Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast.
Today's show is part two of a two-part discussion with the incredibly talented macro investor
Lynn Alden.
Lynn recently published a book titled Broken Money and if you haven't heard the first
part of the conversation, I would highly recommend you go back into your podcast app and
find the episode that precedes this one.
And if you've already listened to that first part, welcome back and we're getting ready
to talk about the merging of a credit-based money ledger system with a commodity-backed
money system into a single new technology which is Bitcoin.
During this conversation, we talk about many different technical trade-offs that Bitcoin
makes such as privacy versus auditability, scripting and smart contracting.
Why many people look at Bitcoin as old technology relative to many of the other crypto projects
and what they're missing with that point of view, along with many other important topics.
So with that, here's part two with Lynn Alden on our newly released book, Broken Money.
You're listening to Bitcoin Fundamentals by The Investors Podcast Network.
Now for your host Preston Pish.
Alright, so I'm back here with Lynn Alden talking about her brand new book, Broken Money.
For people that are just joining us and haven't listened to the first part, I highly,
highly recommend that you go back and listen to the first part with Lynn, Stig and myself.
Before we talk really about the first half of the book and the history and the technology
of money and how we've kind of come to this third phase, if you listen to the tail end
of the last conversation, Lynn talks about there being like basically three phases.
We're getting ready to go into a deep discussion on this third phase.
And before we go there, Lynn, as I look back at the conversation that we just had in
the first part and you did such a great job talking about how money kind of is at the
center of all these conflicts throughout history.
And I think a person who might be hearing some of those ideas for the first time or asking
themselves like, why is that the case or are we over stretching this correlation that
money is always at the root cause of all these geopolitical conflicts that we've seen
throughout time?
I guess I'm just trying to really get to the essence of why is that?
Why is that the fundamental thing?
Is it because if we look at it from a first principle standpoint that money represents
energy exchange between two parties, is that truly the essence of why money is always
at the center of this or is there something else that you would kind of define?
I think who has the ability to siphonize from others and redirect that value is just
obviously a foundational aspect of organization and ethics and conflicts and peace and that
kind of thing.
And as monetary technologies have changed over time, it changes the power structure of
who can siphon that money and re-range it and then also how thoroughly they can do so.
So how easy it is for them to do it?
Do they have complete control over doing that?
Do they have partial control?
Do they have minimal control?
And so these things really matter from a domestic perspective, a geopolitical perspective.
And anytime someone studies a field, they tend to believe that that thing is like the core
of a lot of other things, right?
So I try to have to overstate things to say, okay, literally everything in the world can
be tied back to money.
And it's not really the case, so we have the world to complex place, there's human nature,
there's just the rules of physics, for example, there's just limitations for how the world
works.
There's always going to be conflicts and challenges and things to overcome, but money
along with energy and a few other key things like that are clearly among the foundations
of power and how we interact with each other and who really has control over others.
In the first part, we talked about ledgers, we talked about commodity money, we talked
about why each of them exist, why each of them have benefits and setbacks in their use.
We use so eloquently layout, the importance of the telegram being able to communicate
and send information at the speed of light from Europe to the United States and how you
can manage ledgers this way in a much more cost-efficient way, but you're not able to
immediately settle.
So as we look at this new innovation Bitcoin, blockchain, all of this, what is this enabling
that has never been like truly at the essence in the first principles?
What is that enabling that hasn't been able to be enabled historically up in the process?
Oh, it's the two things.
One would be instant settlements throughout human history, information and material could
only move as fast as humans.
So you can't a thousand years ago, Europe and China could not instantly send information
or value to each other.
You had to move along the Silk Road to do it.
And ever since the invention of the telegraph, as specifically the deployment of the telegraph
throughout the 1850s, 1860s, and globally by the early 20th century, we've had the ability
to send information around the world instantly, which includes transaction agreements, whereas
of course, physical settlement of precious metals and other value can only happen at the speed
of matter, transportation, and more importantly, not just transporting it, but also authorifying
it basically all the logistics of securing and authenticating that value.
And once we had more bandwidth, once we had more complex encryption, once we had more
complex organizational structures, what the invention of Bitcoin is in a way is the first
introduction of a credible way to settle final value nearly as quickly as we can do transactions.
The kind of the first period of human history was everything slow.
And then the period of history from the telegraph up till right before Bitcoin was transactions
are fast, the settlements are slow, and post Bitcoin were in a world where final value
is fast as well.
So transactions and settlements can all move roughly at the speed of light.
The second thing I think is the ability to build a credibly decentralized ledger.
So until this point, any ledger is controlled by humans is centralized.
So a central bank runs the monetary ledger for their country, for example, a bank runs
the ledger for their clients, and we basically build ourselves with a hierarchy of ledgers.
So there's like smaller ledgers built on top of bigger ledgers, and the foundation is
the central bank, and it's just essentially controlled ledger where they get to determine
how many units there are, they get to determine who gets to use those units, they could take
units from some others, they could redeploy those units, and they can double the amount
of units, they can triple the amount of units, they can cut the number of units in half.
What Bitcoin is interesting is that it's a ledger, but no single entity is in control of that
ledger unless they're willing and able to expand so much physical resources that they can control
the majority of the hash rate. And even then, they're still stuck by the rules of the nodes,
which are themselves decentralized as well. And so it's very hard to gain even partial control
over the ledger, and it's nearly impossible to gain complete control over the ledger.
So it's easier to sense your transactions than it is to make more Bitcoin, for example,
but that's what this kind of represents. It's a way for humanity to have a credible
scarce unit ledger system backed by energy and backed by encryption, and essentially controlled
by a more distributed set of users rather than, say, 12 people to self-reserve.
So you say it's backed by energy. So it's not just a ledger, it's also this commodity money,
simultaneously. And we've never seen something like that before that you're able to have
saleable commodity money that instantly settles. You write in your book, and I'm just going to
read this quote here. It's not an accident that it took approximately a century and a half after
transactions were enabled to occur at the speed of light for bearer asset settlement to also occur
at the speed of light. If I were to describe in one paragraph, why money has been broken around
the world for so long while almost everything else has improved substantially in you list energy
abundance, technology abundance, and so forth. It's due to this gap between transaction and settlement
speeds that the telecommunication era created. Any comments on that summarization of, because really
you're saying in that paragraph, this is what this is all about in the future is exactly that.
Yeah, so I was going to say during the central hash where that gap existed, the problem is that
the only way to fulfill the gap is basically centralization. You have gold that doesn't move quickly,
your transactions that can move quickly. And so the question becomes, who do you trust to manage
that gap between transactions and settlements? Because that necessarily exists in a state of credit.
So who is the ultimate arbiter and maintainer of that credit ledger? And so basically,
throughout human history, and especially the past century and a half, most of the physical
shortcomings of money, whether they're lack of divisibility, whether they're lack of speed,
whatever the case may be, most of those were handled with various technologies or new procedures
that make them more efficient, but at the cost of centralization. So it's far easier to use bank
notes or credit cards and things like that than it is to exchange gold and silver coins with
each other, especially for operating in a complex global society. And so we get all these benefits,
but we give up control towards the central entities that control that abstraction layer,
which in this modern era has been nation states, nation states in their banking systems that they
control. And so what's interesting is that Bitcoin is kind of this first kind of trend change,
potential trend change, where it says, here's another efficient way to do it. And this is the first
one that doesn't further centralize it. It actually decentralizes it while still giving you those
benefits of speed and other capabilities. And I think that's kind of why so many people are
interested in Bitcoin. From an outside perspective, if you're in the United States or Europe and
your money works well enough, you're not worried about cutting cutoff through bank and you buy your
groceries every week and it's not a problem. When you look more globally, it's a much bigger problem.
