promise.’ There is kind of like a world where the state chain server could turn evil and cooperate with some old users and try to invalidate transactions that are new or they can't push through invalidated transactions, but do that two of two signatures to try to get the coins out. And so that's like the main risk, but it sounds like that would be very difficult to do.
So all right. If you don't understand, it's a lot to kind of wrap your head around through audio. But if you're intrigued, definitely check it out, I'll put the links on the show notes page, localmaxradio.com/294.
But the cool thing about trading these is nothing happens on the blockchain. So there's no transaction fees and so I can imagine giant exchanges basing their services off this model. They could have state chains for lots and lots of different coins. And if you have a one bitcoin state chain, and you don't want to give one bitcoin to someone, you could simply exchange those for 10 point ones and then you can trade your point ones just like you would with dollars, with regular money. I shouldn't say regular money. Fiat currency.
So I can imagine giant exchanges, basing their services off this model. I think that what would happen is you'd have lots of different coins, you'd be currently breaking them apart and exchanging one for the other and it would all be essentially free. There are some companies that are starting to do this right now. There's one called Mercury Wallet, which I haven't looked into that much but it's sort of interesting. Mercury Wallet is a wallet that's based on state chains. So it has been used, it has been implemented.
And then of course, I believe there's a company dedicated entirely to. There's a company called Commerce Block, which is dedicated entirely to developing state chains. I will put that in the show notes today, right over here. And so I think this would be a great future. My hope is that a company that's basing their exchange off of state chains, where everything has to be held one-to-one, you could immediately audit what you have. You might not be technical, but you know, that like if I own one Bitcoin, I could literally see that one Bitcoin somewhere on the blockchain and I can verify that the transaction that I have can indeed, pull it off. So that would be kind of make it immediately auditable to the users.
And I hope that one of these companies really focuses on making their products the easiest. Because that's the problem that needs to be solved because you don't want the you don't want the ugly players to be the easiest. You want the good players to be the easiest. Unfortunately, the people who are most technically sound are not always the best at UX so that's kind of a problem to solve.
But even a company based on state chains, I think could be very profitable because there's, there's no transaction fee. But you could still charge a transaction fee for interacting with their server, but it's going to be a lot less than the transaction fee on the blockchain and so you can make money like that. You could even give people rewards for holding their money on the system that's paid out based on transaction fees that you're getting which could increase the value of the systems. They'd be very modest rewards, they won't be like the 3% interest rate that you might get elsewhere, the 5% or whatever. But you might be able to get a little bit that could kind of incentivize things purely based off of people trading.
So I think this is a cool product. I think that they’re a cool technical system. It works with the Lightning Network very well. We talked about the Lightning Network all the way back in episode 212 with Guy Awan. And so we'll see what happens with state chains. I'm excited for this next round of crypto as we move into the Bitcoin havening and 2024. And as we put 2022 behind us, which admittedly might take another six months to a year, but I think crypto Spring is coming.
Okay, a few updates on copyright and AI which is a big, big issue right now. One article here, one headline here is from Ars Technica. Open AI disputes author's claims that every chat GPT response is a derivative work. Just to read this a little bit:
“This week, open AI finally responded to a pair of nearly identical class action lawsuits from book authors, including Sarah Silverman, Paul Tremblay, Mona Awad, Chris Golden, and Richard Cadre, who earlier this summer alleged that Chat GPT was illegally trained on pirated copies of their books. In Open AI’s motion to dismiss, filed in both lawsuits, the company asked a US District Court in California to toss out all but one claim alleging direct copyright infringement, which Open AI hopes to defeat at a later stage of the case.”
Skipping ahead.
“Open AI claimed the authors misconceived the scope of copyright, failing to take into account the limitations and exceptions including fair use that properly leave room for innovations, like large language models, now at the forefront of artificial intelligence.”
So again, folks, we see all a lot of back and forth between the need for innovation and concerns that authors and publishers have over use of their works. And the latter may be overreaching somehow in the courts, but the courts are not going to have an easy time. They're not going to have an easy time sifting through all of this, given that intellectual property is taken seriously by the courts. And we just live in that world. And so this is going to be this is going to be an issue. We’ll follow this and we'll see what happens with Open AI.
I think that in order to have kind of a proper. I mean, a lot of people want to stop AI in its tracks. So this might be a good way to do it, if that's what you want to do. But if you want to promote innovation, and you want to have a healthy market for innovation, I feel like claiming that large language models, and like we were talking about last time with what was the company Pros Craft, if you want to say that anything kind of based off of these works is derivative, you're sort of stopping all innovation, because everything is a derivative work on some level.
So we'll see how this gets resolved. And basically, it's up to the courts and up to our legislators and up to up to the the all of the actors involved to figure out how to get through this properly. And hopefully, they allow for more innovation.
All right, another related article. This is huge right now. So many of these issues are coming out in the open. It's been almost a year since Chat GPT came out. That turned out to be certainly a watershed moment in generative AI. And so maybe now that we're at the year mark, all of these issues have come to light. Maybe that's the reason. But on September 4th, according to ticker.org, US court rules that artificial intelligence generated artwork cannot be copyrighted.
So this is the on the other side. This is not on the side of ‘Oh, you use my book to train your model? Your model, now I somehow own like a piece of it.’ This is ‘Okay, I use the model to generate a book or generate artwork for sometime. Now I own it.’ It turns out that this court, at least for now, is saying no. Copyright is not going to apply in these cases where you generated some of the stuff from the machine. Reading from the article:
“On August 8th, United States District Court Judge Beryl A. Howell ruled that artwork created by artificial intelligence without a human creator cannot be copyrighted. Howell upheld in her decision that human authorship is a bedrock requirement of copyright. A lawsuit arose after plaintiff Stephen Thaler, a computer scientist and inventor of the creative Greek creativity machine paradigm, applied for a copyright license from the United States Copyright Office pertaining to the 2012 artwork, A Recent Entrance to Paradise, generated by his own creative machine program. The Office repeatedly rejected his request, resulting in Thaler suing the agency's director. Amidst losses in the US court system, Thaler also applied for patent protection in other countries such as Australia, the UK, South Africa and Saudi Arabia.”
So this is not the end of it. This plaintiff will file an appeal and this is something else that we'll have to watch over the coming months and years to see if copyright law going to apply to AI-generated models. Again, it all comes down to the more copyright law there is, it seems like the less innovation there is and the less permissionless innovation there will be. And so this court ruling might be a good thing.
Although I'd like to know what what you think of it, maybe there's reasons to have very good, very stringent copyright law here. I'm sure there's a lot of arguments for it. localmaxradio@gmail.com if you want to weigh in or go to the localsmaximum.locals.com.
Now, the good news is I have been on a lot of podcasts. I've been busy doing a lot of podcasts recently. Some of which will be coming out in real time. Go on the website and see the podcasts that I've been on. Some of them, when the podcast host says I can, I'll republish on to this feed. And so I'm looking forward to that. I did one political one the other day, and I did one interview yesterday, where it was. We talked a lot about the philosophy of AI, which was really, really interesting to touch back on all of the topics that we've talked about on the program. What is understanding? What is consciousness? So that was a blast. And so I hope to share these conversations with you soon.
All right, have a great week, everyone.
Narrator: That's the show. To support the Local Maximum, sign up for exclusive content and our online community at maximum.locals.com. The Local Maximum is available wherever podcasts are found. If you want to keep up, remember to subscribe on your podcast app. Also check out the website with show notes and additional materials at localmaxradio.com. If you want to contact me, the host, send an email to localmaxradio@gmail.com. Have a great week.