Bankless - 2 - The Evolution of Monetary Policy

Episode Date: March 9, 2020

March 9th, 2020 Episode: #2 How did money get to where it is today? David and Ryan explore the historical progress of money, and the management of money, across time. We ask questions like "what makes good money" and "how does money get managed" and "who gets to manage money, and why" We end with a comparison of the different money management policies of each respective crypto-system, and how each system arrived at that conclusion ----- Tools from our sponsors to go bankless: Rocket Dollar - tax shelter your crypto ($50 w/ "BANKLESS") Monolith - holy grail of bankless Visa cards Aave - money lego for lending & borrowing Ethereal Summit - the most bankless crypto conference yet ----- Episode Actions: Subscribe to this podcast Subscribe to Bankless newsletter program Make the commitment to go more bankless ----- Subscribe to podcast on iTunes | Spotify | YouTube | RSS Feed Leave a review on iTunes Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program Visit official Bankless website for resources Follow Bankless on Twitter | YouTube Follow Ryan on Twitter Follow David on Twitter

Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Hey, David, how's it going? This is episode two. Hey, Ryan. Yeah, this is going to be a good one. Another really foundational episode that's really going to set us up for some really awesome topics into the future. talking all day about monetary policy, the history of money, and where these two big crypto economic systems, Bitcoin and Ethereum fit in the world of monetary policy. So we're going to talk about ether and we're going to talk about Bitcoin and how their

monetary policy compares and contrast. And once again, this is going to be an episode that appeals to everybody. So this is all skill levels. We're going to pause the episode and define things where it makes sense. We want this to be approachable and open to everybody. But before we dig in, I want to tell you about our sponsors this week. This is for our U.S. listeners primarily. If you have an IRA or 401k, the problem is it's stuck in brokerage jail. That means you don't have access to crypto. You can buy stocks, but you can't buy crypto directly. What you need to do is check out Rocket Dollar because they can take care of the pain of breaking your IRA out of your brokerage brokerage and allow you to buy crypto directly. They help you with the paperwork. They help you convert

that IRA to a crypto IRA. You can use the bankless code at rocket dollar.com and get $50 off. One of the things that Ryan and I are really excited for is just the improvement of UI and U.S. when it comes to managing your personal finances. If you go to Wells Fargo or your bank's homepage, you get bombarded with a bunch of stuff you don't need. It's not simple. It's not intuitive. Go check out Xeron, which is the front page of a DFI portfolio. You'll be able to connect to multiple wallets and generate a portfolio of all of your assets, both your lending and your borrowing activity, and you'll even be able to exchange assets through things like Uniswap.

Zeron is really building the one-stop shop to access all the DFI protocols in the background without having to go to each and every DFI protocol's website. Instead of having to go to compound.finance or uniswap. or to the MakerDAO vault page, you can just go to xeron.io, plug in your wallet and access all of those protocols all in one spot with a comprehensive portfolio summary at your fingertips. So check it out, zeron.io, they support a number of different wallets that you'll easily be able to sign in with and see your crypto portfolio. So let's kick things off, David, with this question. What is money? Yeah, what a great question. Money is something that we are never really discussing

actually what it is. Like when somebody says what is money, like they pulled out like a dollar bill from their wallet. Is that really money? It's the money we use, but it's not really the right answer. So money is a thing that comes out of the need to exchange. So before there was money, there were people that were producing goods that they needed to swap for other goods in order to have the goods that they don't produce. So if you're like an apple farmer and you need a new pair of shoes, you need to swap the thing that you produce apples for the thing that you don't produce with your shoes. But sometimes like the shoe producer doesn't want apples, or at least not as many apples as you have to sell them for your shoes. And so what money is is this other good.

It's this good that people adopt emergently to use so that they can trade the asset that they produce for the asset that they want. Money is this substrate good that all other goods go through. in order to be able to exchange goods with all other people. So money comes out of a demand for exchange. You remember that the definition we did last episode of protocol, kind of a set of rules that's socially accepted and broadly used to accomplish something. I think money is very much a protocol. As you said, it's this substrate for value exchange,

but it only works because we all agree that the thing that we are exchanging, or the thing that we use as a unit of account or the thing that we are storing our value in is money. We all have to agree on it. So why can't anything just be money? Why can't I use monopoly money as money? Why can't I use tokens from an arcade as money? Is there some special quality that money has? Yeah, and you touched on it a little bit where money is something that we all agree to use. So if you come to the market with your monopoly money and say, hey, can I buy this thing, people are going to be like, well, no, because you don't have the actual money, the real money. And so the choice of how humans have, how humans have chosen money over time is a

really interesting story that I think we're going to touch on a little bit here. The first and foremost requirement is that you are using the money that everyone else is using. You can, you can fashion your own money, but that doesn't mean that other people use it. Money is the thing that everyone uses. And some monies are better than others. We won't, we won't, we we wouldn't ever use something that decays as money. And so that's why we've seen stuff like precious metals, which don't decay, being used as money over things organic, like cattle or apples. Like those are bad monies because they die. So money is something that needs to persist across time so that it doesn't lose its value. And so that's kind of one of the basic tenets of money is

that time shouldn't matter for it. It's going to be money tomorrow. Because if it isn't money tomorrow, well, then you're going to get rid of it today, and then that reduces its moneyness. So I think economists call the quality that you're talking about the quality of durability. It has to be, money has to be durable across time. We can't use fruit as money. It would decay. It would rot away. And it would be no good in the future as money.