There's 160 different currencies in the world. The long tail of most of them are don't hold their
value, don't have any global acceptance. And so it's very hard for people to save in liquid value.
In the United States, we think, okay, so the dollar degrades slowly. So you got to buy real estate,
you got to buy stocks, you got to buy all these other things. And that's works well enough.
I think as I cover the book, there's downsides that whole system, but it's workable. Whereas
say you go to Egypt, the currency degrades much quicker. The stock market is not robust enough to
put serious money into. So people put it in the real estate, which is illiquid. And they have all
these empty homes, because if you want to save, go build a home and maybe a little run out in the
future. And so it's very hard for developing countries, people developing countries to accumulate
liquid capital. And that is a friction that is significant and exists. And it's so literally in
2023, there are doctors in Egypt. If you ask them, how do you save money? They say, well,
I go to the black market, I exchange the Egyptian pounds for physical US dollars. I then hold
this physical US dollars in my apartment with no interest, like liability stole or lost in a
house fire or something. And that is the best monetary technology they know it to save in.
Wow. Because they're not going to hold Egyptian pounds. They're not going to put the dollars in
Egyptian banks because Egypt often has a dollar shortage. So there's always prone to say,
okay, well, we have to take these dollars and we'll give you an equivalent amount of Egyptian
pounds at the exchange rate we decide. It's very hard for them. Of course, the other options
gold, many of the, this basic house's gold and physical dollars are their variety of options that
they have. And none of those are perfect. It just shows kind of the frictions around the world.
And especially like, then if you want to send money, it's like, well, you try to send money
there. And it's like, well, this service doesn't allow you to send money to Egypt. And this
service doesn't allow you to send money out of Egypt. So you have to like find the, you try
a second way. That doesn't work out either. So you find a third way and that one works, right?
So there's frictions both in terms of saving money and in terms of transacting money globally
that, you know, 100 plus countries, billions of people in the world encounter that is kind of
abstracted away from us in the United States and Europe and Japan. And, you know, we have
our own problems with money, but at a global scale, the problems are much bigger. And it's in large
part because of this gap between transactions and settlements. And therefore, in order to rely
in a solid unit of account, you need to rely on some sort of central entity, which in the modern
era is really the Federal Reserve. So you wrote extensively about Bitcoin prior to writing this book.
And I would argue understood it as one of the top thinkers in this space for quite a while.
After writing a book of this magnitude and all the history and everything that you studied
and then wrote about Bitcoin there at the end of the book, what is something that you learned or
that you took away that you didn't really know or think about prior to writing the book?
So it's an amazing question because in broken money, I inject my own kind of thoughts to
organization and emphasize key points that I don't see emphasized enough. But it really draws
from hundreds of other people that have created so much amazing literature or podcasts or
books or various mediums of information. So whether I'm talking about older technologies or
the Bitcoin world, you know, if you look through the citation, you'll see a lot of familiar names
that people that have put out amazing content. I think kind of what sparked me to write the book
was the realization of how big that how important that gap between transaction and settlements is.
So the fact that transactions occur at the speed of light and settlements don't
is like a technological accident of history that I think shaped a lot of the past 150 years.
So I think that learning about the importance of that, I also enjoyed diving into the arguments
between commodity money theorists and credit money theorists and to really kind of tease out those
nuances. So I tried to steal even arguments I disagree with. I would try to steal man and find out,
okay, who's the smartest person that that makes this claim and find that person to read
what they wrote and then try to deconstruct it, you know, see where I agree or disagree. I also
enjoyed reading about the nuances of the classical gold standard because I enjoyed seeing how people
like economists and logicians of that era like Jevons would analyze that current system at the time
and describe their various pros and cons, which are kind of like lost history. We kind of look back
and we just kind of say, oh, it was this great time of a classical gold standard. Whereas like,
when you actually go back to when it was operating, this guy is like, hey, this thing's levered
20 to 1. It's working really efficiently, but we got to be careful with how we're running this
thing. And it's like that kind of nuance is really, you know, it's when you go back to initial
source material, it's really fascinating. And so I would say that whole progressions has been very
interesting. Also, I was fortunate to have Joaquin Book serve as a research provider and editor
of the book. And he is a professional monetary historian. And he was going to master's in Oxford
from it. And so he fact checked everything I looked up. And so there'd be occasionally something
where I didn't state it the right way or there's a certain historical nuance that he knew that I
wasn't familiar with. And I would go and rewrite that paragraph and kind of so I learned from
working with great people. Wow. That's really cool. Okay. After chapter 20, I tried to look at the
introduction because this is where you give the introduction to Bitcoin and you kind of lay it out
for a person it's maybe never even read about it. And I was just trying to think about it in terms
of that person or that reader who's seeing it for the first time. And I just suspect they would be
really skeptical as they're reading through it. And I would imagine a lot of is just they just
don't have the technical competence on how it all works to really have any type of faith or trust
in in that type of new protocol or system. So like one of the I'm just trying to think of ideas
that maybe they would have and they they'd look at the way that the node system works and the
way that you have it laid out in the book. And I think a beginner would say well if I'm a
government while I just create 50,000 nodes and then start interjecting those nodes into the network
to maybe so discourse or confusion amongst the the way that the nodes coordinate with each other.
Why wouldn't the government do something like that and so seeds of chaos in the Bitcoin or why
doesn't that work from a technology standpoint? Well they can certainly try. I mean there's various
attacks that are possible. The question is how powerful they are. You know if people point out
with this whole kind of recent black rock spot ETF question, you know if a ton of Bitcoin value
gets concentrated what it and let's say it's also concentrated in the hands of government so they
can kind of impose laws on miners and stuff like that. Could you have power over a hard fork for
example or a soft fork and could you kind of could a sufficiently powerful entity shape Bitcoin
to their will? And the way I would describe it when we look at kind of institutions. So one of the
things that humans do is we abstract things. So back in the day if a person was king, you know that
person is king, there's no abstraction that person is the ruler. Whereas for example in the United
States and and other places like that, the office of the president is abstracted from the person
holding it at the current time. Right. So the president is a powerful institution whereas the
person holding it is not necessarily so. And we build up kind of part of the reason why the United
States has been successful is because we build up these separate institutions, these divisions
of powers. And so you have the Supreme Court, you have the Congress, you have the president, you have
semi separate central bank that came up later. And then at the foundation of the whole thing is
you have a constitution that is purposely very, very hard to change and gives you a foundational
set of rules to work with. And the way I would argue it is that none of these institutions are
incredible. None of them are invincible, but they're robust. There's it's very slow to crop
them. It's very hard to be corrupted. And that's why they've been able to last as long as they have.
But it still requires some degree of social maintenance to work with these very robust systems.
And I would describe Bitcoin similarly, which is similar to the US Constitution is this like
open source robust highly incentivized thing that distributes the power as much as possible.
And while it may not be, it's not certainly not invincible or impervious to any sort of
corruption or attack, but it is highly robust and resistant to such attacks as long as there
are a sufficient number of people to do their best to try to maintain it. So it basically serves as
an organizational tool that allows people to come together. And the burden of effort is always
on those trying to change it. And I think that part of the monetization process of Bitcoin is us
testing how good it is, right? So we throw every attack we have at it and see can survive this one,
can survive this one, can survive this one. And what if we copy it and change these variables?
No, that doesn't work. Okay, what if we copy it again? And so it's like this whole series of attacks
on it. And so to answer your question, I mean, you could spin up a lot of nodes, but what makes a
node valuable is that it's your node. You're playing your part and saying, this is this is what I
accept as Bitcoin. And this person might control 50,000 fake nodes, but it's really just one person
or one entity behind it. And they're not changing when I'm defining this Bitcoin. And so then it
becomes how many real human actors and how much real capital is behind the ones that are not changing.
