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(Silence).
What's up everybody?
My episode today is with one of the more thoughtful,
open minded, and I would venture to say broad
thinkers in the Bitcoin space that I've come
across.
His name is Nic Carter, and he's the co-founder
of both Castle Island Ventures, which is a
crypto focused VC fund, and Coin Metrics dot
IO, which is a platform devoted to demystifying
on-chain data, which we actually spend some
time doing in this episode.
Specifically around trying to put a value
on the Bitcoin network, and also on its advantages
and limitations as a protocol for transferring
value across the internet.
Nic also has a master's in philosophy, and
we spent a lot of time in the overtime to
this week's episode applying that discipline
to Bitcoin, by examining the works of people
like Friedrich Nietzsche and his philosophy
around essence.
John Rawls and his veil of ignorance, as well
as applying a strain of utilitarian thought
to questions of money and society.
I think it's important for all of you to understand
where I think this episode fits in the library
of content that we've put out on cryptocurrencies
and distributed ledgers.
I think most, if not all of my coverage on
crypto DLT, has focused primarily on the problem
of scalability, technical implementations
for various base-layer protocols, and financial
arguments.
Whether we're talking about arguments that
weigh the merits of speculation in something
like Bitcoin, or even pseudo-political arguments.
Stuff like re-engineering the gold standard,
and displacing the fiat based global financial
system with sound money.
This conversation explores all of those themes,
but with I think an intention on my part to
understand Bitcoin as more than just the sum
of its parts, and as more than just a permission-less
ledger for tracking debits and credits.
One of the lessons I've taken from my continued
education into Bitcoin through the works like
Nick Szabo, Paul Stork, and others, is that
trying to measure Bitcoin against existing
systems or conventions that seem somehow comparable
is almost always counterproductive.
And I think that's because it represents so
much more than just money, or a payment's
network, or a Wall Street speculation.
There's a competent, and I think genuine community
of intellectuals within Bitcoin, who are actively
engaged in what feels like a grand project
to remake society.
And it comes across in the seriousness with
which they apply themselves.
Whether we're talking about the engineers
working on enhancements of the base layer
and scaling solutions, or whether we're talking
about folks like Nic and others who are contributing
intellectually to debates about governance,
economics, and ethics.
In other words, Bitcoin is not what most of
us think it is, and even what we think it
is is constantly changing.
And I think that its endurance, its evolution,
its resilience has both a store of value,
but also as a diverse community of people
who are coming to it from different backgrounds,
and with different motivations.
All of this suggests to me that there is much
more going on here than just a naïve speculation.
As Nic points out during our conversation,
Bitcoin is a subversive idea.
It's an experiment in social organization
that doesn't play by the rules of the state,
or by the conventions of modern society.
And I think the momentum behind it is only
going to grow.
Especially if governments validate the concerns
of its proponents with further debt monetization,
or preferential bailouts in the event of another
global financial downturn.
Now, before I hand it off, I want to thank
those of you who heeded my call to action
last week and rated the podcast.
We added close to 100 reviews since last Monday.
We crushed it.
You guys are awesome, and I'm here to thank
you with an even more awesome episode with
my guest, Nic Carter.
Nic Carter, welcome to Hidden Forces.
Pleasure to be here, man.
There's so much stuff to talk about, Nic,
it's actually kind of challenging to know
where to start.
I've read a lot of your material and that's
sort of why it's challenging.
You write really well, thoughtfully, you're
a philosophy major.
Give our listeners a bit of a background of
who you are and sort of how you came into
this space.
Well, that's the classic question is, when
did you discover Bitcoin?
When did you have the whitepaper?
Would you read the whitepaper?
Everybody has their own origin story, and
everybody's told them so many times now that
very few of them are actually grounded in
truth, I would say.
And so, mine's not very interesting with regards
to Bitcoin.
I discovered it on Reddit or Slash Dot early
on. and I liked the fact that you could just
tip people permission-lessly through the internet.
I thought that was funny.
And then I only got turned onto the ideological
underpinnings much, much later.
Thanks to the Pierre Richards and Micheal
Goldsteins of the world, so I owe them a debt.
I came into Austrian economics and all of
these Austrian theories through Bitcoin, as
opposed to the other way around, which I think
is a little different.
But I used to work as a journalist, I used
to write about corporate law which was very
dull.
And eventually I went to business school,
and I wanted to go work in investment banking.
But around that time, this was about 2016,
I realized that cryptocurrency and Bitcoin
were these really vibrant industries, and
so I decided to see if I could make a career
in them.
I worked at Fidelity as their first crypto-asset
analyst in 2017, and then in 2018 left to
start a public blockchain focused venture
fund.
Well, we're going to talk about that too.
What's the name of the fund?
Castle Island Ventures
Castle Island Ventures.
And you guys are based out of Boston?
Yeah.
So, what attracts you to Bitcoin today?
What is it that most endears you to this community,
to this protocol?
I think Bitcoin is the most interesting phenomenon
occurring on the planet right now, and its
so rich, and there's so much depth to it.
It sits at the intersection of so many different
disciplines, computer science, cryptography,
econ, political philosophy for sure, corporate
governance, they're all relevant.
And there's so much you can get out of it,
so I think it's a shame that people really
write it off because they don't like a certain
feature of the thing, like the energy usage
for instance.
I have spent the last five, six years reading
and thinking about Bitcoin almost constantly,
and I call myself very lucky to be working
within the industry, and being able to support
companies building on top of Bitcoin.
I'm at a rare case where my hobby, and my
professional life, and my academic interests
are totally aligned.
So, I consider myself extremely lucky to be
able to say that.
So, if someone comes up to you in the street,
or you're having dinner with a family friend
and there's some stranger at the table and
he says, "Nic, I don't know anything about
Bitcoin.
Can you tell me what is Bitcoin?"
What would your answer be to that question?
That happened to me on the train down here.
Did it really?
Yeah.
But the thing is actually, most people kind
of know a thing or two about Bitcoin-
They do.
Do you feel like it's a situation just like
in economics where what they know actually
hurts their understanding?
Yeah.
I wish that people came in tabula rasa, blank
slate rather.
Because most people, their opinion of Bitcoin
is colored by what they see in the press,
and so they typically don't like it.
Because in fairness, you see this thing, this
incredibly well performing investment, probably
the best performing investment of the last
decade, maybe there were some venture exits
that were better, but I'd be hard pressed
to find them.
Starting at what price are you-
Well, you start at zero.
Okay, well-
So, its up by infinity percent.
People hate that, right?
Because for the most part, they didn't participate
in it.
And then you get all these headlines about
how it's using one Denmark's worth of energy,
and so there's the environmental narrative
layered on top of it.
The default reaction there is to hate the
damn thing.
They're like, "What is this?
Could it be that the nerds on the internet
created a new money and we're not able to
participate in this?"
And so, I think people also get a bit nervous
that maybe it's going to keep going, and keep
being impactful and significant, and then
they maybe start to wonder a little bit about
what money is even.