It wouldn't be a good store of value. So we have to pick some sort of item that is as durable across time. But it seems to me there's some other qualities of money too, right? We can't pick something that is easy to produce and that can be found everywhere. There has to be some level of scarcity to money, wouldn't you say? And this is relevant to how money is a useful thing to act as a price tool. So if I have my apples and you have a cow, how do we actually measure how many apples equals one cow. It's not really something that's possible, especially when in the market there are

hundreds of different goods. And so the fact that money has inbuilt scarcity is this thing that allows us to be this meter stick of value. That's what one unit of money really is. It's a measurement of how valuable something is. That's why money often has different denominations, like $1, $5, $10. This is like one inch, one foot, one mile. It's different. measurements for how valuable something is. And you can't have those measurements without scarcity, because scarcity is the thing that you measure against. You know, there is only a finite amount of gold in the world. And gold has historically been the money that we have used the most. And so when we trade a cow for gold, you're trading a cow for one, for a very specific percentage of all the

world's gold. Yeah, it's really interesting. You know, I've heard it said, there's only enough gold in the world to fit in an Olympic-sized swimming pool, at least above-ground gold, gold that we could use. So there is a scarce amount, and you talked about that ability to divide the money into specific units. Economists call that fungibility. It's sort of a fancy word for it. So it has to be scarce. It has to be fungible.

It has to be durable. And lots of different monies have been used. you know, shells, wampum, stone tablets on islands. But gold has been a very popular money throughout history. And I think it's because it has all of those qualities and societies that have adopted gold. It's a stronger money tech than societies that have adopted something like shells. And so if you're a society and you have shells on the beach as money and a number, and a other society comes and, you know, they have the ability to kind of find shells far quicker than you, they can inflate your money supply and essentially destroy your society's money

technology. And they can use their money technology gold to essentially drive out your bad money. So there's this concept called Gresham's Law where good money drives out bad. So that means when a better money, a better money technology enters a society, it will drive out the worst money because people will keep the better money. They won't spend it. They'll store that. They'll hoard it. And they'll spend the bad money. And this happens in all sorts of societies. You can see it happening even today in Argentina, where good money, the U.S. dollars, driving out the bad money, Argentine pesos. And people want to keep good money. money. They want to store it. So it's it's kind of a timeless sort of attribute. It's a timeless,

I guess, societal meme that we've developed, this this meme of money, but there have been some consistent attributes that all money has really provided for and contained. So that first type of money, that gold money that we sort of settled upon throughout throughout history in the 1600s and 1700s. That is a specific type of money. That's a commodity money. Those are probably some of gold's strengths, the things that we mentioned. But what would you say are some of gold's weaknesses as a commodity money? Gold's biggest weakness is that it's big and heavy. And, you know, carrying around gold is difficult. So you either carry it in your pocket and then if you want to carry a lot of it, like it weighs you down and it becomes impossible. And if you want to stave it in your

home and your place of residence, well then you have to leave your home. At some point, it becomes unguarded. So the more gold you have, the more commodity money you have, the more it actually is required to protect it. So if you have a sufficient amount of gold, it starts to become, you know, you start to become incentivized to, you know, hire somebody to secure it. And so this is kind of where the early banks came from out of a demand to need to safely and securely store your gold. And so you are giving your your money to someone else, you're depositing it into a bank so that they can store it for you. And that's kind of one of the biggest weaknesses of gold that has be turned in from a small

chink in the armor to a fatal flaw of gold. Because now, as a result of this, you know, over 4,000 years of using gold as money, gold has converged upon the biggest banks in the world, which are the central banks. And so as a result of this weakness, no one has gold in their house anymore and all the central banks have it deposited in their bank. And so this has really shifted who has control over the money from, you know, the individuals who used to keep it in their pocket to the banks that have like the vast majority of the world's gold, something like 80 plus percent of gold is located in central banks. We talk about Wells Fargo as sort of an archetype of a bank on this podcast a lot. And their logo is actually a like a wagon, a Wells Fargo wagon. A Wells Fargo

wagon that was, you know, the old-timey equivalent of a Brink's truck. You know, that's what kind of carried the gold around from one physical bank location to another. And I think that this quality that you're talking about has led to massive centralization of gold and has led to the banking structure as we know it. And so this commodity era that we're talking about, this gold era, you know, has indeed produced the banking, the roots of the banking structure that we see today. But I want to pause and define maybe commodity money a little bit more for us. So commodity money has this monetary value aspect in that we use it as money. But commodity money, isn't it also used outside of money?

So you can use gold and other things. Like, you know, we used to use gold in dental work as an example. Gold can be used in jewelry. Can you talk more about that aspect of usage? Is it important for a money to have some sort of commodity utility outside of being a money? Yeah, so gold has used in the industry for a bunch of different reasons, like as fake teeth, like you said. but also in wires, electronics for data communication.

The idea of commodity money is that this thing is some tool that is usable in industry as a resource. So commodities are typically things that are one-time use assets like wheat or coffee or energy, like the oil in a barrel. These are things that are one-time use that produce something useful for you. You can take wheat in industry and turn it into bread. You can take oil and you can turn it into locomotion to move your car, your train, your boat. And so commodity money has a specific component of it that is useful in the industry. Now, this actually turns to a big debate, especially among the Austrians, where they think that any money that has some sort of commodity industrial use case actually makes the money worse.

because what money is supposed to be is the commoditiness of it, the utility of it is as the substrate. And so anytime the money is used for something other than money, it actually weakens it. The good that is supposed to be money or the utility value of the money is the fact that you can exchange it for anything anywhere of equal value. You just said Austrian right there, David. And I want to talk about what you mean by that. So you're not talking about Austria, the country, right? You're talking about something else. What do you mean by Austrians?

Yeah, so there is this school of thought that is often called Austrian economics. And it's something that the Bitcoin community has really rallied behind. And it's the Austrian world is a gold money world, the opposite of a Fiat money. If you're an Austrian, you believe that no one should be managing the monetary supply. You believe that the Federal Reserve and their manipulation of interest rates, which turns into the manipulation of the total money supply, is a net negative for the world at large. And humans should actually be the people that are organically deciding what money is and how to value it. And having some central body that manipulates people's choices via interest rates is a net negative. The opposite of an Austrian is a Keynesian, somebody that believes that the active management of the monetary supply is a good tool to balance the economy in good times and bad times when the coronavirus has just triggered the Fed to reduce interest rates by half a percent, which means that there's going to be a little bit more money in the total economy, which means people are going to spend more, they're going to engage in trade more, and it's going to boost the economy a little bit.