And so again, I would just say that Bitcoin is resistant to attacks. It's not
invulnerable to attacks, but it gives us one of the most credible set of organizational tools
to build a what I would argue is a very good monetization foundation. Let's take a quick break
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All right, back to the show. And if somebody's running these 50,000 nodes with like a different
type of software or there's different consensus rules on those 50,000 nodes, I can look at that
and say, I'm not connecting to any of those 50,000 nodes because it looks like they're a bad actor
or they're trying to do something. And so they're almost immediately excluded from the network
because it's very detectable. It's fully auditable. And I think the honest participants in the network
are going to just identify it for what it is. Just to kind of compound on your point. When we look
at where Bitcoin is today, in excess of 10 years of history, and it continues to progress,
the adoption continues to go up. But I think people would look at it and say, you know,
it's quote unquote, better money. But why hasn't it, if it's so great, why hasn't it really
kind of taken over and they're looking at the timeline of this adoption curve and they're saying,
yeah, I just, I don't think there's any way that the dollars ever going to be overcome or beat
by this thing called Bitcoin. It's, it's already had a decade plus and it still hasn't done it yet.
When I talk to people and they say like what they think is going to cause that adoption to take
place, there's really kind of two schools of thought. And I know the truth is usually somewhere
in the middle of this, but I'm kind of curious to hear your, your opinions on these two schools of
thought. One is all the developing nations around the world, they need better money because they're
dealing, you gave the example of like what you're seeing in Egypt, they need some type of reliable
unsensable money that doesn't get the base to the breakneck pace and they're going to start using it
and more and more and then that's going to drive global adoption. The other side of the argument
would be global credit markets are so broke, you're having this breakdown and global cooperation
and inflation is far outpacing the yields that you're getting in these really large multi trillion
dollar credit markets. And because they're not going to be able to get that under control,
they're going to have to turn to something that isn't getting debased because credit markets go
to zero in a scenario where a new money emerges and it's a better form of money, that that's going
to be the thing that drives global adoption. When you look at these two arguments, how do you
kind of shore it up as to what you think is actually going to potentially drive this new form of
money to take hold around the world? So it's a great question. And I'll be the first of
I don't know the future and so instead I try to use whatever economic or technical knowledge I
have to kind of shape or reason kind of the general direction of the path I say. The first thing I'd
point out is that Bitcoin went from zero to a trillion dollar market cap, fastening any other asset.
And so it's already doing quite well. It's gone very far in 14 years. You know, Satoshi wrote 20
years ago that Bitcoin is going to have a ton of volume or no volume. It's kind of a bully
now come whether or not this thing works. And I would say so far 14 years into his 20 years,
we're on the path of a ton of volume. I mean, the amount of value settled per years in the
in the trillions. And so I would say it's on the path of being successful. Now one of the challenges
with Bitcoin adoption is the volatility. When you look at most technological adoptions, whether it's
electricity or radio or the internet or smartphones. When people transition to that technology,
they rarely ever transition back. Most people don't get electricity and decide they don't want it.
And they go back to not having electricity. They don't get a smartphone and then decide,
you know what, I want to live in a flip phone world. And so you tend to see very smooth adoption
curves with most technologies. And that allows it to be very quick. The problem with an inherently
monetary technology, specifically the unit of account itself, is that as it gets adopted,
people naturally lever it and naturally re-hypothicate it and play games with it. And human euphoria
takes over just like the stock market. And so you get these boom bus cycles. And that discourages
a lot of people. So you actually, unlike people that adopt electricity and never go back,
there are people that adopt Bitcoin and then decide, no, it's too volatile, it's dead now. I made
a mistake and they could take it out of it. And then it takes years to rebuild the next base
to the next larger bull market. So I think that a monetary technology inherently takes longer to,
I mean, it's not really, if we were to go back and look at the initial gold adoption,
how long do you think that took, right? It's like monetary network effects. Just take a long time
to build, you know, we're going against an incumbent 10-to-try and dollar system with, you know,
a very small starting point. And so I think it's inherently understood to be a multi-decade
process with this level of change. I mean, you don't rip out the base layer money and put
another base layer money globally in 14 years. It's just, it's not realistic. It's the disruption
from that is immense. And the accounting systems, the legal systems, the human conceptions of what
money is, all of that takes time and arguably generations, you know, like just newer people kind
of grow up with it. It's more natural to them. And it just kind of slowly puts itself in
society or time as long as incentives make sense, which, you know, Bitcoin's fixed supply
and decentralization helps it be robust to that process. That's my first answer to the question.
The second answer to the question is that people often assume that the dollar is a steady state,
that the dollar as it looks now is roughly going to look at the dollar in 50 years,
except of course, you know, to have gradual inflation along the way, but that it is essentially
going to look the same as it does now. One of the problems you see is that if you look at developing
countries in particular, Bitcoin is often too volatile than to accept even though they have
a major, the basement problem with their local currency. And so a lot of them jump to stable coins.
You know, if you look at Argentina, you'll say you'll see someone, okay, it says why I understand
Bitcoin and I hold some of it long term, but if I want to hold money for six months, I don't
want to hold in Bitcoin because I could lose value. So I'll hold it in tether. And from their
perspective, it's, you know, a dollar is way better than the Argentine peso. And even though tether
centralized, the central hub is not in Argentina, which is for them the key thing. And this thing,
well, sure, I'm not going to put my life savings in tether, but it's like a really good six month
option. And they might try a lot of them to actually hold more value in tether than Bitcoin. So
it's as long as the dollar itself is robust enough to work and is less volatile. A lot of people
gravitate still towards dollar rather than going directly to Bitcoin and becoming like instant
Bitcoin, you know, Maxis, and he's just only focusing on Bitcoin. And that's just a reality on
the ground in a lot of these countries. Now, I think what can eventually interrupt that system.
So one is that Bitcoin is going to keep, I would argue you keep getting larger and more adopted
and eventually less volatile. That's one variable that's happening. It just takes a long time.
And the other variable is that the dollar is increased to becoming less stable. You know, as debt
as a percentage of GDP keeps building up, do you eventually get to a point where you get sort of
reset? And that sounds like that's like a conspiracy theory. That's like a heterodox way of
thinking of it. But when you look at this monetary system start history, every two or three
generations, you tend to have some big DPEG or devaluation or reset. It's just how it's how things
work, especially when you have such layers of abstraction and centralization. And historically,
when you get developed countries with this much debt to GDP, eventually the system just breaks
down. It's just that the interest expense becomes too immense. It becomes too exponentially
comical. And people, even something as robust as the dollar, eventually becomes quite inflationary.
It's just very hard for it to use it relative to other assets that the amount of new currency
creation becomes so significant. And so I would say the combination of all the over the long
hour of time, the eventual breakdown of the dollar in the ascension of Bitcoin through multiple
multiple cycles is what can allow it to gradually compete with something as large as the dollar.
And I think the variable that ties into the second one is that when the dollar system was born,
so Bretton Woods, the United States was like over 40% of global GDP. We had the biggest industrial
base. We had the most gold. We had the biggest military. Basically, we were just completely dominant.
And as the world has recovered from World War II and as it's kind of rebuilt aspects of itself,
we see China and India reassuring themselves as major global powers. Like they actually were,
prior to this past 200 years or so, they were always major economic powers, those regions, at least.
And their reassuring themselves is being very dominant. And so we see more decentralization across
the world in terms of where is the percentage of GDP, where is the industrial base, where is the gold.
And it becomes increasingly untenable for the entire world to use the dollar ledger system.
And the United States is diminishing from 40% of global GDP to 25%. And right now, when you look at it,
to be able to measure it, whether purchasing power parity or nominal, we're somewhere between 15%
and 25% in global GDP. And as we keep slipping, it just becomes increasingly untenable for that.