And who has the right to produce it and so
on.
But yeah, I mean it's a very aggressive, disruptive
thing.
I'm not surprised that most people really
dislike it.
So your experience is that most people, the
vast majority of people, have some idea of
what it is, irrespective of whether or not
that idea is correct, they've got some idea?
At least in the US, yeah.
That's interesting.
And that narrative is colored by its energy
usage, or the perception of it being wasteful,
using up tremendous amounts of energy.
You said that these nerds created this money
and got rich.
I actually think that the most forward facing
personalities in this space are not the nerds
but actually the bros.
Well, they're the ones that are-
The crypto bros.
The most visible externally now.
Right, and they're sort of despicable.
Well, we've entered this eternal September,
so it's mainstream now, it's lost a little
bit of its niche charm.
Because a lot of Bitcoiners, probably myself
included, would love to go back to the pre-2017
era where it was just sort of a quiet little
hobby.
But it just continued to exert itself and
grow, and so then basically all the normies
came in and found it.
So, that's where we are now.
You said, I think you mentioned it, or I don't
remember how you brought it up, but there
are all sorts of different aspects to Bitcoin,
which is what's so interesting about it.
There's an economic aspect, there's a technological
aspect.
We've definitely covered the technology, generally
speaking, specifically and generally.
We've looked at it as an asset class as well
with folks like Berniski or Ari Paul.
We have done a bit, sort of at the edges on
governance, but one thing that we really haven't
covered has been the narratives of Bitcoin.
And I think that was, of all the work that
you've done, and we're going to get into a
bunch of stuff, but I think I want to start
with the narratives.
You wrote a paper, I believe it was called
Visions of Bitcoin, is that correct?
Yeah.
And in that paper you had all these different
narratives and how Bitcoin has evolved over
time.
And I think this is valuable because it also
I think biases the perceptions of people who
last engaged with Bitcoin at a certain time
when it was a certain thing, right?
And when I had first learned about Bitcoin,
I had learned about it as, if I remember it
correctly, it was basically kind of cash for
the internet and a peer to peer payments network.
That was how I learned about what it was.
You've actually broken down the evolution
beginning with eCash and then moving to P
to P, censorship resistant gold, private,
anonymous dark-net currency, which I think
kind of died with the end of Silk Road-
That was a phase.
Or a few years after that.
Yeah.
Yeah, it's not used as much for that now.
Yeah, and a bunch of other things.
But I want to talk about this because this
also really speaks to why I've gotten interested
in Bitcoin in the last year, when I had for
the most part written it off.
Because I was focused its limitations technologically,
and I was sort of looking at the despicable
elements of its community.
And I didn't actually realize or appreciate
the depth of its bench, so to speak.
The depth of its community and the fact that
there are folks like you, Pierre, Tuur Demeester,
all sorts of people, Hasu, who are writing
in this kind of this digital community.
This little, not a Vienna Circle, but you
guys are all sharing writing, and thinking
through all these problems, and it's really
deep stuff.
So, walk me through a little bit about the
evolution of Bitcoin over time and the way
the narratives have changed.
Sure.
The interesting thing here is that Bitcoin
itself has pretty much not changed.
I mean, at its core, it's a ledger, so a state
of balances of who owns what, and then it's
a set of rules for how you can change the
ledger.
So, that has been consistent from 2009 to
present with some updates, but what has been
changing rapidly around that has been how
people perceive it, and by extension what
they use it for.
And so, Bitcoin is like this blind, deaf,
and dumb thing.
It's not aware of the world outside of it.
It doesn't even know what its own price is,
right?
Works just the same if it's worth a dollar
or a million dollars.
So, what I wanted to do was to chronical how
people were perceiving it and what they thought
it was good for.
And really, that gets into what they though
it actually is.
So initially it was an experiment, which is
why I said, "Prove a concept, Ecash," and
for a long time it was an experiment.
And to some degree the cryptographers that
work on it still see it as a pre-alpha software.
And then people began to realize that they
could do interesting things with Bitcoin that
they couldn't do with other systems.
So, cheaply send money on the internet for
P to P internet commerce, and then more subversive
people realized they could buy drugs with
it online.
That was a huge part of the early narrative.
And then, the big turf war began between the
people that understood it as peer to peer
petty cash protocol on the internet, and the
people that see it as this monetary phenomenon
which is a gold like thing, which they want
to challenge central banks.
So how early on did that thread emerge?
Because it seemed to me that in the limited
amount of writing that I've read from the
earliest days of what Satoshi wrote, there
seems to be some element of that.
There are certainly references to the 2008
crisis, and I wonder also perhaps answer this
as part of your answer, could Bitcoin have
succeeded?
Could it have emerged were it not for the
financial crisis in 2008?
I love that question.
I was just thinking about it.
If Bitcoin was created in the 90's, when most
of the technological tooling to create Bitcoin
already existed, not all of it, but most of
it.
Would it have taken off the way that it did,
in this relative peace time?
Monetarily speaking, yeah I mean, so to answer
your question, there's this big discipline
which I call Satoshi Exegesis, which is scrutinizing
the text, the Holy Text now-
The Canon.
Yeah, to determine what he meant.
Because he or she is not around to-
Or they.
Or they.
I like to think that Satoshi's a time traveling
AI.
There's other plausible explanations.
But to some degree it's a little futile to
determine what his intention was in creating
Bitcoin, because Satoshi actually makes various
contradictory references.
Should this thing be cash?
Is he creating it because of the financial
crisis?
Which he absolutely makes reference to.
Now that Satoshi is gone, the community is
making their imprint on it, and I would say
his intentions don't really matter as much
now.
But to answer your question, yeah.
Many of the early Bitcoiners, Hal Finney in
particular, who was the first one to ever
make edits to the code aside from Satoshi,
saw it as this high-powered collateral upon
which you could create maybe fairer banking
system.
Which is what I align with the most.
I think that's the way that the protocol is
the most impactful.
I think that's commeasure with it limitations.
And I think that's in practice what it's being
used for already.
So, I'd definitely put me in that camp, as
opposed to the "We think the base layer should
be used as a P to P payments layer, globally
scalable".
Right, so let's dig a little deeper into that
aspect.
What about it would make it a more fair financial
system?
Well, Elaine Ou, who's this amazing writer,
has this great quote about it which is that,
I'm going to garble it but, "Risk in the financial
system is abstracted a way, it's kind of imperceptible.
It's hard to quantify, it's socialized.
But with Bitcoin the risk is right there,
Bitcoin brags about the risk right there on
the internet."
So, it's rather quantifiable to know what
the odds are of having your transaction reversed
in Bitcoin.
The settlement is probabilistic so to speak.
Where as, in the traditional payment space
and financial system, it's very hard to know
exactly what you're dealing with.
There may be risks that are undetected, or
you may believe that you're protected based
on some government assurances, but that can
also be the cause of a great deal of chaos
and risk.
It's much more abstract and I would say obscure.