And some people think that's good. It's how we got out of the 08 crisis. But Austrian economics think, Austrian economists think that the whole reason why the 08 crash happened in the first place is that because the Fed is irresponsibly managing the money in ways that no one should have the control over. So it's a really interesting debate. And it's one of the things that's at the central core of cryptocurrency and cryptocurrency monetary policy. Wait, so what are you? Have you picked aside? Are you Austrian? Are you Keynesian? I tend to lean Austrian. I don't go full Austrian. I don't think anyone should go full Austrian, but I think their arguments are pretty compelling. And that's reflected in the crypto world at large. I think the reasons why these crypto assets are valuable is because in the design of Bitcoin and Ethereum is inherently Austrian beliefs, where these things, the monetary policy of these things is determined by a computer protocol, not a group of 12 people behind closed doors that no one elected. And we'll get into this a little bit more in the episode. But I think if you go to any one end of the spectrum, you're definitely wrong. So a balance of being able to manage the money supply while also having it mostly out of the hands of humans is a

pretty good answer. I think I resonate with that, particularly about the balance. And I think we have veered the balance in the wrong direction. So the teeter-totter is completely skewed. towards the fiat money, the Keynesian perspective, and it's becoming more and more Keynesian as the years go by. The 2008 crisis prompted government intervention, central bank intervention that we haven't ever seen before. New economic tools like quantitative easing, which we don't have to define here, but these new tools central banks have deployed are really untested. So we're in uncharted waters in Keynesian country, and there's really no backup to the current system that we have, which is a bit what the bankless and the crypto system provides is backup, a parallel universe in case the Keynesian system goes wrong. And the Keynesian system can definitely go wrong. Look at what happened in Venezuela.

The government tried to print their way out of a crisis, and it ended up just digging the crisis even deeper. The ability to freely print money is very dangerous. The ability to freely print money is very dangerous. Even the most responsible humans fall to the temptations of printing money. Austrian economics says, why even have the ability to be tempted by this power? Let's just have a money that no one can have the control over. Let's remove the temptation. And I think that's fair.

And a good illustration as to how dangerous money printing can become. Operation Bernhard was a plan that the Nazis in World War II were going to, we're thinking about doing to the British economy. Their plan was to drop billions and billions of British banknotes that would effectively be money. They were going to just drop a bunch of money on top of Britain. And it was going to hyper-influen. inflate the British monetary system. What they were going to do is they were just going to drop so much

money on top of Britain, so much fake money, that it was just going to destroy the economy. The value of the money would be worthless. And so it kind of illustrates that the ability to print money, it is a weapon of mass destruction. It really takes a lot of faith in these like 12 people behind closed doors that they are not going to, you know, press the hyperinflation button. So we've talked about commodity money and gold being a representative of that. But the centralization that we were talking about earlier led towards a different type of money, something that we might call representative money. And maybe that's best embodied in the U.S. dollar.

So can you talk about kind of the origins of the dollar and how it was originally backed in this representative money era? So when you are working in your field and you are producing a bunch of weeks, you need a place to store that. And so what you do is you go to a granary or some store of the local economy's assets and then you put in your wheat into the store. And then whoever's managing this

gives you something in return as a credit, like a piece of paper, you used to be clay tablets, and this thing that you got, this piece of paper or this note that you got back was a credit for whatever you deposited, which means that you can go about your day do whatever you want, you can come back to that bank, that granary, and you can give them that piece of paper and then receive your whatever you deposited back. Now, it can actually be something different

that you, it can be a different bunch of wheat or a different basket of apples. It doesn't matter because you deposited 10 apples and so you get 10 apples back. That's what the note that you were given says. But you can also take this note elsewhere in the world and you can give it to somebody else. and so you can go to the local blacksmith and say, I would like a sword. I deposited 100 apples, and you can go get 100 apples worth of stuff out of that same bank. And if you take this piece of paper, you can make me a sword.

And that's the very beginnings of what we call fiat money or paper money, where the bank where people are depositing all their value gives people a receipt of that deposit, which is much more efficiently communicated as a piece of paper. paper with writing on it and that receipt is able to be given out to the rest of the world because it's just much more efficient instead of having to carry your gold everywhere, just carry a piece of paper that says that you own gold. And you can give that to anyone and that is the new money. That is the paper issued money and that's kind of where that humans created or engineered

their own money rather than emergently selecting gold. They said, okay, well, we'll use gold as deposits but we're going to use this paper money, which is a receipt for that gold, and we're going to use this money out in the world. And this is the genesis of banks. This is how banks came to be in the first place. Yeah, absolutely. So we kind of move from commodity money where everything is gold to the banks have to store the gold. And so what they do is they issue notes, pieces of paper, IOUs for the gold that they're keeping. And these IOUs become an early form of Fiat. We might not call it fiat yet, just maybe fiat light, but it's really representative money because each of these

notes represent a dollar that you can go to any bank in your country to or maybe across the globe and get that gold out. And so this representative money, these pieces of paper, become the money that circulates in the system. And that representative money system really lasted into the 1800s and early 1900s until something happened, which is Bretton Woods. Do you want to talk about Bretton Woods and the next era of money? Bretton Woods was this event after World War II where all of the remaining powers in the world came together in Bretton Woods, New Hampshire, in order to decide what the international monetary policy should be after the breakdown of the world in World War II. And so every economist from all over the world

came to the same room and just hashed out what the world is going to be. And there's a famous fight between John Maynard Keynes from Keynes economics, economists that we talked about earlier, and Harry Dexter White. Keynes is from Britain. Harry Dexter White is from the United States. It's a really interesting story. There's a Planet Money episode that I'm going to link in the show notes that walks you through this. But basically what happens is at the end of Brettonwood, it's decided that the U.S. dollar is going to be the dominant currency across the whole world.