That one currency has such a big lock on the world. So I think we're gradually moving towards
decentralization. And I think developed market currencies are becoming increasingly unstable compared
to how they've average of the past 50 years. In your book, you get into a little bit of Gresham's law
and Thurs law. And you talk about how when you're looking at Gresham's law in this money that is
less desirable, the velocity of it keeps picking up as you approach almost like a terminal velocity
and then a flipping into Thurs law. When we look at stable coins and we look at how they're
immediately saleable. And the desire for more, I mean, when we look at the amount of stable coins,
they just keep popping up in the size, these assets that are contained inside of these stable
coin markets and how large and how substantial they are in such a short amount of time. And we
look at that velocity as part of the overall like global equation. Is this something that you think
could help us understand whether that flipping over to Thurs law is taking place is by contrasting
the stable coin velocity to Bitcoin's lightning network. Is that how we should maybe look at that
flipping happening and maybe where we're at in space and time by comparing and contrasting the speed
of money between those two markets? Or is there some other way that you could think through
understanding that potentially happening that flipping apart? So I think monitoring both relative
market capitalizations and monitoring velocity are both very useful metrics in some ways as apples
and oranges because Bitcoin and dollars not quite use the same way, especially at their current
level of adoption. The larger and liquid, more liquid money is generally going to be the one that
is the unit of account. And so until Bitcoin say rivals the dollar, most people are going to sink
in dollars or things are priced in dollars. And so Bitcoin is the thing that's kind of volatile relative
to the dollar rather than the way around. We like to say having price in Bitcoin is not Bitcoin
that's volatile, it's everything else that's volatile. But really, you're building it by, say,
apples or copper. When you hold Bitcoin, those things are more volatile for you, not for the dollar
holder. So really, even as a big, Bitcoin enthusiast, it's not that the dollar is volatile to Bitcoin,
it genuinely is the Bitcoin's volatile relative to the dollar. That's the larger, more liquid,
saleable unit. Now it's a worse unit, it's controlled, it's centralized, it devalues,
but for unit of account purposes, that's still the one that has the power. And I think over time,
as I just discussed, that degrades with Bitcoin, hopefully strengthens and has been strengthening.
And when we look at Gresham's law and Tears law, so the originally,
we had to think of Gresham to say that a golden silver ratio. So let's say you peg,
you know, United States pays it at 15 to 1, but the global exchange rate is 15 to 1 to 1.
And so you'll get this like mismatch. And so whatever metal ends up kind of being
pegged at like an undervalued rate, that's the one that's going to, you know, circulate.
Actually, you know, the undervalued ones can be hoarded and the overvalued ones are going to
circulate. You're going to spend the weaker money into the economy and you're going to
hoard where you're going to move offshore, the stronger money that's not being valued appropriately.
The second way that I agree this can apply is when you have a tax on the better money.
So if every Bitcoin transaction is a taxable event and every dollar transaction is not a
taxable event, well, then unless you specifically need the properties of Bitcoin or unless you're
so into the space that you're kind of just doing on purpose, you want to pay with more things in
Bitcoin because you want to support Bitcoin. Most people will generally pay in the units that
are not taxable, right? And so now, if it gets to a point where there's so many Bitcoin holders
that are all talking to their politicians and saying, hey, take away these taxes. That's what I want.
So you have to, you have to chip away at that over time. And so obviously the
combination of existing network effects, existing size and stability, existing understanding and
brand of how it works. The dollar is like Coca-Cola is not that special, but it has a brand.
Everybody in the world knows what Coca-Cola is. Similarly, everybody knows the brand of the dollar.
And that's the combination of the network effects, liquidity, the brand. These take time,
it's a gigantic ship that has to turn slowly when you add onto that tax authority and things
like that. I think either until Bitcoin gets large and stable enough or the dollar breaks down
or the United States decides to cut off stable coins, you know, like Argentina can't do anything
to tether, but the United States could if they decided they didn't want these digital euro dollars
to exist anymore. And so I think there's multiple passwords can happen, but I think it's
inevitably going to be a long one. Doesn't the treasury need stable coins like
as we go further down this road five, 10 years from now, you need a buyer for all of this stuff.
And I find so miraculous is the buyer really kind of emerges as these stable coin entities
that are going to be willing to buy short duration debt, not long duration because there's just
too much inflation risk there for them to squat on long duration. But I think that you have this
natural relationship that the treasury here, at least in the United States, and I would argue any G7
country needs stable coins. Do you agree with that idea? And if not, I'm curious to hear why.
We often think of governments as monolithic entities, but in reality, most governments have
multiple different factions or people that understand things differently. And as an example,
when it comes to Bitcoin mining, there are some government officials that say, hey, for environmental
reasons, we want to kick out Bitcoin miners. And there are other ones in the government that say,
no, no, we want to encourage all the mining to come here so we can sense the network with our
laws, right? And it's just the different priorities or different levels of understanding of what
they're trying to accomplish. Those two factions do exist. When it comes to stable coins,
you know, on one hand, there's groups that say, we don't like the fact that there's this, you know,
unregulated or like not unregulated, but there's like an offshore digital euro dollar that we
don't have full control over. On the other hand, there are people that say, well, this is a huge new
buyer of treasuries. And also, it helps extend the dollars reach globally. And it's a useful new
technology that we shouldn't interfere with. That's kind of the different factions. And when you look
at the concept of de-dollarization, that's in the news a lot because of the whole bricks thing,
and, you know, sanctioning of Russian reserves and all this stuff, there's all these attempts at
the sovereign level of various powerful countries to try to distance themselves from the dollar.
But what's interesting is that there's two levels here. So there's the sovereign level,
and then there's the people themselves. So are people themselves in developing countries
de-dollarizing? No. You don't see ardent unions deciding, you know what? I want to hold Chinese
one now. You don't see Egyptian saying, you know, I want to hold physical Chinese one in my
apartment as my monetary savings. You don't see that. It's not an accident that like over 99%
of stable coins are dollars. That's just where the demand is. You know, when you have kind of
the ability to make dollars globally, people want them. You could have stable coins with other
currencies around the margins that exist, but there's no demand or liquidity or salability for them.
Yeah, I think basically like, I think the smarter faction in the United States would basically say,
okay, support stable coins through a major buyer of our treasuries. Even as sovereign nations try
to de-dollarize, this is the way for us to keep the dollars among all those foreign people
at the people level. And it keeps the dollars reach going for a longer period of time. So yeah,
I think it depends on how, how many orders of thought they think through this and how well they
understand the technology and the dynamics involved. In one section of your book, you get into what a
Bitcoinized world would look like and how it's different than what we're accustomed to today.
One of the things you mentioned is no unit abstraction, no financial middleman,
better global connections without the friction in between the currency exchange. But the one I
want to hear that you cover in depth here is the idea of credit and how what we view as credit and
being so abundant in our society today really kind of widows itself down to just the pittance of
the overall broader economy. People who are not Bitcoiners that would maybe hear that would be like,
what in the world are you talking about? The credit will always be around to help explain to them
why you have this opinion. And I would agree that credit is always going to be around in some
degree. It's just a matter of how much formal credit exists relative to say the monetary base,
for example, or how much do businesses or individuals finance themselves with equity versus credit?
And how long duration is that credit? Those are things that are impacted by the type of money.
And generally what we see when we look in history is monetary hardness and debt is almost like a
bell curve where if money is very strong, like let's say a gold standard or a Bitcoin credit exists
but it tends to be used judiciously because if you're a borrower, how much long duration debt
you want to borrow in a hard unit of money that appreciates relative to most things, you want to be
obviously pretty careful with that. So for those less borrower demand for a very robust,
solid money. When you look at the other side of the spectrum, if you have a very weak money,
let's say a Argentina, for example, nobody wants to lend in that unit of account because it's
very hard for them to determine what value they're going to get back in five, 10 years.