But then to be more concrete about it, I think
Bitcoin is cryptographically auditable, so
by running a full node, you can get the whole
history of all the balances on the network.
Which means, you can audit the entire global
supply of the commodity, of the thing.
Which is really astounding.
I mean, compare that to gold, if you want
to determine whether some gold that someone
has given you is legitimate and it's not counterfeit,
you need to get it assayed, you need a XRF
spectrometer or something.
Or you need to establish a system like in
London, the LBMA, they have this trusted supply
chain where every link in the supply chain
is authenticated.
So it's very costly and difficult to determine
the validity of an inbound payment, and that's
part of the reason gold was centralized and
ended up in banks and central banks.
With Bitcoin, it's very cheap and efficient
to acertian the validity of an inbound payment
and of the entire supply.
So now that you have those assurances, you
can build interesting things.
You can build banks with Bitcoin in their
vaults that are provably solvent for instance,
with really standard cryptographic operations.
Or you could have a fractional reserve bank
which provably only had 40% collateral in
the vaults, or whatever reserve ratio you
wanted.
So, that is the really interesting thing to
me.
And the ability to give end users that kind
of transparency information is something that
I don't think really exists in the current
financial system.
So, a few questions, one to stay on the point
about narratives, how does that fit into a
narrative about Bitcoin being the settlement
layer for global payments?
How does that relate to this idea of digital
gold?
But also, is that really true?
Because if we were to actually build out a
fully functioning financial system, there
would be tons of intermediary transactions,
and in order to scale Bitcoin, you'd need
to rely on second layer solutions.
So, really how true is that that you would
get "finality" or a higher level of certainty
about of a bank's financial standing?
How true really is that?
Yeah, I guess it's a good point because you
can never really assess what a bank's true
liabilities are, even if they have some highly
auditable collateral in their vaults.
But I think what you can do is just close
those informational gaps that exist.
And yes, re-intermediation in a cryptocurrency
context is something that it seems very paradoxical,
and gets us laughed at I would say, by industry
critics.
It's like, "Oh, these guys thought they were
decentralizing and yet here they are building
up."
The running joke by Matt Levine, the Bloomberg
columnists, is that everyone in cryptocurrency
is just relearning all the lessons of finance
in accelerated motion.
Isn't that kind of true?
I would say yes, absolutely, but it's interesting
that they're doing that.
It's like, yes, we're going through this accelerated
process of condensing the last 5,000 years
of financial history into ten years.
But the objectives are fairly noble I would
say.
Well, let's actually stay with that.
If that's the case, because I have a sense
of it, which is I think that the best arguments
I've heard ultimately have to do with basically
re-engineering the gold standard.
It seems to me that what Bitcoin offers is
in the face of the scaling issues, the fact
that you need second layer solutions, that
what it offers is a base layer that provides
un-inflatable money.
Private issued money, non-fiat money, and
accountability in terms of credit creation
for the banking system.
That's what for me, is a viable alternative
that can be built using Bitcoin.
But how would you frame it?
How do you see it?
No, I think that you put it very well actually.
And many Bitcoiners are Austrians, so they
actually reject the notion of credit entirely,
which is kind of crazy I think, to me.
But so, there's this Bitcoin lender that exists
called BlockFi, and you'd think that just
facilitating lending activity in a pretty
standard way would be very uncontroversial,
but that's not the case in Bitcoin land, it's
incredibly controversial.
It's the topic of a really heated discussion.
But yeah, I think Bitcoin is similar to gold
in that it's relatively cumbersome to move,
and it's treated as something that is valuable.
And then, you can also use it additionally,
unlike gold, as this high powered, and highly
transparent, and auditable collateral upon
which you can build any number of financial
applications.
So, why do we need that?
Why do you feel that we need a new financial
system?
And one that has more constrained in its credit
formation?
I mean, I think the current financial system
in many ways is highly exclusionary.
So, that's one thing.
You're talking basically about the unbanked
and all that stuff?
Yeah, but I was on the train over I was challenged
with the same question.
Doesn't our legacy or current financial system
work just fine?
And-
Was that a serious question?
Yeah.
It was serious.
He really seriously asked, "Doesn't it work
just fine?"
And I'm always sort of astounded when people
ask me, because it's like how sheltered must
you be to believe-
That's so interesting.
Did you ask what line of work this person
was in?
They were an investment banker.
Oh God.
Yeah.
It was the Acela, so it's like you can always
do networking on the train.
What company was he-
No, no, no, I'm not going to docks this guy.
Oh man.
But no, it's interesting because if you spend
time outside the US you kind of know that,
A, there are many countries with high inflation,
that's like a fact of life.
And the local sovereign currency is not something
that's appropriate to save in, you just wouldn't
want to do it.
And then B, even within the US, there's a
lot of arbitrariness and caprice, especially
as banks have become more risk adverse recently,
they're excluding more and more classes of
activity from acceptability within the financial
sector.
Whether that's cannabis businesses which are
totally legal, or it's sex workers, or even
actually basically the whole cryptocurrency
community has become un-banked at some point
because they're perceived to be too risky.
So, there is a huge amount of arbitrariness
I would say within the current financial system
even within the US.
And if you do something as simple as putting
Cuban restaurant in the memo field of your
Venmo transaction, you risk getting yourself
frozen out of that account too.
The other category of things happening now,
is that banks are being pressured to use their
services in a political way to unbank the
NRA, or gun manufacturers, which regardless
of your beliefs on that, is a worrying sign
about how financial services are being weaponized
to exclude whole classes of activity or to
punish them.
As we see, the US used Swift as this enforcement
arm, this policy instrument abroad and they
used the threat of sanctions, that I think
de-legitimizes the established financial regime
that they created.
They created this nuclear umbrella of financial
services that works globally, and now they're
selectively withdrawing it.
So, I think it's a good time to be skeptical
of the dominant financial system
Well, that also kind of opens the door to
a few things, one of which is how realistic
is it that you'd be able to build an alternative
financial system when there's an existing
oligopoly that has the support of the United
States government, and all governments worldwide.
The Central Bank is an established institution
that goes back many centuries.
So, that's one thing.
We should probably get into it.
But before we do that, listening to you talk,
one of the things that I was thinking about
was what different people see in Bitcoin?
Up until now, when we were talking about these
narratives, we were talking about what Bitcoin
is, but it also seems to me that, and maybe
there's some intersection here, but there
is for different people Bitcoin represents
something else.
And I mean in a sense of aspirationally, right?
For Austrian types it represents an opportunity
to bring back sound money, right?
Yeah.
For other people it represents an opportunity
to be anonymous.
We kind of touched on both of those things
but how do you think about that?
The way that people come into it?
And of course, I think the predominant thing
is people want to get rich, right?
Yes.
That's probably the main thing that people
care about.
But yeah, to some degree it reflects your
own expectations and desires because as you
say, you have people that are Austrians and
they have this profoundly restorative objective.
They want to go back to the 1890s, or at least
the monetary system.