And the reason for that is because the American economy is largely untouched. There was no actual fighting in World War II inside the United States. And because places like Britain and France had paid United States all of their gold to supply them with supplies in the early part of the war, the United States had all the gold in their vaults. They had the gold in their central bank. And so the United States really had the leverage here. They said, well, our bank has all the gold.

So our bank's paper, money, note receipts that we issue, aka the dollar, is going to be the currency of the world. And that was the resulting decision of Bretton Woods, that the United States dollar is going to be the currency for the world. Now, at this time, one dollar was always backed by a bunch of gold. And so if other countries in the world had a bunch of dollars, they could come bring that to the window at the, central bank and they could exchange that dollars for gold. And so that's the the dollar at this point.

It still represents its value in gold. There is a hard peg of $35 to one ounce of gold that the United States Central Bank promised to uphold. As you may know now, that door, that window is closed. They'd no longer accept $35 for any amount of gold to anyone. Yeah, so let's talk about that. So, So, you know, but first, like, the quick recap, we had gold commodity money. That centralized into these banks and turned into IOUs for the gold. That's representative money. But still, there were many forms of these IOUs. Each of the countries had their own gold reserves.

But after World War II, that further centralized into U.S. control because it turned out that the U.S. bank had the power, had all of the gold. and their currency, the U.S. dollar, could be the representative money for the world. And that was determined by a small group of people in that Bretton Woods meeting that you mentioned. But it's still representative money. So the U.S. dollar was backed by some measure of commensurate gold in Fort Knox. And the various places the U.S. government stores. its gold reserves until, until something else happened. So can you talk about the next event where we move from representative money to a full-on fiat money system? Yeah, and this to me is just

so telling that humans do not belong behind the driving wheel of money. This is the big argument for why no one should be in charge of what money is or how it works. So Bretton Woods was in the 40s post-World War II. And in the 70s, we, go to war with Vietnam. It's a very expensive war and frankly the United States doesn't have the funds to really keep it up even though for some reason we want to continue with this war. And so what Nixon does is he starts printing money. So the way that we finance this war is through printing money. The U.S. government starts to spend money it doesn't have. And this is where inflation comes from. The increase of the monetary supply of the U.S. dollar goes up, which means that every other

U.S. dollar goes down. Remember, money is a measuring stick. It's a measuring stick of value. And the value of the world doesn't go up when you print more money. It just makes actual money go down in value. What money printing does is it just allows whoever has the ability to print money to take money from everyone else and put it in or take value, I should say, from everyone else and give it to themselves. So they're printing money, David. The U.S. government is printing their U.S. dollars without the ability to print gold to back those dollars.

Is that right? That's totally right. And that's a fundamental flaw of human generated monetary systems. The Austrian economist belief is that if someone has the ability to print money, then they will print money. because of incentives. The world is all about incentives. And if you give the ability for someone to print money,

they are automatically incentivized to do so because, I mean, wouldn't you do that, Ryan, if you had a little money printer in your house, like I would print some money every single day. I would go out and I would print $100 and buy a nice steak lunch and I would do that repeatedly. No one should have that power. No one should have their own personal money tree

where they're just continuing to grow it. So, okay, so what happens then? So the U.S. is printing money. Wouldn't that cause the U.S. dollar to inflate? People realize that, wow, these dollars aren't actually backed by anything. They're worth a lot less than they should be. And so the U.S. dollar inflates becomes worth less over time. Like, what happened there?

Right. So the window at the Federal Reserve allows for the exchange of $35 for an ounce of gold. When the U.S. government decided to print more money, well, then there's a window. going to be more dollars than there was in the central bank. And this starts to upset a lot of European countries. They're saying, well, you know, the dollars that we have in our banks are becoming worth less. And so we're going to go and take these dollars to the Federal Reserve and swap them out for gold. And so during the in the middle of the Vietnam War, the very expensive war, the supply of gold in the central banks was was being withdrawn. It was being withdrawn from

other countries because other countries didn't want to hold the dollars. And so this goes back to what you said earlier, where people will always leave the bad money for the good money. And when the central bank was printing a bunch of money during the 70s, they were making the dollar bad money, and they were incentivizing everyone to swap out their dollars for the good money, which is gold. But Nixon was having none of it. So in 1972, he closed down the gold window. He said, there's no more exchange for U.S. dollars. And we essentially defaulted on our commitment. to have our dollars swapped out for gold. And we did this because we had the power to.

That's what happens when the dollar was at the center point of the world monetary system. Everyone uses the dollar. The United States prints the dollar. And we had the ability to shut down that window. So we defaulted. So boom. Representative Money era is over and we just enter the Fiat Money era. Nixon brings us into it in the early 1970s.

And the theme that I think runs through all of this is centralization. So the commodity money gets centralized, the gold into banks, the banks issue IOUs for gold. That gets further centralized. Eventually, it all gets centralized in the U.S. government. The U.S. government is the most powerful entity post-World War II, the centralization of power, the centralization power. Essentially, they get centralization of money, centralization of power. Essentially, the U.S. gets to do what it wants. And it does.

