Ripple Protocol Developer Jed McCaleb On Discovering Bitcoin, Founding Mt. Gox, And Launching Stellar

Jed McCaleb, co-founder and CTO of Stellar, a value-transfer network that strives to be a faster and cheaper way to send money, doesn’t consider himself a disruptor — but he was drawn to things that disrupt.

“I just like working on things that are interesting to me, and that can change the world for the better,” he told Michael Terpin during a talk at CoinAgenda 2019, which is hosted by the Transform Group, where he also recalled his journey to Bitcoin. 

He worked first on a peer-to-peer application, called eDonkey, a decentralized, server-based, peer-to-peer file sharing network for large files. After that project, as he browsed the internet, he came across the Bitcoin white paper on slashdot, a social news website for nerds. 

“I was super excited,” said McCaleb. “I didn’t think it was possible to solve [the double-spend] problem before I read the white paper. It was super interesting to me and, about two weeks later, I had made the Mt. Gox exchange, because at the time there wasn’t really a good way to buy or sell bitcoin, and I wanted to experiment with the technology to learn the system.” 

In an effort to better understand the Bitcoin technology, McCaleb decided to make a Bitcoin application. Ultimately, running an exchange did not interest McCaleb, so he began searching for suitors to take the exchange over, deciding upon Mark Karpeles. McCaleb recalled that process, which took place at a time when Bitcoin wasn’t the cultural phenomenon it is today. 

He had made Mt. Gox as a hobby, and people were using it. Running an exchange long term was not what he was interested in. He started looking for someone to take it over.

“The Bitcoin world back then was much, much different than it is today,” he said. “When I joined BitcoinTalk, which is where everyone that knew about Bitcoin had an account, there were about 2,000 people. By the time I gave Mt. Gox to Mark, there were like 5,000, 10,000 people––something like that.” 

He came across Karpeles through that community. Mark seemed like he could handle the responsibility. 

“Obviously, he was incompetent it turned out,” said McCaleb, noting he has never actually met Karpeles.

He got to work on his next project. The Stellar founder always thought Bitcoin was an awesome idea, but has been bothered by the mining aspect.  “If you can solve the consensus algorithm without mining, obviously that’s a better situation, because literally billions of dollars are spent on mining,” he said. “People don’t really realize how it’s a huge drain on the Bitcoin economy, essentially, because all that money has to flow out every year to pay for electricity, the people who work on these things, and this is a big drag on the system –– environmental concerns aside.” 

Before Bitcoin, McCaleb thought there was no solution to the consensus problem Bitcoin set out to solve. 

“Bitcoin inspired me like some other people to start thinking about other ways you can solve this consensus issue, which is really what mining is about,” McCaleb said. “I came up with the idea that led to Ripple, then along the way we realized there’s a lot of other things you can do with a network, not just a digital token.” He realized you could do things such as represent other kinds of value, like in the form of digital fiat currencies as demonstrated by stablecoins and decentralized exchanges. 

McCaleb, however, didn’t set out to solve the consensus problem the same way as Bitcoin. “Bitcoin is obviously extremely decentralized, and there’s no central company driving it forward,” said McCaleb, “and that’s a really awesome model, but it’s very hard to replicate. There is some middle ground between that and just like a fully centralized Uber-type thing where there’s a company that is helping to get the network started and then you kind of step back and let the thing run once it reaches a certain level of maturity.”

Instead of depending entirely on an open-source community, Stellar raised money to build a team, which led to them raising money from the likes of Stripe and PayPal executives. Mr. Terpin noted how Stellar was one of the most successful projects at building a community. 

The topic of airdrops, an often used strategy in the blockchain industry to distribute tokens to individuals, was breached more than once during the thirty minute discussion. Despite Stellar’s aggressive airdrop strategy, which they’ve recently backed down from, McCaleb admits that Stellar, and the industry as a whole, has yet to overcome the difficulty of creating network effect. This is one of the problems of crypto in general, he said. 

“I don’t think any [projects] have really done it yet, especially for payments, you need both sides of it,” he said. “And, this is why things aren’t actually used yet. This is one reason why everyone was really into it, but it’s not being used in the world, because we don’t have a big enough network between like between people holding it and people that are accepting it. So, how do you get that flywheel started? It’s a hard problem to solve.”

Terpin asked if Stellar, which enjoyed a lot of early backers including Stripe, had any plans for a separate fund a la NEO’s New Economic Entrepreneur’s Fund, the EOS Blockchain Venture Capital Company, and Cardano’s EMURGO fund. 

“We don’t have that today,” said McCaleb. “We’ve given out grants to various companies, but never for operations. We are debating internally now whether we should go that route and set something up like that. I don’t think we’d do it in the same ways that these other funds are setup, but we might.”