And then you have people who have an altruistic
motive, they see the potential of cryptocurrency
to really bank the unbanked, so to speak.
Although that's become a bit of a cliché
in the industry, but that's still a very profound
motive.
I would say typically it involves helping
out some marginalized population.
But then you also have libertarians and anarchists
that have seized on it, and people that see
it as a slow-burning rebellion.
I mean really, like a "Fuck you," to the state
basically.
Sorry I don't mean to swear but-
Oh yeah, well I think Pierre...
That's fine.
I think Pierre falls in that category.
When I had Pierre on the program, it felt
to me very much, and I think he admitted it.
He wouldn't deny that he's ideological and
I think that a big part of the community feels
like that's the way ultimately to be successful
with this.
Yeah, it's been characterized as political
and I would say it is political.
It's in part, the really dogmatic corners
of the industry, it's a reactionary movement
rather than a progressive one.
So, the question is I guess, because then
also you've got Wall Street, right?
Licking their chops.
And they've gotten involved the last couple
of years, which has definitely helped drive
adoption, and again, adoption's important.
We may despise certain characters or people.
but to the extent that they're able to drive
adoption in a sustainable way, I think that's
generally a good thing.
Now, whether it's good to hype a price and
have giant booms and busts, I don't know that's
a different story.
But how do these camps reconcile themselves?
You've got these buttoned up Wall Street types
that want to use this a financial instrument,
build derivatives, trade off it.
Then you've got these political activists
who see it as part of a larger ideological
mission to take back power from the state.
And then you've got just people that are technologists
that like to tweak and solve problems.
How do all those people come together?
This is kind of a way of asking also about
the governance of Bitcoin.
Yeah.
It's very funny, and many people find it to
be paradoxical in some way, because having
been inside a large financial institution,
one of the largest, that decided early on
to be a service provider for Bitcoin-
Fidelity?
Yeah.
You wrestle with these paradoxes and I think
the truth is that there are more radicals
within the Wall Street institutions within
the JPM's, and the Fidelity's, and the Goldman's
than you might think.
Because they know how effed up their system
is.
Well, it's just because once you get turned
on to this notion of building for Bitcoin,
it's kind of hard to get off it.
It really is-
Why is that?
Well, because it's such a subversive idea.
What is subversive about it?
That the state should no longer have the right
to make currency, that we can disempower them.
And the thing is, is that you can dare to
dream because Bitcoin is this just colossal
juggernaut that it seems very, very hard to
interfere with.
So, let me ask you something because this
touches on, I think a very interesting thread.
Which is something that I talked about with
Ben Hunt in one of our recent episodes.
And I think it speaks to the disillusionment
of society, certainly in the United States,
with the government.
I think there are two really important events
that drove that home.
One was the failed, disastrous occupation
of Iraq and the lies that were incorporated
in selling that war.
Then you also of course had the invasion of
Libya, and a bunch of other things during
the Obama administration.
But you had also the 2008 crisis.
It was those two, the Iraq war and then 2008.
The 2008 crisis which was a larceny of the
federal government and the treasury.
How big of a role does that play in your view
in all of this?
I would say absolutely critical.
There's nothing more indicative of the largess
of a captured democracy, and also there's
nothing more indicative of the failures of
a fiat regime than something like a war which
spends a trillion or multiple trillions of
dollars, which can be summoned out of thin
air.
This is one of the best arguments in favor
of a sound money in my opinion, that if you
wanted to go to war under the gold standard
for instance, you would have to actually tax
your citizens and figure out how to pay for
it beforehand.
I would disagree with that.
You could borrow the money.
Well, you can borrow the money.
And that's exactly what happens during wars.
And that's true, and actually Saifedean makes
this point in his book, The Bitcoin Standard,
that a lot of the historical instances where
countries have left the gold standard has
been precisely because they wanted to finance
warfare.
But the ease of doing it under an inflationary
regime I think is really startling.
The ability to marshal those funds and then
pass that on to future tax payers.
Well one of the things that, and I have not
read Saifedean's book, but many have read
it in this community.
One of the things that we do know historically
even in the United States, the Civil War is
a perfect example, Lincoln issued the Greenback.
Governments have shown a willingness and an
ability, even under regimes of hard money,
to issue fiat denominated currency in order
to finance wars.
In other words, when it comes to existential
crises or anything that the state deems to
be sufficiently important, the state has shown
an ability, a willingness and an ability to
subvert a hard money standard.
Which kind of brings us to a question that
I have in my mind, which is that let's say
the community of Bitcoiners manages to build
this alternative system, and it scales to
some degree where it captures some percentage
of global commerce.
Why does that matter?
The question, is ultimately how does that
prevent governments from doing what they want?
This is a point I brought up to Pierre as
well.
So, this is where I think it departs from
the comparison with the gold standard.
Because a gold standard is still ultimately
administered by a government.
The Bitcoin standard is administered by a
code, and the inner subjective consensus of
the Bitcoiners, and by cryptography.
So the ability to intervene, to exercise monetary
discretion is really radically reduced.
And if this experiment in governance succeeds,
and you spread the decision making power to
a global audience, you're not going to be
able to have interest groups which are able
to alter the rules of the chain in a way that
is favorable to them.
I want you to walk me through that, because
I don't fully understand the difference between
this and let's say the classical gold standard.
What is that distinction in your view?
Well, I would say gold standard is just more
fragile because of the nature of gold and
in practice-
Because of the auditing process?
Well yeah.
Because gold concentrates itself because it's
costly to verify it, and so it ends up in
these centralized silos basically.
Isn't that also the case with Bitcoin?
Isn't there concentration within the network
both at the exchange level but also in mining
pools in terms of new issuance?
Yeah, there is in practice, the supply tends
to accumulate in exchanges which is unfortunate
but it's also the reality.
And that's also part of the issue though with
scaling on layers above the base layer, right?
Well, if Lightning was successful for instance,
you could have scaling without the trade off
of needing to pool liquidity or pool collateral
into a large hub.
But even with Lightning, aren't there trade
offs that are made within the network that
lead to centralization at different parts
of that network?
What I'm basically getting to is that, we're
not there yet, right?
And in getting there I question whether this
system will look any different than our current
financial system?
Other than an important distinction which
is the base layer, which is the base layer
and not just the immutability factor but the
supply schedule.
The deflationary supply schedule.
That to me is the only clear distinction,
which is an extremely important distinction,
and to what extent it's a workable distinction
I'm not sure.
But what would you say to that?
Yeah, I think just a hard money system where
the supply really was in violet and it progressed
according to the preordained rules, that alone
is a really significant improvement over what
we have now.
To opt into that system and to opt out to
the Legacy system, that alone is a very powerful
and important thing.
So to me, it's perfectly natural that we should
have a non-state money.
In complement to all the sovereign moneys.
Maybe some of them, the monetary authorities
are going to find their sanity again and start
to behave better.
I think that ultimately could be the greatest
contribution of Bitcoin in the world.