It says we're no longer backing the U.S. dollar by gold, and we're moving to this fiat era. But here's the weird part to me, because wouldn't you think that that would send the globe into a massive panic, that there would be massive inflation of the U.S. dollar, complete breakdown. of our modern economic system. Why didn't that happen? It seems like, you know, there was some inflation in the 1970s, but things got better in the 80s. The 90s were fantastic. Why didn't this cause global collapse as some of the Austrians may have predicted? The belief here is that the Keynesian economists that run the central banks, well, they want to always run the central banks. And if they keep printing money, they understand that if they keep printing money,

they upset the whole financial order. And so they do have to have some responsibility when it comes to money printing. And that's the role that they publicize that they have. They say that we are going to responsibly inflate the money rate at 2%. So every single year, there's 2% inflation. The dollar becomes 2% less valuable. That's their target. And what this is that anyone who's saving their money, their value in U.S. dollars has 2% less value every single year. So they're incentivized to go out and spend, to go buy stuff, promote the economy, increase commerce, increase exchange, and allow the engine of the economy to just run a little bit hotter, which is good for growth.

Austrians say that no one should have that power. That is a subjective choice that we are making, and no subjectivity should be going into the economy. It's manipulation of the fundamental foundation that allows this world to run, which is money. And that's a really long conversation, which maybe we'll go into into future episodes. But the idea is that the Keynesian economists at the head of the central bank need to responsibly print money, and they understand that in order to not destroy the whole entire world. And so they have kept themselves in the seats of power by making sure they don't inflate the money too much. Yeah, and I think that's key.

I think part of the reason the entire world and the economies of the world didn't fall apart is because humans accepted that central banks were controlling the system and would be responsible with their monetary policy. They accepted that as the mean. And this gets back to kind of what money is, and it is a shared social tool for, coordination. It's a fiction. It's a myth, a shared narrative, if you will. And even gold was that way. I mean, there's nothing inherently valuable with gold. It's a lump of metal. So they essentially, the central banks essentially swapped out the gold meme for the Fiat meme and humanity siltred on. We just accepted it. And we now accept, no one disputes, that US dollar is worth a dollar, and of course, it's money.

We also had no choice. We also had no choice. That is the big difference. What we were going to do? Start sending gold around? Well, exactly. So that is the big difference between the original system that humanity adopted, which is a bit more of a ground-up, a bottom-up approach to the Fiat money system. which is really dictated by governments.

They mandate that it must be accepted for taxes and that it must be the medium of exchange within the economy and they control the banks in such a way that essentially we're all forced to use the system. We don't have any other option or we haven't had one until now because we've moved from the commodity money era to the representative money era to the Fiat money,

era and I think we are about to enter and we have started entering this new era with the birth of crypto. Can you talk a little bit about the birth of Bitcoin and how that's different from the monies that we've seen in the past? So there's a thought experiment I always like to run with Bitcoin. Let's imagine that we are starting society over from scratch and all of the people are getting together and we're making some agreements. So the one agreement we need to come across is what money should we use? And so I think Bitcoin is really the very early answer of this question. So what makes a good money? Well, I mean, we have the internet. So let's just put the money on the internet because, you know, everyone has access to the internet. It's 4.5 billion of the seven

billion of us. So that makes sense. So internet money. That's the first start. We don't want, and this is a really telling scenario, I think. So imagine in this world where we're trying to decide what the future is going to be. We're all here. No one's the leader. We're all on the same plane. And say 12 old dudes raise their hands and say, hey, we'll manage the money. No one's going to say, okay, like you guys can go manage the money. Like you guys get to do it because everyone wants that job. Like everyone wants to manage the money. Everyone wants the ability to print money. I mean, they're all going to bend the rules in their favor, right? Anyone who has that power. Right. And so in this new world that we're trying to set up that we're designing from scratch,

it's much more likely that everyone decides that it's much more fair, that we don't have anyone to manage the money. And what that means is that there's no monetary policy. And so what no monetary policy is, the only viable version of no monetary policy is a money that does not inflate. That is a hard cap. And that's what Bitcoin is. And so it's, this internet money that doesn't have any issuance above and beyond the 21 million. So people say that, you know, Bitcoin is inflating at like 4% per year at this rate. And that's because that, you know, the blocked reward issues new bitcoins to miners to pay for security. But I prefer the, the alternative way of viewing it where Bitcoin has zero percent inflation because it's going to always be at 21 million

and never anymore. And we're just in this early distribution phase, this fair distribution of Bitcoin across the world. And so like Bitcoin is like this early prototype for crypto money. It's a absolute hard cap that no one controls, has no monetary policy. And it's very much similar to gold. Gold also doesn't have a monetary policy. No one can print more gold. No one can, you know, alchemy that no amount of alchemy can make new gold in cost effective ways. And Bitcoin is that represented on the internet. Absolutely. Now, you know, I, I do, want to be clear about when you say Bitcoin has no monetary policy, right? What you mean is there aren't 12 old guys moving the dials up and down and changing things based on GDP

and changing things based on economic outlook or political pressure. The monetary policy, if we want to call it that of Bitcoin, is purely algorithmic. So it's defined within the code structure itself and that code structure is socially enforced by all of the nodes that choose of their own volition to run the software. So the monetary policy or the issuance policy, maybe we should call it, is purely algorithmic and it's not decided by a small group of people. And to your point, that is the fairest way to do it. If the world adopted a new money system, we would want, above all things, a money system that didn't favor one group over the other, didn't favor the U.S. over China, or rich people over poor people, or, you know, people who are one, you know, from one area of the world or another,

it would be a credibly neutral system that everyone could trust, because no one's manipulating the rules, that they could opt into, so they could choose to adopt it or not, that was accessible over the internet, so all you need is an internet connection. You don't need a citizenship, and you don't have to trust a group of politicians. You can choose to participate in the economy or not. And that is really what crypto money is all about, is this algorithmic issuance policy that is credibly neutral and available for the world to opt into. And that's this new form of money. It's a step beyond fiat money. In some ways,

humanity is going back to its roots. These commodity gold money roots. It's why people have called Bitcoin and Ether digital gold. It's reminiscent of that era of money, which was much more bottom up and managed by transparent rules of the game rather than managed by a small

group of individuals. Before we get into the next section, I think we should pause here, David, and talk about two of our sponsors. Monolith is a really great bankless product. This is going to be for our European listeners, which I'm totally jealous of. Monolith is a crypto visa card. It's the only real bankless visa card that really exists. And what it allows you to do is it allows you to spend your crypto assets through the Visa network. And so what you can do is you can get your monolith card.