Right. So there might be people who want like someone wants to give me a loan in
Argentine pesos. I'll take it. But no one's going to give me that loan. Whereas ironically,
the middle of the bell curve, we have a gradually devaluing unit of account like a developed market
via currency. That tends to accumulate the most debt because it works for borrowers and it works
for lenders reasonably well. And it's stable enough that it kind of builds up this more and more
and more debt to GDP. But then ironically, that becomes the source of instability. So its
own stability is in what part, you know, it kind of fine tune, that's like the fine tune point for
debt maximization, which inherently is its own undoing. And so what I would argue is that in a world
with an even scarcer unit of account than gold. So Bitcoin in this case, the incentive to borrow
large amounts of it for long duration is very limited. You know, there's still going to be various
types of credit. You know, anytime someone owes someone else money to say, hey, I need some money,
can you kind of lend some? It's an emergent phenomenon credit. It just happens. But and there's
still high rate of return impacts. We might want to borrow Bitcoin. But the idea of just having
constant debt on our balance sheet would make less sense. So we can kind of separate money
debt into two types. So there's very like high highly productive debt, right? Let's say you want
to expand your business. You don't want to give up equity. So you borrow a one year loan. It's
like pretty small relative to your total business value. Someone might make that loan rather than
equity because they'd rather have a defined and lower risk outcome that's higher in the capital
stack. Maybe you want to get education. So you're willing to take on some debt to get like a
you know, a stem degree, for example, whatever the case may be, because you know, it's going to
increase your earning potential. There's various ways where credit can make sense. Now the
the less productive types of credit or debt are ones that are just kind of permanent parts.
And what you're primarily doing is shorting it. So for example, Coca-Cola has debt. Now this is
like a central corporation. Why do they have debt? And the reason is because they choose to have
debt as a permanent part of their capital structure because that debt devalues. They're basically
they're using their economic strengths. They're high credit rating. The borrow plenty of dollars
and low interest rates for long duration to basically short it. And that doesn't make sense in
gold or Bitcoin. Whether it's governments running these massive gigantic debt to GDP ratios.
Whether it's people with 30 year mortgages, whether it's corporations with debt as a permanent
part of their capital structure, that's the type of debt that makes a lot less sense when the
unit of account is very hard. And I'm not the first to make this argument. Basically in a Bitcoin
world, you would have much less debt relative to equity because the types of debt we're practically
only supporting the currency go away. And it just becomes highly, highly accretive types of debt.
And then also when you think of fractures or banking, one of the reasons that fractures
or banking works moderately well in the current era, you know, we have all these
booms and busts and things like that. But the reason it works well enough is because if you're
illustrate your earning on your deposits is lower than the monetary growth rate,
like the growth of money supply, that ends up being relatively safe. I mean, you're getting devalued,
you're getting all sorts of problems. But the fact that a central entity can just create more of it
means you're unlikely to lose nominally in the fall. So people kind of put up with this because
it works well enough. Whereas in a world where it's inherently unsafe to have a deposit rate that
is higher than the supply growth rate of money, right? It's just inherently the case. You're either
taking on serious credit risk by having that interest rate, or you're taking on serious liquidity
risk, one of the two maybe both by having that rate of return. So in a unit where the supply rate
of growth of money is zero, any interest is inherently taking on risk. It doesn't mean people won't
do it. It's investing. It's investing, it's speculating, it's putting capital to work, but it's not
a passive risk-free activity in a way that we think of banks today. How about taxes in a Bitcoin world?
One of the, and I talked about this in the book, one of the kind of downsides of the whole
fear-currently system is that when the government doesn't feel like taxes are going to be popular
enough to do, and to fund what they want to spend, they just print the difference. So they say,
well, we can't finance this as transparent as we want to. So we're going to finance it
opaquely. An example I use is that during World War One, the UK wanted to get involved, even though
they weren't being attacked. This conflict's going on in Europe, and they say, well, we want to get
involved for geopolitical reasons. We don't want Germany to win, and so we're going to get involved.
And so they try to, they know that taxing everyone, they're not going to tax a UK steel worker
and say, yeah, we got to go fight the Germans in Europe. So we have to raise your taxes. That's
going to be very impopular. You're going to get a revolution if you tax too much. Maybe you can do
a little bit, but we try to tax a ton. You're going to, it's not going to be workable. The other
option is you raise debt. You say, well, okay, you know, we'll pay you interest by these bonds,
and we'll use it to go do war. And those in UK's case, not enough people subscribe to those bonds.
They were like, no, I don't think that's a good investment. And so instead, the UK's printed the
difference. And what they did was they devalued everyone's savings without telling them advance,
without them being able to even know or measure what's happening. And it just got taken from them.
And so in a Bitcoin world, if more people hold their own hard money that a government can print,
then basically all of government expenditure has to be financed by either taxation or small
amounts of debt, you know, to kind of smooth things out here and there. But basically it kind of
forces governments to be somewhat more transparent and say, okay, if you want to do this expenditure,
how are we going to finance it? Because we can't just print the difference. Let's take a quick break
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All right. Back to the show.
Then I'm going to read a quote that you put here in the book. And this all relates to trade-offs
as the as any cryptocurrency blockchain is created. There's trade-offs that are constantly
being accounted for and what they're creating. And this is the quote you wrote,
proponents of newer cryptocurrencies often criticize Bitcoin for being old technology.
When in reality, it's just strict about the trade-offs that it was designed with and was
built to maximize security and decentralization over all other attributes. Why are those two
attributes security and decentralization? I think the decentralization part we've covered
pretty extensively. But more on the security side, maybe talk to that in any other comments or
thoughts that you have about this idea that a newcomer that's coming to this is going to look at
this and say, yeah, Bitcoin's like really old. There's Solana. There's all these other things
that have come out in the last couple of years. How in the world are they not better? It's really
kind of the argument that I think a newbie that would be showing up to this discussion and looking
at it would be saying because technology's always better now than it was 10 years ago or you go
back historically in time. How are the new ones not better? I think we put ourselves in their shoes.
It's very rational for them to assume that's the case. You said most technologies are better
over time. And therefore, Bitcoin was the concept, but it's not going to be the end.
That's the thing. They say, what's the newer one? What's the better one? It's been 14 years.
Of course, it's better technology. One point of contrast is that when we look at protocols,
they tend to stick around for a very long period of time. When you make things
purpose-simple and robust, the design space is very limited. And the technological growth and
upgrades tend to happen to layers on and around that very simple foundation. So, for example,
Ethernet is like 50 years old, right? And it's nowhere near being out of date. You know,
the upgrade of the speeds over time in backward compatible ways. And it's this evolving protocol
that ultimately is very slow to change. And we think, why are we still using Ethernet to 50-year
old technology? Because it's literally still the best we have is why. And it has the dominant
network effect. The unity makes something marginally better. Well, you're competing with the fact
that every computer has an Ethernet port and not this other protocol. And then, too, any change
you might make, future Ethernet versions could maybe incorporate. And so, they just get absorbed
into that dominant protocol. The same is true for TCPIP, the same is true for USB. These protocols
tend to be very long lasting technologies. And ultimately, when we look at Bitcoin and
block size wars and crypto and stuff like that, a lot of it comes down to trying to figure out what
problem we are trying to solve. And so, some of the initial assumptions were, I want to make
transactions easier. So, I want to use base layer money to buy coffee, for example.
But it turns out, for a lot of people, that's not the problem that they have. I mean,
in the United States, I don't have a problem buying coffee. My visa card works well enough.
My cash works well enough. I don't go out every day and think like, man, my money is so bad at
transactions. Now, in certain countries that might be the case, but even then, it's often not.