It's a check on global power at the sovereign
level.
Absolutely, absolutely.
So, I'm not demanding that this system grows
and scales to a global level, and includes
every individual on earth and their forced
by Bitcoin, I think that would be silly.
But I do think that if we're able to succeed
in our objectives, we're building something
that could be very useful to anyone on earth
if they so desired to engage with it.
But the beauty really is that it's non-coercive.
So, that no one is forced to.
It's very much a social contract that you
can actually weigh, and determine whether
you want to opt into this thing or not.
That's the beauty.
I believe you told me you read Homage to Catalonia?
Yeah, that's my favorite Orwell book.
Talk to me about the role of anarchism both
in the community, but also the philosophy
anarchism to you and the importance of this
idea?
I mean, you touched on an aspect which is
non-coercion.
How important is that to you?
Well, I'm not an anarchist, so I don't have
any of these-
Well, you're not a militant anarchist.
But I mean, just the idea that there shouldn't
be coercion, right?
And I don't mean that in any pejorative sense.
I think we did an episode with Carne Ross
the diplomat, I think it was Episode 10 where
it dealt in part with anarchism.
I think anarchism is an admirable philosophy,
the question is is it workable, right?
Well, I see Bitcoin as building this system
of independent property rights.
I suppose you could characterize that as anarchist,
but it's like building any other institution.
It's just that this institution manifestly
is outside the control of the state.
Right, but its governance is anarchic.
Its governance is fascinating.
And I'll say its governance is something that
I didn't appreciate early on.
And I think it's the aspect of Bitcoin that
I least appreciated, and that I've come to
most admire, and think offers not necessarily
a template, but it should be studied by everyone.
Everyone should look and see what's happening
in this community, and how people come to
inter-subjective consensus about what Bitcoin
is and should be.
I would say Bitcoin's governance is like looking
in a flock of sparrows that are producing
a murmuration, where they're all flocking
together in the same way.
It's really breathtaking if you've ever seen
it.
Starlings rather, not sparrows, sorry.
And each individual bird within the flock
has agency, and yet they all act in concert
together, because that's...
I actually don't know why they murmurate,
but each bird just looks at its neighbors.
There's a paper on-
Murmurate means what?
When the flock is essentially-
Pulsating.
Pulsating.
It's like artistic almost in a way.
I encourage you to watch a video.
Well, I think that some of the similar...
Again to shill our own episodes, we did an
episode with complexity theorist Brian Arthur
where we discussed some of the work in this
area, and I think the same phenomenon is true
of traffic patterns for example.
When you have independent automaton a system,
their own unique decision making creates these
more beautiful patterns, or complex patterns
at the network level so to speak.
Yes.
So to elaborate on this, the interesting thing
about Bitcoin governance is that there is
not entity really which determines what policy
is, or what users in the network should do.
The sovereign entity within Bitcoin is the
full node.
And if you want to participate in the network,
you chose to run your node and you can set
it to follow whatever behavior or rules you'd
like it to, but ultimately it's in your benefit
to have it follow the default set.
However, this changes.
There are frequently updates, and it's often
the node operators that are the ones forcing
through the updates, as opposed to any elite
cabal of developers which are handing down.
Those are the distinct from the miners?
Yeah.
So, there are really three big interest groups
in Bitcoin, the node operators, the miners,
and the developers.
And if you read the probably pre-2017 takes
on Bitcoin governance from academia, you'd
often read things like, "Well, actually it's
just a handful of developers that control
the system.
Oh, actually it's mostly the miners, which
are mostly in China, that control the system."
Empirically, this just isn't the case and
the events of 2017 showed us that.
What was tantamount to a user rebellion against
miners who were being intransigent with not
pushing through the segregated witness upgrade,
and so the users essentially overruled.
By users you mean node operators?
Node operators, yeah.
So, they threw this policy of brinkmanship,
they virtually overruled the miners.
Well, it was a bargaining chip essentially.
In the early days, were nodes synonymous with
miners?
Yes, they were, yeah.
And that was how Satoshi wrote about them,
and then they-
Right.
Another interesting point though, right?
Because that also speaks to differing visions
of Bitcoin.
There are people that think, I imagine today...
I'm getting way out of my league, but I imagine
there are people today that still believe
that node operators and miners should be one.
In other words that anyone should be able
to run a mining rig.
Well I mean in practice, unless you have an
ASIC, your mining activity is going to be
virtually worthless.
And even then, you probably need to pool with
other miners in order to make it worth your
while?
Yeah.
There is a faction within Bitcoin that believes
that only miners are the relevant entities,
because in the past they're been tasked primarily
with resolving governance questions.
But I don't think that's the case today.
Mining is mostly an industrial, kind of a
utility, and the miners are not considered
to be the essential political unit.
So, I kind of took us off a little bit.
You were talking about how in 2017 what we
saw was actually that the node operators exercised
a level of power over deciding what Bitcoin
would or would not be.
Yeah.
So, there were really two critical events
in 2017.
One was the so called User Activated Soft
Fork, which was a case where the miners had
been tasked with rubber stamping this upgrade
called Segregated Witness, and they were not
doing it.
You needed 90% of the mining power, or 95%
to ratify it and there was only 40%.
And then, the Bitcoin community collectively
came together and said, "Well if you don't
do this structure, you're going to partition
the network."
How did that 95% come about?
That was kind of an arbitrary threshold that
the developers used to set to incorporate
so called soft forks.
So, it changes-
So it becomes conventional?
Yes.
To make sure that everybody-
Just another fascinating point, though right?
That there's this convention of 95% that you're
pointing to which has an origin story it's
not really clear.
It just kind of emerged somewhere down the
line.
Because again there is no-
Yeah, it's very arbitrary.
There is no foundational governance structure.
There's no constitution.
Well, you could say the whitepaper is a very
rough constitution.
Right, the founding document.
The canon basically.
But it's very open to interpretation, and
Bitcoin's governance has developed in its
own way over the ten years.
The whitepaper, would that be something similar
to let's say if the Bill of Rights was a document
that some revered early American had put together,
and it was something that let's say judges
referred to, but it wasn't the law that they
had to refer to it?
So, the whitepaper is in Bitcoin's context,
it's a little bit like a brochure for the
system.
So, Satoshi himself said this, "The code itself
is the system and then the whitepaper is an
explanation of how it works."
But the whitepaper is not exhaustive, it's
extremely short.
It's like nine pages.
And most of it is spent on the question of
the security model, and you can be critical
of Satoshi.
You can say, "Why didn't you fully specify
the system?"
And his answer was the code itself, so the
rules expressed in the code was the system.
So for instance, Satoshi doesn't say that
there's always ever going to be 21 million
units of Bitcoin, but that is evident by looking
at the first Satoshi client looking at the
code.
So, it's kind of an under specified constitution,
so maybe it's a Declaration of Independence,
or a Federalist Papers.
Did he give an explanation for why it was
set at 21?
I don't believe so, but the actual number
itself is totally arbitrary as long as it's
sufficiently divisible, which it is.