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Try it out. Also say hi to them at a Paris blockchain week in March. And so that brings us to Ethereum. And Ethereum has a little bit more complex monetary policy. Where Bitcoin's monetary policy is maximally simple, Ethereum takes on the challenge of doing it a little bit more creatively. Both protocols still issue their currency by an algorithm. but Bitcoin's algorithm approaches zero over time. And Ethereum's doesn't. Ethereum's algorithm actually changes the issuance of ether based on a certain parameter. And this goes into the topic of consensus algorithms, which we'll probably talk on many,

we'll probably talk plenty about on future episodes. But consensus algorithms are the way that the blockchain incentivizes security. And so Bitcoin's consensus algorithm is proof of work. You have these mining machines that produce a bunch of work. work that receive the right to produce blocks and receive the fees in those blocks. And Ethereum is moving into a proof of stake where you stake your ether and then you get the right to produce blocks and then you get a little bit of a reward. Now, the more stake there is, the more total number of ether being staked by all the staking validators across the world, the less the protocol

issues for block rewards. So the less ether is being minted in order to incentivize people to stake and provide security. This is the security mechanism for how these blockchains are resistant to attack from larger, more well-funded players like the central bank, for example. This is a really complex topic. We'll get into this later. But basically, the more issuance that you have, the more secure your blockchain is. However, you need to balance. issuance making sure that we don't inflate money with security. And so this is Ethereum's monetary policy, issuing the minimum number of ether in order to provide a maximal level of security. And I think it's important to go back to the point of why these various protocols like

ether and Ethereum and emphasize this point, why they issue in the first place. Because it's different than the reason central banks issue money. So the reason central banks in the Fiat money system issue money is to do a few things. One, it's to stabilize the economy in times of uncertainty. Another is it's to provide employment for folks sometime during an economic downturn. So they'll inflate and ease monetary policy during those times. They do that through interest rate adjustments, of course. Now, they also have to balance those political and economic needs with an ugly kind of gremlin that gets in the works, that gums up the works, which is inflation.

Because if they do too much of that easy monetary policy and, you know, they inject too much supply and too much liquidity into the market, then what can happen is their money inflates and it becomes valueless over time. But it's important to realize the reason central banks issue money is economic and is political. And that's different, back to what you're saying, David, than the reason why crypto networks like Bitcoin and Ethereum issue new coins. The reason why Bitcoin and Ethereum do that is due to security. So they're doing it to pay for their military, if you will. And their military is a group of validators, a group of nodes on the network like miners that extend some sort of cost into the system, some sort of economic cost into the system. And it's that cost, that economic cost that actually provides the security to the underlying network. So you can think of issuance in a network like Ethereum or Bitcoin as synonymous with security budget

because the new issuance, those new coins, are going directly to the military, the miners and the validators, the people that are actually and the groups that are actually securing the network. And that's the only thing, really, that these networks have to do. They don't have to adjust for unemployment or economic prosperity through downturns and business cycles. All they have to do, their one job, is to secure the network, and the vast majority of that security comes from printing money per the rules of the algorithm, and that money is distributed to the mercenaries, the military, the groups that economically secure the network. So it's a fundamentally different incentive structure. And I think that's an important distinction with respect to the difference between these central banking systems.

And a really important difference I like to always point out is that the military of a government, the fact that each government forces upon their citizens a legal tender and only allow that legal tender to be used is a coercive system. You are forced to use this system. Whereas Bitcoin and Ethereum, these are opt-in systems. No one's ever going to force you to use these currencies. You can opt into them. And that's the difference between paying for security of a blockchain versus paying for the military of a nation state.

One forces you to use it, and one just provides the security for you to use it, if you so choose. And that's really what Ethereum is doing with its minimum viable issuance. Ethereum is paying the minimum amount necessary to allow for people everywhere across the world to opt into it. And that's actually where we get into a fundamental difference between Bitcoin and Ethereum. There is a ton of research from the Ethereum researchers to figure out how to have security for the least cost. And this is very different from Bitcoin, which actually wants security to be very, very expensive. The Bitcoin budget for security is billions and billions of dollars per year spent on the electricity to provide the proof of work algorithm with energy to secure the Bitcoin blockchain.

Proof of stake from Ethereum is a little bit different, where Ethereum is trying to issue the least amount of ether possible, and it also wants the cost of security to be as little as possible. So unlike Bitcoin, Ethereum uses very little electricity, uses very little, external costs in their method of securing the blockchain. And that's what proof of stake is. Whereas Bitcoin takes billions of dollars every single year to maintain, Ethereum is being designed to be very minimally costly to validate and provide security for. And that's the big difference between proof of stake and proof of work and really represents the core difference between these two systems monetary policy. Yeah, you can almost think of it as, you know, if the folks who are

mining or staking in a system if they're the military, what Ethereum is proposing to do is upgrade their military, right? So an era of, you know, tanks where very expensive, very bulky, you know, to an era of maybe your stealth jets and bombers, right? An era of cyber warfare, an era where you could spend less on your military and actually through technology get greater defense and have a greater impact. That, at least, is the idea of proof of stake. And I think it could potentially lead to this outcome where you don't have to spend as much. And when you don't have to spend as much on your security budget, on your military budget, well, you don't have to issue as much. Because remember, these are not like fiat systems. We're not issuing to balance an economy. We're just issuing for

security. And if you have technology that improves your security at lower cost, you can issue less. And so that leads to less issuance every year. And Ethereum's goal in proof of stake is to actually drop its issuance, which is about 4%, 4.5%. Bitcoin's, by the way, is about 3.5% right now. Ethereum's goal is to drop its issuance below 1% even in the future. So that means every year, only 1% of its supply would be issued, if its total supply would be issued.

maybe we should talk a little bit about, you know, this notion of security because it's probably foreign to people. We've talked about, obviously folks know how countries secure themselves. They use military might and, you know, guns and tanks and all of those things. But when we're talking about security of crypto systems, what are we actually securing against? What types of attacks are we securing against? and why does spending all of this money actually secure the systems themselves? I really like analogies here. So you accurately described the security of the dollar as being enforced by the military.