What a lot of us have, instead, is I want to build a store of liquid value and move it around
globally. I have nobody built a stop me, or at least it's very hard to stop me. And that I know
that the rules, I'm not going to get rugpulled in the next 20 years. That I'm not going to just
add off the watch it too closely, because it's not just going to get changed. There's no central
entity that can just double the number of units or censor me or something. In that sense,
the probably trying to solve is an immutable foundation of money. Basically, a decentralized
central bank, a decentralized ledger that is robust and backed by energy and distributed,
so that it's very hard to corrupt. To the extent that it'd be corrupted,
it'd be a very long and slow process, and the burden of proofs always on the corruptor.
But the whole block size wars, I think, people aired in the wrong direction for trying to sacrifice
that decentralization to make it faster, but you're solving the wrong problem. And when it comes
to crypto, a lot of it is about trying to make them more expressive and complicated. But again,
that often that generally comes to the cost of decentralization and security. So when we think
of decentralization and security, we want something that one, the code base is as simple as possible
to minimize bugs and hacks and problems and incentive breakdowns. And then two, we wanted to be
sufficiently decentralized so that any entity that wants to either change the rules of the network
or to sense the network has a massive uphill battle, even if you think out 10, 20, 50,
100 years. Because you can't transmit value into the future and it still be worth the same
amount because the units are just constantly getting to pay. So like, you know, if it's $100
worth of buying power today or one Bitcoin's worth of buying power today, you want to be able to
transmute that 20 years into the future and it still can go out and buy me the same amount of
buying power as what I've got right now. And yeah, so let me read something else here. This is a
little long, but I think this is such a great quote and from such an important figure in this
movement. Adam back, you put this in your book, Lynn, he said this, there's something unusual about
Bitcoin. So in 2013, I spent about four months of my spare time trying to find any way to
appreciably improve Bitcoin, you know, across scalability, decentralization, privacy,
fungibility, making it easier for people to mine on small devices, a bunch of metrics that I
considered to be metrics of improvement. And so I looked at a lot of different changing parameters,
changing designs, changing networks, changing cryptography. And you know, I came up with lots of
different ideas, some of which have been proposed by other people since. But basically, to my surprise,
it seemed that almost anything you did that arguably improved it in one way, made it worse in multiple
other ways. It made it more complicated, used more bandwidth, made some other aspect of the system
objectively worse. And so I came to think about it that Bitcoin kind of exists in a narrow pocket
of design space. You know, the design space of all possible designs is an enormous search space,
right? Encounter intuitively, it seems you can't significantly improve it. In bear in mind,
I come with a background where I have a PhD in distributed systems and spent most of my career
working on large scale internet systems for startups and big companies and security protocols.
And then that sort of thing. So I feel like I have a reasonable chance if anybody does of
incrementally improving something of this nature. And basically, I gave it a shot and concluded,
wow, there's literally basically nothing. Literally everything you do makes it worse,
which was not what I was expecting to find out. I find that. And for people that don't know who
Adam back it. So I mean, he's literally referenced in the in the Satoshi white paper. And for him to say
that he spent this time really contemplating on all the trade-offs and trying to improve it and
saying there was nothing I could do to really objectively improve this. I think it's just a really
important highlight that you put in in the book. And I don't know if you have anything else that
you want to add, but I just think it's important to kind of read that out for people.
All that, two things. One is that like I said about protocols is very, if you analyze Ethernet,
I think how can I make this better? The design space compared to what Ethernet already does
is very tight. So basically the answer is that as Moore's Law gives us better speed, we can speed it
up gradually or time. And that's about it, right? I mean, there's little marginal things you can do.
Same thing for TCPIP. When you have something that's simple and at the foundation,
you want that to be simple and robust. And you want complexity to be on the edges.
That's generally a good design principle. And that's that's historically the way that the Bitcoin
ecosystem has developed. And I think that's what it touches on there. And then two, I would point to the
I made the analogy on the Oster yesterday about Bitcoin and the US Constitution. I'm not the first
one that's made this, which is to say, is the US Constitution a perfect document? No. In fact,
and we might disagree what we think a perfect US Constitution looks like. You know, I could probably
write down 10, like a new bill of rights that are like added to the Constitution. I want additional
rights for citizens that I wish in my perfect world would be in the Constitution. Let's say I want
the next amendment to say you have the right to use whatever money that you deem appropriate,
right? The citizens have this right. And I can picture nine other additional rights that I want
included in the document. But at the end of the day, what makes the Constitution valuable is that
it's very, very, very hard to change. You need a supermajority in Congress and a supermajority
among states to change it. And so a document that is good and nearly immutable is better than a
document that's great, but that five years from now, we have no clue what it's going to look like
because it's easy to change, right? And so that I would argue that Bitcoin is in its design space
similar to Ethernet or similar to TCP IP where it solves a certain problem in as simple as the way
as possible. And then much like the US Constitution is what it tries to maximize is difficulty of change.
So it's not impossible to change because that would also be a design flaw, but it's very, very, very hard
to change. One of the trade-offs that you talk about in the book is privacy. And I know
from participating in this community for a long time, privacy is something that a lot of people
are really passionate about. They look at projects like Monero and they're saying this is a better
form of money because it's more private than Bitcoin. But I think you do a really good job
talking about that trade-off and why Bitcoin is a better solution for people and where you can maybe
push the privacy into a second layer. So can you explain some of that for folks?
So when you look at cryptocurrencies, you know, a lot of them are just outright scams,
but there are infinite handful of areas where intelligent people truly propose things say,
hey, what if you make a more private currency or what if you make a more expressive currency?
And these are, you know, I think if you were to re-run this multiple times,
it's natural that people are going to test all these different answers to see what works and what
doesn't. There's no world where only Bitcoin exists, no one tries any other crypto networks,
and you know, it's Bitcoin wins, right? There's always going to be these tests in these market
challenges and these iterations to see what works in practice rather than just theory crafting.
And one of the downsides of Bitcoin is that it's not super private. You know, it's private enough
that no one formally knows who's the toesch is. You know, if you use it very skillfully,
it's private, but it's hard to use it privately. And so there's these privacy coins that makes it
easier to use the coins privately. And the downside is that they sacrifice some degree of audibility.
So it's easier for undetected inflation bugs and things like that to occur. There's a little
bit more layers of trust in the code and the encryption and the proofs compared to Bitcoin that
is more inherently audible. And so if you're trying to build a foundation of money, you know, if you're
trying to, if you want a network that's worth 10 trillion dollars or more, that robustness,
that audibility, that decentralization is arguably a more important component than privacy or
touring completeness or whatever the case may be. And so to the extent that you can build those
things on layers on top of it, I think is it makes a much better engineering model than trying
to incorporate those things right into the base layer where you sacrifice some degree of decentralization
or robustness or audibility in order to do something that's sure might be useful. Privacy and
touring completeness can be useful things. But if we're kind of getting down to the very base layer,
you know, down to Ethernet, down to TCPIP, down to the Constitution, we want something that's
easy for us to all agree on. And then when we build these, these old silos are complexities
on top of it, we can kind of pick our own paths that all tie into this very simple and audible
and robust base layer. And so the problem with Monero is that it generally degrades in value
versus Bitcoin. It's hard for it to establish the same level of trust and adoption. And so you
might get more privacy, but you don't want to hold your value there long term. And then when you
get in and out of Monero, that's where the privacy breaks down because there's not a lot of liquidity
there. Privacy is limited by liquidity, especially the entry and exit points. And so you're still
somewhat stuck. Whereas I think there's a lot of good tools on the horizon that can make Bitcoin
more private. We already have coin joins that are significant. Lighting network is relatively private
for the sender. And over time, it's generally more private. There's more proposals to further
fix some of its privacy issues. We have Fediments. We use 40-year-old Chalming Mint technology.