Or that it was deflationary.
Was there an explanation for why it was deflationary?
I don't believe so, but if you think about
it, I think that's the only way to create
a system that would be mutually acceptable
to people.
Because if there was some built-in inflation
rates so to speak, the question is where do
you set that?
And who do you give control of the inflation
rate to?
And then you send it back with the same questions
that plague us today with the federal reserve.
So, I think the only way he could have created
this system such that people would actually
want to use it, was to make the supply scarce
and fixed, after an initial period of issuance.
And if you think about it, if he created an
inflationary system, probably what would have
happened would have been people would have
forked it to create a scarce version.
And my guess is that that one would have succeeded.
Do you think so?
Because I mean, there's a difference between
arbitrary inflation or let's say a systemic
type of inflation.
Yes, that's true.
Let's say 2% every year, or 1%, or it's not-
Yeah, and maybe a version which had 2% inflation,
so to speak.
Although, I think supply inflation as opposed
to purchasing power inflation.
2% issuance every year may well be...
And I think it probably would be an improvement
over the current system where inflation is
totally at the discretion of a few individuals.
I think the bigger issue with the current
system is that it's unaccountable.
I guess there's some political accountability,
right?
Right, but clearly there's not, right?
Because I understand what you're saying, but
just to bring it back to the outrage, and
the disillusionment, what we saw in 2008 showed
us that at the limit all bets are off.
At the limit, what matters is saving the constituents
that hold power in the system, right?
Yeah.
At all costs.
Yeah, so the problem in my opinion, the really
essential problem is that there is the spoils
of inflation are unevenly distributed.
So it's people that own financial assets that
have really benefited in the last ten years.
But also the power to change the code is concentrated.
Yes, and that means that there's a massive,
massive incentive to join the rentier class
and use your advantage, the access to the
code to speak, to benefit yourself.
Right.
And the incentives to change the code are
also misaligned, in that sense.
Not the code, I mean in the case of the federal
government, in the case of the federal reserve.
Yes, so the fact that there is no one who
can privilege themselves by arbitrarily changing
the rules of Bitcoin, that's the important
thing in my opinion.
And the fact that, I do think it would be
an okay system if there was a fixed level
of issuance too.
I don't think there's anything that special
about 21 million units, but that was what
we settled on originally so that's what it
is always going to be.
So, we've spent a little bit of time now talking
about the meta layer of this.
Let's get into some of the more substantive
parts of the discussion.
Because you've written quite a bit on how
to value this asset, how to think about it.
One of the more interesting contributions
that I've found had to do with market cap,
realized market cap versus market cap as we
think about it.
And also thermal cap, and economic density,
and throughput, another thing which is...
So, actually I'll separate those two, the
market cap issue and then also throughput.
Often times, folks like myself for example
will compare Bitcoin's through-put to transaction
throughput for Visa.
But you make this great point of differentiating
between types of throughput.
Economic throughput as you call it.
Let's begin though with market cap.
How should we think about the value of this
network?
Yeah.
So, the default way to think about it is by
borrowing the concept of market cap from equities,
which is kind of funny because I think it's
probably closer to a commodity.
And you don't really think commodities in
terms of the market cap.
I mean, if I asked you, you probably wouldn't
know what the supply of gold is off the top
of your head.
But since it's so easy to quantify these things,
this is what we ended up with.
You take the supply, and you multiply it by
the current market price, and then you say,
"Well that is the economic significance of
this thing."
In Bitcoin, it's kind of a silly way to do
it, because 15% to 20% of the supply is truly
inert and considered lost.
Explain that.
Really deeply lost.
So, Satoshi is believed to have about a million
or so, 1.1 million maybe, there's some disagreement
on this point, coins-
Why is there disagreement?
Because they can't decide who owns the wallets?
Yeah, because there's a couple million wallets
just sitting there from 2009 to 2010, which
haven't moved and some fraction of them is
presumed to be Satoshi.
But Satoshi didn't sign them by saying, "I
am Satoshi."
He just mined like any other network participant.
So, nobody really knows how many are in there.
But just the fact that none of these coins
have moved in ten years, not to be presumptuous,
but to me that signals that they're unlikely
to ever move actually.
And for sure, we know that some of those coins
truly are lost.
There's a lot of stories of early Bitcoin
miners that threw away their hard drives and
it's a landfill in Wales somewhere.
So to me, it's a little arbitrary to used
to total supply ever issued of Bitcoin as
a proxy for its economic significance.
So, I devised this concept of realize cap
where you take every single unit of Bitcoin,
and you cumulatively aggregate the value of
those units according to the price at which
each unit last moved.
The last time it was marked to market.
Yes, because you can sort of naively assume
that if there was a transaction between you
and me, that's most likely settled on chain
or recognized on chain.
So, I call this realized cap.
And if you do that, so the market cap of Bitcoin
today is around 200 billion if I'm not wrong,
the realized cap is much lower.
It's about 95 billion.
And you might say that is roughly the economic
significance to the coins owned by holders
in circulation, that have actually transacted
with it fairly recently.
So by that calculus, Bitcoin is actually less
significant economically than you might have
thought.
So, I have a question about that, a clarification.
In your paper you cited a ten-billion dollar
number as the inflow.
Oh that is a different-
That's a different thing entirely?
Yeah, that's cumulative security spend or
thermal cap.
Okay.
So, the realized cap basically marking to
market the last time these Bitcoins were moved,
you estimate it at 95.
And the total market cap at the time of writing
the paper was, I mean these numbers have changed-
A lot, yeah.
Since I wrote this-
When did you write this paper?
In September 2018.
So, the numbers are really different today.
All right, okay.
But at the time there was a discrepancy of
20 billion, 95 to 115.
Yeah.
Today the discrepancy is much greater.
Right.
And you were saying that actually meant that
the Bitcoin network was worth less than people
believe.
I actually took it the opposite.
And in fact, I also not only did I invert
that relationship, but I actually also didn't
feel that that same type of relationship held
across different coins.
So, in the case of for example an obscure
coin, not Bitcoin cash, give me something
more obscure.
Something where no one gives a shit.
Like they've got the coin-
Vertcoin maybe.
Yeah, whatever.
Something-
No disrespect to my Vertcoin mining friends.
Right, I don't know.
But something where, let's say particularly
if it was a fork, and they got these airdrop
of this alternative coin, and they never really
gave a shit about it.
They probably lost the coins, you know what
I mean?
It reflects actually the fact that no one
gives a shit about it, and it's really actually
worth nothing.
Whereas in the case of Bitcoin, couldn't you
make the argument that the network is actually
worth more on account that there's actually
less supply?
I suppose you could.
This is why it's such a beautiful measure,
it's open to interpretation.
Because market cap itself, exactly.
Because the market cap, it's not a stock,
right?
Well yeah.
But this is really the point that I'm making
is that-
Brings us back to the point about the face
that you don't think about gold's market cap.