You know, we have used the U.S. military to go into many different countries that have thought that they could just opt out of the dollar. You know, any country with oil in the Middle East, any southern American country that wanted to move away from the dollar system. We use our military and then we go enforce it. And so it's our way of actually being an imperial power is by enforcing the use of the dollar upon the rest of the world. And that's our security mechanism for the dollar. That's the tanks and fighters and troops and Navy and Marines.

That's the security mechanism. Bitcoin's mechanism is entirely different. There's no amount of tanks or fighter jets or armies that can even begin to touch Bitcoin security. mechanism. And so like I said earlier, Bitcoin is secured by proof of work. And work is meant as jewels of energy. It's literally a measure of the electricity that is being consumed by all the Bitcoin mining machines to run the Shaw-256 hashing algorithm to compete to find a block and be rewarded by the Bitcoins. And that was a big sentence. But in one single analogy, Bitcoin is secured by this massive energy wall. It's a wall of electricity that doesn't even exist in the

tangible world. It exists on the internet. And so if you want to get through Bitcoin's energy wall, you need to take down all of the things that are supplying energy to the energy wall. You need to go to every single mining operation and forcibly turn it off and it's across the world and you have to destroy the machines or take them for yourself and plug them in, for your own benefit to overcome that energy wall. And the amount of Bitcoin miners there are dispersed across the whole entire world is, it's a monumental task. And that's where Bitcoin gets its energy from.

It's a massive shield of electricity that doesn't care about, you know, tanks and planes and guns. Ethereum's energy wall is a little different. And this kind of comes from the fact that money is stored energy. Ryan, if I gave you $20 and I asked you to do like $20, push-ups, you'd probably do it. That'd probably be a good deal. And you would expend this energy in order to, in order to receive the $20 I offered you. And Ethereum, that's kind of how proof of stake works. Capital or money or value is like a battery. It can force people to do things

based off of their own incentive. And so, you know, if you have, you know, a million dollars, you can pay people to be employees for your business to expend the energy required to get your business up and running. It's stored energy. And that's where Ethereum really gets its very low-cost security budget from. Instead of just having this energy wall, Ethereum provides this value wall that you have to get over. And so because money works on scarcity, you can't just print new money to overcome this value wall. You actually have to work for it. And Ethereum and proof of stake, we're looking for a rough number between 10 million and 30 million ether,

which is between roughly 10 and 30 percent of all supply of ether out there. to act as this wall that you have to get over. You have to stake more ether than the other people also staking in order to attack the system and get over it. And everyone is incentivized to stake honestly in order to receive the rewards. And so where Bitcoin has this massive energy wall, Ethereum has this massive value wall. And these are the main security mechanisms for these respective blockchains. And I really love that analogy, David, because the thing these networks are securing

through their money wall and through their energy wall is the integrity of this system. They prevent double spend attacks. So they prevent folks from just issuing their own Bitcoin and issuing their own ether. The economic security of these systems prevents those sorts of attacks so that we can all trust the integrity of these systems. And as the value of the assets like Bitcoin increase, as the value of the assets like Ether increase, the security of the network increases commensurately. That's all because the issuance itself is paid in denominations of Bitcoin and denominations of Ether. And so as the value of that issuance increases, essentially the security of the network increases, the security budget increases. The cool thing about these systems is that it allows anyone to participate in the security.

Anyone with a Bitcoin miner can plug in their Bitcoin miner into their outlet and spin up a machine that adds energy to the energy wall. And the same is true for Ethereum and proof of stake. Anyone can go buy 32 ether, the minimum number required to stake, and put it on their laptop and start validating the network. And that is really the core difference between the systems that we know of, the dollar, and in Bitcoin and Ethereum. Bitcoin and Ethereum are permissionless systems. Anyone can participate in the security and anyone can receive the issuance of the currency.

This goes back to what we were talking about in the first episode of the Cantilian Effect, where the central bank is able to print the money and the money goes into their hands first, and then it goes into their friend's hands, and everyone around them gets richer before the money trickles down to the rest of the world. With Bitcoin and Ethereum, it's the exact opposite.

Whereas the traditional system is a top-down revolution, Bitcoin and Ethereum are bottom-up revolutions. It allows the individual to stake, the person, the common individual to just participate as they see fit in staking, in mining. And that's where all of this resources comes to provide the energy wall, the money wall. It comes from the individual. And that resonates with me so much. It's a middle finger to the authorities, to the central banks of the world saying, you know, we're just going to, we don't need an alternative authority to print new money, to make new money that's more fair. We're going to do it ourselves. We're going to do it by the people for the people.

And that really resonates with how gold was selected as money. It was selected because so many other people selected it. It was a bottom up revolution. And that's what these crypto systems are reinvigorating on the internet. Yeah, absolutely. I mean, what you're saying is anyone can join the military and anyone can provide the security and get the new issuance as a result of that. At least that's the vision. Now, you know, maybe you want to challenge the idea of anyone being able to participate in something like Bitcoin mining, because that was absolutely true during the early days. But has it become less true over time? So in the way that everyone could, participate in, you know, panning for gold at one point in time. Now it's an industry full of large corporate companies and industrial machinery so that the individual can't go and mine their own gold. Is the same happening with Bitcoin and proof of work? Yeah, and I think this kind of

leads into why you and I are so optimistic about the future of Ethereum. Bitcoin is awesome. It's a great first step into the crypto world, but it has some of the same weaknesses that we see in gold. Bitcoin and Bitcoin mining, providing energy to the energy wall, runs on economies of scale. Back in 2010, 2011 people were able to mine the Bitcoin blockchain using their laptop using commodity hardware. But as Bitcoin became more valuable, the incentive to make a professionalized and formalized business out of it became stronger. And so now, instead of people being able to mine Bitcoin on their laptop, they have to go all in. They have to pour in millions of dollars to create these large-scale infrastructure that can use electricity more and more efficiently.