It works quite well to make it hard to, you know, it's near complete privacy, as long as you
have sufficient liquidity. And so in general, I think that while privacy is a very important tool,
I think so far the market and just engineering design observations have shown that it's not
the best for the base layer. You get into a thorough discussion between proof of work and proof of
stake protocols and the advantages, the disadvantages. I mean, you just do a really fair job kind of
laying them out. But with that in mind, Lynn, I just want to emphasize your discussion points around
with proof of work that you lay out in the book. How there's this, you can leave the network,
you can come back and you can get basically back up to date, but in proof of stake, that's not
necessarily the case. I think this is really important when you have a newcomer that comes to
the space and they come with this pretty common question or concern when they come into Bitcoin.
They say, I see Target and I see these large companies that you would think would have really
superior cybersecurity in place and they all, every one of them always get hacked. And the
information is compromised. How in the world do I do I know that something like that will not
happen with Bitcoin? And how can I place trust that this thing could literally be the global settlement
layer for the whole planet when the targets of the world are getting hacked all the time?
Yeah, so that goes back down to keeping it as simple and audible as possible. And then the other
available is why that proof of work, that energy component is so important because you're
tethering it to real world resources. And I use the comparison between volatile and non-volatile
memory. So with volatile memory, it's faster, but if you lose power and turn it back on, you've
lost all your data. Whereas non-volatile memory, it has limitations, but if you de-power it and turn
it back on, the data is still there. And so with proof of stake, the complication is that there's no
immutable, the network itself does not prove that it's the original. No, Satoshi originally
point out the reason he picked proof of work is because you don't have to trust who sent the
information to you. The information itself is self identifiable. At least once you've gotten past
the bootstrapping phase. So the proof of work speaks for itself. You don't have to trust whoever
sent it to you. The problem proof of stake is that there is no inherently, there's no foundation
that speaks for itself. So the person or entity that sent that information to you is important
variable to consider. There's no immutable history there. And so if you're a node that leaves and
joins an network and a proof of work system, you can pick up where you left off, whereas as long
as you spend no hard fork. So anytime there's an inception or hard fork, there's a little bit of
a bootstrapping phase, but other than those, it's self evident. Whereas in a proof of stake system,
if you're a node that leaves and comes back, there's no immutable proof of what happened while you were
gone. All you can do is look around at the current validators that are saying this was the objective
history. And you have to trust them. There's no proof that that's actually what happened. That's
just proof of what the majority is saying now. Because they can go back and they can create
alternative histories nearly cautiously for what transactions were signed and where. Another way
of putting it is that the coin holders determine the state of the ledger and the state of ledger
determines who the coin holders are. So you have the circular logic system. And the problem with
the circular logic system is that if there's a critical issue, a governance problem or imagine
something crazy, imagine a solar flare shuts off mostly global internet for a period of time.
And it takes us a week to get back online. The problem with proof of stake system is that the
network shuts down, Solana shut down, Binance change shut down. If these systems shut down,
either because of an internal bug or because of loss of internet and power, when they restart,
there's no node that's always been online. There's no objective immutable history of this network.
Whereas it literally, if you somehow shut down the Bitcoin network, like with a bug or the entire
internet just goes off for a week and comes back on, we can reconstruct what the objective
history of the network was because all that proof of work is still distributed among the nodes.
So as the nodes come back online and start trying to communicate with each other,
there is an objective source of truth they can find for what is the longest chain that meets the
rules of the network. Yeah, I would generally argue that proof of work is a more robust system.
It's less corruptible and it's something that I think is very important, despite any costs or
benefits it might have in terms of its energy usage. It's totally worth it because what you're
trying to replicate here is a system that relies on something, you know, it's not circular logic.
At the end of the day, transaction ordering is not based on the amount of coins you hold,
which is determined by the ledger. Transaction ordering is determined by your ability to put
external energy into the system. Wow, so well put. Let's talk about, you have another section in the
book where you're talking about how proof of stake is inherently a centralizing force with
enough time. Talk to us why that's the case. If you look at Bitcoin miners, even though mining
pools can get pretty big, individual miners generally don't. And of course, miners can always
redirect their hazards from another pool, should a pool be giving a problem. So what we really
care about is miner centralization. And mining is inherently a, and this is true for physical
mining. Like if you're a copper miner or a gold miner, there's never really like a copper,
you know, monopoly or gold monopoly because you're expanding almost as much resources to get the
fee commodity as you're earning revenue from the commodity. You don't really control your expenses,
you don't really control what your commodity sells for. And so other than trying to make sure you
execute well and, you know, make good kind of countercyclical decisions, it's very hard to run
a commodity miner. And the same is generally true for Bitcoin mining. It's inherently distributives,
coins tend to distribute over time. And the initial proof of work, the whole point is it's a
bootstrapping mechanism, whereas if you start a proof of stake system and you say, well,
could the existing coin holders get to determine, you know, what new transactions get added in,
the question is who are the initials coin holders, right? So then basically you have to kind of do
some sort of like ICO, basically you're making your project into a security, a capital race.
So you're starting out with that. And then two, you know, validators, they earn revenue over time
by validating, but they're not really expanding almost any resources. So as you have more money,
you now exponentially grow your money. And there's no cost to maintain this. Over time,
that's the system that's likely going to centralize the validating power, whereas Bitcoin tends
to inherently stay more distributed. Now, we still have to monitor kind of incentives of the
network to make sure there's nothing that changes about Bitcoin that might make miners more centralized.
That's kind of at the heart of somebody's discussion around possible soft forks and stuff like
that. But basically as the systems are laid out fundamentally, proof of work is inherently more
distributive type of system, whereas proof of stake inherently tends to exponentially accumulate
coins in basically a more and more powerful set of validator hands.
All right. This is my last one because then we could we could go for hours here. I'm just
trying to wrap it. There's so much content to cover here, Pat. This one here is I'm curious
your opinion. So when we look at the rise of stable coins, and we're not even getting into the CBDC
stuff, but just stable coins like tether and all these others. And the fact that they're all being
stood up on top of Ethereum and Ethereum like protocols that are proof of stake protocols, which are,
you know, what we just talked about as far as centralizing forces and how the people with the
most amount of coins on these networks are the ones that are validating and it's a this
self reinforcing or circular loop type system. When we look at that and we look at the sheer
velocity of fiat that seems to be accelerating in the use is Ethereum and these other protocols
that are proof of stake and necessity for this legacy system to meet Bitcoin where it's at
as the proof of work energy backed system that it is in that the world is and this is just the
proof of the adoption curve more and more demanded of the global population is something like that
needed because government bureaucrats aren't able to keep up with the speed of technology that's
happening with the legacy financial system. Do you understand where I'm going with that?
I don't know that I phrased the question all that well. I'll try to see if I answer the question
if I go in a different direction. Yeah, let me know. So I think again, stable coins serve a
demand. There's a demand for stable coins and therefore supply is made to meet that demand.