Yeah, and really within the context of crypto,
there's this immense perversity where these
things they are highly gamified and there's
all these leader boards, like Coin Market
Cap.
Where the market caps of these various cryptocurrencies
are compared.
So, my point was a rebellion or reaction to
that.
Where as Matt Levine says, "We're reinventing
finance from scratch," this is a case where
we probably overshot by making market cap
the default measure.
And I propose realized cap is a potential
alternative but maybe not the best alternative.
Who knows what the real answer is?
But I do think that you might as well just
look at the ledger itself to determine what
the active supply is, what the float is.
And the nice thing about cryptocurrencies
is, you absolutely can do that.
So, if 90% of the Bitcoins were lost, you'd
want to know that for instance.
Also, would you agree that one of the problems
is that absent utility, it's really very difficult
to measure the value of what is effectively
a speculative asset that has only been around
for ten years?
Yeah, I don't think there's a way to value
it so to speak.
As with Damodarna says, "They can only priced
not valued."
Cryptocurrencies that is.
Right, right.
But and I think that generally is true, and
I have been very critical of this lack of
utility with Bitcoin.
But I think one area where that's not true
has to do with the fact that real wealth is
actually moved on the Bitcoin network.
And I think this brings us to this distinction
that you draw between throughput and economic
throughput.
Talk to me a little about that.
So, yeah.
The interesting thing about Bitcoin is that
it tries to be as parsimonious as possible
with the actual data overhead, because every
node has to save the history forever.
So, that's where a lot of the disputes came
in over how much data should we be through
putting though the ledger every single day.
And today it's about 150, maybe 200 megabytes
a day is transiting, or new information is
being added to the ledger.
So, it's not a lot really.
I mean, you can store the whole history of
Bitcoin on a regular commercial hard drive.
So, the way the Bitcoin operates, or the way
it kind of should work in my opinion, is that
you attach a lot of financial value, or economic
value to each smallest byte.
So, every day Bitcoin will do a few billion
dollars of transactional volume, which is
kind of remarkable that it's compressed into
so few bytes.
Because the externality is that the node operators
incur the cost of ingesting all that information
and saving it.
And they have to spend money on bandwidth,
and the Bitcoin developers have always tried
to be super parsimonious, and stingy with
the data flowing through the system.
So it should be disentangled, the data overhead
and the number of read-write operations, number
of transactions per second so to speak, which
is fairly low.
It's about seven at the maximum.
And the actual economic throughput that's
flowing through the system which is really,
really big.
So, if you can move that lever of making your
average transaction pretty large, you can
achieve a really significant economic system
even if you have a low data overhead.
Actually let's parse those two things, because
I think you're touching on two separate ideas.
One is that generally speaking, each transaction
on the Bitcoin network has more economic value
than let's say each Visa transaction.
I would say absolutely, yeah.
Your average-
Right.
And there's data that backs this up.
Yeah.
Your average Bitcoin transaction's going to
be in the thousands of dollars typically.
Right.
And that also has to do with the fact that
it costs more to transact on Bitcoin, than
it does to transact with your credit card.
Absolutely, yeah.
All right.
So, there's that aspect of it.
But then there's also this other aspect which
you're touching on, which has to do with efficient
use of the base layer.
And a lot of that deals with exchanges and
batching.
Yeah.
So, it's rather neat I think that Bitcoin
transactions are actually costly, and that
Bitcoin block space is a scarce and costly
resource.
Because that induces something like market
participants exchanges, good behavior.
So to have a light impact, so batching, where
you combine a lot of transactions together
to minimize the fixed cost of data involvement
in your transaction.
That's one way that exchanges are encouraged
to have a light impact.
But it's not just us encouraging them to do
it, they're actually economically incentivized
to do it, because they save on fees.
How much more efficient do you think core
developers can get with the base layer?
We're actually probably reaching the limits
of efficiency, I would say.
Your typical Bitcoin transaction is 250 to
300 bytes, and that has to be stored by virtually
every node forever.
And there are some cryptographic enhancements,
like using a different kind of signature,
so using Schnorr signatures instead of the
one that we have now.
That might give you more efficiency, and in
particular in terms of multi-signature transactions,
but yeah, we're kind of getting there.
Because there is a lower bound to...
Because the transaction has to contain a certain
amount of data to work.
The problem is not with the core developers
I would say, but with the exchanges who have
historically been really profligate in their
usage of block space.
Because they could socialize a lot of those
costs to their end uses.
Just pass the cost along, the fee costs.
Also, merchant payment systems like Bitpay
for instance.
Bitpay, they had a habit of passing on the
fees costs to their users, so their incentive
was not to do cost saving transaction constructions,
which is a little bit perverse.
So, I think the only way this is really resolved
is if fees actually continue to climb, thus
making block space more valuable.
And kind of inducing the big industrial operators
on the network, to behave better in terms
of making small transactions.
I mean, this is not in my notes, and you haven't
really seen you write about it.
So, I'm not sure what your fluency is on it,
but where are we today, where are developers
today in scaling beyond the base layer?
If we're getting to the limits of efficiency
on the base layer, where is the community
besides that?
Well, the main scaling vector that people
have settled on is Lightning.
Which is a way to defer settlement from payments,
and then eventually settle them onto Bitcoin.
But you win a lot of scalability.
It does have an interesting model where you
have to kind of lock up collateral and have
some liquidity present on this so called Lightning
network for it to work.
And like any other network, it needs to grow
before it's useful.
There's still a relatively small amount of
Bitcoin on there.
But that has been the main focus I would say
for the last few years.
Hypothetically speaking, if the entire current
financial system were willing to adopt Bitcoin
as a base layer for settlements, what would
be the difference between that and let's say
what is emerging through the Lightning network?
And whatever will be built in second layer
solutions?
Well, I think in ten years we might look back
and be like, "Remember Lightning?
That was a weird thing."
And there would be some totally alternative
overlay network on top of Bitcoin, which works
just fine.
So, I don't think Bitcoin's future is really
indexed to the fate of Lightning at all.
I still believe it's going to be successful
but-
Tell me about that.
Explain to me why you feel that it's going
to be successful?
Well, just the caliber of individuals that
I know that are working on it.
Really, really talented people, and there's
a lot of critical mass there.
And startups as well that are building on
top of Lightning.
So I think that it will be useful.
However, the nice thing about these overlay
networks is that they are not critical for
Bitcoin to keep working as intended.
They can fail, and Bitcoin still does its
thing.
Because ultimately Lightning is a special
kind of time lock, multi-sig transaction on
Bitcoin.
What do we know about security at some of
these exchanges?
Typically very weak I would say, and they're
infamous honey pots for attackers.
How often do they get attacked?
All the time.
Billions of dollars have been stolen from
exchanges.
And I think the reason that it's so bad is
because you had really armature-ish people
building exchanges for a long time.
By the way, that's another huge vulnerability
for systems using proof of stake implementations
at exchanges.
If an exchange is hacked, and then a lot of
stake goes to the attacker?