It's a market demand that exists. We talk to people in Argentina. They say here's why I want stable
coins and there are people that are happy to issue the stable coins to them. Now in general,
because the stable coin is centralized, you know, so if we're talking about traditional
fee collateralized stable coins, the issue where centralized, the issue where it can freeze certain
addresses, for example, they tend to not care too much whether the blockchain that those stable
coins are issued on is centralized because the stable coin itself is centralized. So stable coin
started out on Bitcoin, you know, it turned complete blockchain like Ethereum was naturally a little
bit easier to do them on. So they gravitated over there when Ethereum got kind of expensive
entrance transactions fees, they would gravitate towards an even more centralized system like
Tron where the purpose is just, you know, keep minimizing fees and people are sitting around
these stable coins and you have multiple layers of centralization that you have to worry about,
which is why, you know, no one should put money in a stable coin and expect that it's going to be
fine for 10 years. That's too risk-given assumption. There's too many points of centralized
attacks and rug polls compared to Bitcoin that's much more likely to be robust 10 years now than
any of these other systems, but it's serving kind of that intermediate demand. And if you're a
government or an enterprise, a banking enterprise, as some sort, one option is they can develop
their own in-house systems. So like, you know, kind of close central bank digital currency type of
things. And another option is they can look at these, you know, kind of open networks that they
have all these centralization problems, but there's a workable enough medium there that they can
issue their money on top of it. Like we just saw, for example, PayPal is interested in using a
theorem to launch the able coins, right? It's just, this is a substrate that they're finding useful
this period of time. Yeah, I wouldn't be surprised if that becomes a tool that governments and banks
use are these different types of tools, you know, and it's hard to say where it ends up because it's
like, do they want a theorem? Do they want Salana? Do they want Trond? You know, it'll very, we'll see
where it goes. But in general, I think that as long as the dollar network is as big and robust as
it is, it's going to enter all these different technological areas. Whatever technology is available,
dollars are going to leak into that technology. That's just how it's going to go. These are just
new ways to deliver dollars. And so it should be expected that that's going to be a thing.
Ultimately, I would say that Bitcoin is competing against fee occurrences and ultimately the dollar.
And that all these other technological layers are just extensions, really, of those fee occurrences,
especially when it comes to stable coins. And so I think Bitcoin, long term is the most robust
thing, but it does have that volatility. People have to be able to absorb the volatility to be able
to hold it. And you know, you have a bank account in dollars. I have a bank account in dollars.
There are people in Argentina that can't have a bank account in dollars. And so their bank
account in dollars can be tether, right? And there's pros and cons with that. It's, you know,
kind of like how our dollar accounts have risk. Their tether exposure has risk. And that's the trade
off that they're making. I think it's important to educate people on the risks, the very centralization
risks that exist in these other networks and the existence stable coins. And I also think like I
said before, eventually the dollar itself becomes unstable. That's a long term outcome. It's something
that's a process rather than an event, but it's something that I also think is a long term option
to consider that sure right now, from many economic perspectives in various countries, the dollars
attractive to them at least as an intermediate term instrument. You know, like the Egyptian doctor
might say, well, maybe makes sense to hold stable coins instead of physical bank notes in my
apartment, like subject theft and stuff, right? So there's various, you know, and maybe they don't,
maybe they see, you know, what I like the fact that I directly hold the bare assets that, you know,
only the Fed can devalue, right? So there's various tradeoffs for how they might want to hold
some of their liquid money. But as long as the dollars, the unit of account for the world,
it's natural that it's going to leak into various technology protocols to extend it to reach.
And it really de-risks the government by having these entities stand up and do this because it
really kind of, they can put their hands in the air and say, well, this wasn't our fault. Like,
we're not controlling those rails. These are independent companies that like tether that are buying
treasuries or buying dollars and they're custodying them and then they're doing all these
swoopy things with technology on whatever protocol in order to to put it out there. Like,
that's not on us. That's on anybody who was trusting them. And I think they can just kind of wave
their hands and wash their hands of any type of responsibility as the demand for dollars and
immediate settlement of dollars continues to pick up because the velocity of dollars continues
to pick up around the world. Yeah, and it's hard to say what the US government will eventually want
to do. I mean, it's possible that they eventually want to go after the stable coins. But like we
discussed before, it seems to be in their best interest if they're intelligent to let the stable
coins proliferate because they basically, that's a way of increasing demand for treasuries because
if you're an Argentinian that holds tether in some ways, what you're holding is treasuries. Yeah,
you're basically making treasuries more fungible as a saving instrument or more liquid, more
spendable. You're kind of turning treasuries into a medium of exchange in a way.
And because money is often an emergent phenomenon, you know, this demand for dollars emerges.
Now, the demand for gold exists for long-term savings, the demand for Bitcoin exists for long-term
savings. And they have to deal with the fluctuations of these assets. But in the intermediate term,
there's a demand for dollars in many countries. And it's just one of the ways that that demand
is met. And it's from the government perspective, they monetize treasuries. Now, people argue that
stable coins slow down Bitcoin adoption. And that's probably true. But I would argue that
the existence of the dollar ultimately is what challenges Bitcoin adoption. As long as the dollar
is a larger network effect and less volatile, that's the 800 pound gorilla in the room.
It doesn't matter if stable coins are just an extension of the dollar. The dollar is going to
use whatever technology is available to it to extend itself. Stable coins are just one arm
of the final boss really thinking about Bitcoin adoption. And ultimately, that is the dollar.
Is that the only value that you find? And a lot of these other
quote-unquote proof-of-stake blockchains is basically stable coins?
I think that's been the killer app. I mean, ever since I've been covering the space,
I kept saying it's Bitcoin is stable coins. What is blockchain good for money?
And that's just kind of seeing how it plays out. Now, I always try to steal, man, I think of what
else could this technology be used for? We see with Noster that you don't need a blockchain to
make something that's reasonably decentralized. Generally, when you need a blockchain,
it's two things. You want it to be decentralized, but also you want to build a monitor the entire
ledger. You want it to be a bounded system. So with Bitcoin, we care about that because we want
a bit of monitor the entire supply. Whereas with something like Noster, we don't care the fact that
we can't necessarily say how many messages exist in Noster. We care about the part of the network
that we want to see. So we want decentralization, but we don't want auditability to the entire
network. And that's why we don't need a blockchain for Noster. Now, Bitcoin makes Noster better by
being the money of Noster and helping to find some of these relays and keep the system operating.
But it's not like Noster has to run on a blockchain. So I think that the technology of
blockchain is overapplied because you need a lot of trade-offs to run a blockchain. And most
things don't need a blockchain. And therefore, blockchain just adds expense to whatever you're trying
to do other than money. I try to think of things like crypto gaming or digital collectibles.
And I generally, my steal in our argument is that these things are basically just tech layers.
They're competing for a market that I'm just not as interested in as the market for money. Because
as I talk about and broken money, one of the biggest problems in the world is that vast swathes
of people around the world don't have good money. So those of us in the United States and Europe,
we have like, it's decent money. It's not good money, but it's decent. It causes all sorts of
problems under the surface that are subtle. And you go out to the developing world. The problems
are more obvious. So one of the biggest problems that humanity faces, the $100 trillion problem
is lack of good money. So that's the market that I care about. And so I kind of don't even care
about most crypto unless they're trying to say that they're better money. Then I'll examine
that claim and say, well, here's why I don't think that's the case, right? So other than if
they're trying to compete for like base layer money, arguing that they're more robust or something,
I'll explore them as like little technology projects. But ultimately, I think that the
when we think about this whole space, we're thinking about what technologies are robust and
powerful enough to try to fix this problem we found ourselves in. We have a world with a 160
different fee of currencies. Like clearly, this is a local maximum. It's not the best
of all possible worlds of money. This system we've had in place for the past 50 years.
There's clearly a lot of improvements to make. And I would argue that out of all the technologies
that exist, Bitcoin is most powerful tool we have to keep building on and proliferating and
adopting in order to try to solve this problem of bad money around the world.
I cannot tell the audience enough you guys got to read this book. Then where can they pick
this thing up? I'm assuming it's on Amazon anywhere else that you want to point people towards.
So broken money's on Amazon and over time, it'll appear in other stories as well. It's a process
of distribution, but yeah, check it out. Awesome. And we'll have links to Lynn has an amazing
newsletter that I personally subscribe to. I'll have links to that. We'll have links to the book.
Lynn, thank you so much for making time and coming on the show. This was just an incredible
discussion and just really appreciate everything you're doing for the Bitcoin space, for the finance
space. And wow, what a book. Thank you for having me and I appreciate that.
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