Yeah.
Yeah.
So, that's why I think a lot of people believe
that the Ethereum Foundation chose to roll
back the so called dow attack.
The dow being this pool of capital on Ethereum
in the early days that got exploited, and
it was a really big pool of capital.
It was exploited and the Ethereum community,
or more specifically, Ethereum leadership
at the time, decided to move to a new state
of the chain where it's like that exploit
never happened.
And they had stated their desire to move to
prove a stake, they're still planning to do
that, and the kind of conspiracy or maybe
not conspiracy.
But one of the explanations for why they marshaled
support to make this very arbitrary change
to the state of the ledger, was because it
meant that in a future proof of stake world,
the person who had hacked that dow would have
a huge amount of political influence in the
protocol later on.
And so, they were trying to strip them of
their future influence.
They didn't want a black hat to be influential.
So, yeah.
But that is definitely a critique of proof
of stake.
I would say that if you can acquire coins
costlessly or cheaply, you can acquire influence
cheaply.
Well, I think this is a problem though.
This thing of exchanges.
Because again, we've covered this on the program
with Bruce Schneier, and most noticeably but
also with Josh Corman.
Generally speaking, around the vulnerabilities
of servers to being attacked, cyber attacks.
These are getting easier and easier to conduct,
and the level of sophistication required by
the attackers is going down.
I'm not sure how people can expect exchanges
to be a secure place to leave their keys in
the future.
Yeah.
And exchanges are just in practice, what they
are is colossal bug bounties.
Because you get to claim your reward in something
that's actually valuable.
Yeah, a honey pot.
Which wasn't really the case before with other
exploits.
So, the creation of cryptocurrency made the
world this amazing, lucrative bounty for hackers
where it wasn't before.
So here's a real legit, real world problem.
The fact that we're moving into a world where
it's going to become increasingly more difficult
to secure your database.
And this is ultimately why the base layer
is so valuable, right?
Yeah.
Because you can secure your wealth on the
base layer.
But how do we navigate this, right?
And this isn't just true for Bitcoin, it's
true for everything.
Yeah.
I would say-
How does the community think about this problem?
I believe that the cryptocurrency actually
has a really significant incentive to work
on these security problems.
So, that's why we have all this innovation
and hardware wallets, and also innovation
and custodial set ups, which is a lot of what
our fund looks at.
So before, strings of information were not
worth billions of dollars, and now they are.
So. the world has had to learn how do we safeguard
128 character string of information in a way
that's truly, truly secure form key-man risk,
from hackers, from other exploits?
And so, you have custodians doing really interesting
things there.
So, the consequences of failure mean that
the cryptocurrency industry is spending a
huge amount of effort working on this problem.
Which most likely will spill over into other
disciplines, and I think it'll be useful in
terms of security.
So to some degree, the crypto industry is
this testing ground for security, and because
the stakes are so high over here, interesting
lessons are learned in crypto land, which
then they become general Infosec lessons.
How do you think about attack vectors in Bitcoin?
Yeah.
It's a tough one, because my guess is that
whatever attack is best against Bitcoin, is
not one that we're anticipating.
The most commonly cited ones are probably
quantum computing, miner collusion, or just
governments actually just shutting down mining.
I tend to believe that it's actually much
harder than most people think to shut down
mining probably.
Well, let's talk about the miner collusion
because there's also a disincentive for a
commercial entity to attack the network, right?
And how do you-
If they're a miner, yeah, and it they own
Bitcoin ASICs.
Right.
Okay, but my point is let's say you're a commercial
entity, and you want to monetize your reward,
how would you go about doing that today?
If you had successfully attacked Bitcoin?
Yeah.
Well, you would sell it on an exchange.
If you-
Before anyone would know what was going on?
Yeah.
So, that's the challenge.
In practice, monetizing 51% attacks in crypto
land is very hard because the exchanges are
all kind of tuned onto them.
And so, if they see that there's an attack
occurring on some coin, they'll just stop
deposits.
How quickly does the community pick up on
that?
From the moment an attack begins to when generally
everyone knows?
It's not a formalized thing yet I would say,
but exchanges are very attuned to this.
But there's still a lot of confusion I would
say when these attacks actually happen.
Like there's actually an attack happening
on a minor cryptocurrency called Verge today.
Were it's proof of work function is being
exploited, so they're fairly common.
Right, on smaller ones.
But how valuable is that to exploit?
Not very valuable, for Verge, yeah.
The-
And you're basically I guess you're taking
the money from the exchange?
In that case, they're actually accelerating
the inflation, so they're stealing from the
protocol so to speak.
But yeah, the typical 51% of attacks involve
attacking exchanges.
You make a deposit, and then you introduce
an alternative state of the chain where the
deposit never occurred.
But meanwhile you've withdrawn anther cryptocurrency.
I think also something else that comes to
me when you're talking is, separate from the
technical challenges of let's say scaling
an alternative financial system.
There are also the behavioral challenges,
behavioral changes, that would be required
right?
People are used, for example, to thinking
that if their money gets stolen at Chase Bank,
it's not their money.
There's that scene that Robert DeNiro in Heat.
Have you seen the movie Heat?
They're robbing the bank, he's telling everybody
not to be a hero.
He's like, "It's not your money.
Your money is insured by the federal government.
You're not going to lose a dime."
But people are used to insurance.
At least with the original visions of Bitcoin,
the idea would not be to rely on insurance,
but to rely on self-sovereignty and responsible
custodians and savers, right?
And I think if you added insurance into the
mix today, if you had FDIC insurance for Bitcoin
accounts for instance on exchanges, I think
that would be really, really dangerous.
Of course, because FDIC, you mean government
insurance?
Yeah.
Well, that kind of wouldn't work.
No, but in the preposterous thought experiment
case, I think it would be catastrophic because
then everybody would keep their coins on the
exchange, and then you would be liable to
bug or an exploitation, or confiscation.
So-
But just to be clear though, in such a situation,
it would imply that the base money isn't Bitcoin,
but it's actually whatever the issuers, the
FDIC insurance.
But even in the case of a private issuer of
insurance, no matter what you're going to
have financial crisis in this type of a system.
Nic, I want you to stick around for our overtime,
I want to get into energy, because you've
done a lot of really interesting work there
in terms of the energy costs associated with
proof of work.
Where that energy is coming from, and some
of the opportunities, some of the economic
externalities there.
And I also want to talk a little bit more
about open source development, fork diplomacy,
and maybe get into some philosophy stuff too.
Okay.
I'm here for it.
Well, it was great having you on.
For our regular listeners, you know the drill.
People that are new to the show, head over
to Patreon.com/Hidden Forces, where you can
access this week's overtime, as well as a
transcript to my conversation with Nic.
As well as this week's rundown, which is much
better and more coherent than my thoughts
have been during this conversation.
Nic, I appreciate having you on.
My pleasure, thanks for having me.
Today's episode of Hidden Forces was recorded
at Creative Media Design Studio in New York
City.
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