And so the Bitcoin miners are the world are these very large facilities that have thousands and thousands of individual Bitcoin units in them. And so because of this economy of scale, the individual has been kind of pushed out of the ability to mine the Bitcoin blockchain in favor of these still distributed set of miners that operate very large operations. It's pretty much impossible to mine the Bitcoin blockchain yourself in a profitable manner without going through these economies of scale. And it's kind of pushed out the smaller individual from the issuance. control of the issuance of the chain. Now, it's still far better than the central banks. It's rather than one massive entity like the central bank, it's hundreds and hundreds of entities across the world. It's still far from the bottom-up revolution that we started with. So is proof of stake an improvement upon that? Does it allow greater and wider participation? Well, that's why Ethereum is

moving towards proof of stake. That's the idea. To be clear, proof of stake is not a that currently exists, Ethereum is also proof of work. But this concern is why Ethereum is moving to proof of stake, because proof of stake returns the ability to participate in validation back to people with commodity hardware, back to people with laptops. The long-term vision is that you'll be even, you'll even be able to run a validating node with something like a Raspberry Pi, something really, really lightweight. And that's just the availability, that's just a result of proof-of-stake consensus algorithms where it doesn't require you to buy machines, find really cheap electricity, and create a huge warehouse full of these units in order to mine

the Bitcoin blockchain. You can do it at home on your desktop computer, on your laptop, and the only thing you really need to pay extra close attention to is having a very stable internet connection. And so this kind of returns the validation of the system to the people. and enforcing decentralization as much as possible. Now, it's important to note that centralization drew a really hard thing to fight. And even with proof of stake, there's still centralization. Like the large stakers are receiving more ether in front of all the people that aren't staking. And so this does increase the centralization, but it's the most mitigated way that we have so far designed.

You know, all systems create centralization. That's why Bitcoin mining is now just in large facilities. Proof-of-stakes still has some centralization, but the idea is that it's much, much less than any other system that we've ever been able to design. So we've established that issuance is essentially equal to the security budget of these systems. You mentioned earlier that Bitcoin has fixed issuance, so 21 million only. that also means, it has to mean, that Bitcoin also has a fixed security, at least in terms of issuance. So its security budget over the lifetime of Bitcoin is only 21 million Bitcoin ever. And I think that is probably one of the starkest contrast between Bitcoin and Ethereum.

Bitcoin is fixed issuance, 21 million only. that also means it's fixed security, $21 million, it's $21 million Bitcoin budget only through the lifetime of the network, whereas Ethereum's issuance is minimum necessary issuance. So it will always have some level of issuance to secure the network, probably long term in proof of stake, in the 1% range. And it really prioritizes security. as the thing to focus on rather than fixed issuance and the lowest possible issuance. So these are two completely different monetary experiments that are taking place in crypto. And there's strengths and weaknesses on both sides, wouldn't you say? What are some of the strengths of the Bitcoin approach and some of the weaknesses versus the strengths and weaknesses of Ethereum's minimum necessary issuance approach? Bitcoin's hard cap is perhaps the fundamental reason as to why it has the value that it has.

The fact that when you buy one Bitcoin, you are promised to have the same share of the total overall supply of Bitcoin's forever into the future is really powerful. And that goes back to what we were talking about, money durability. When you buy one Bitcoin, you are guaranteed by the protocol to have the same percentage of money that no one can inflate from you forever. And that's really powerful. And so while Bitcoin has this strong security, it's a really powerful game. I view Bitcoin as this big game that people are playing where, you know, it's like a big game of chicken. If you believe that Bitcoin might be the currency of the world, you are really, really incentivized to buy as much Bitcoin as you can now. And that's kind of the narrative that you see in the Bitcoin community.

That's where the hoddle meme comes from. Friends don't let friends sell Bitcoin. It's this game of who can accumulate the most Bitcoin. And eventually the theory is that this game will make its way into the big institutions. That's why crypto always talks about the institutions are coming. And eventually it goes all the way up the pyramid to the central banks where central banks are also playing this game of chicken where they need to buy Bitcoin before all the other central banks need to buy Bitcoin because they can get it for cheaper.

And that's really the bull case for Bitcoin. However, at the same time, as you use, said the security budget for Bitcoin does run out. It does go to zero. And at some point, the fees for making a transaction on the Bitcoin blockchain have to replace the security for the block rewards. Now, Bitcoin has like one megabyte sized blocks. And so if you want to get a transaction in them, you have to buy that security. And that goes by a fee market. And so the more demand for Bitcoin block space, the more fees the Bitcoin blockchain receives. We do not know. if the maximum fees that Bitcoin can earn are going to be enough to secure the entire blockchain.

And that's really the core difference between Bitcoin and Ethereum. Bitcoin prioritized money, the supply of money over the amount of security budget that it has. And Ethereum does the opposite. Ethereum prioritizes the security over the monetary issuance. And so people often ask, you know, why would I buy Ethereum when I don't know what the total supply of Ethereum is going to be in 10 years. Well, the difference is, the opposite is also true. Why would you buy Bitcoin when you don't know what the security budget of Bitcoin is going to be in 10 years? But Ethereum's security budget, we do know. And that's the value of minimum necessary issuance. And so Ethereum's issuance of ether

is controlled by an algorithm, but the algorithm prioritizes the security. There's always going to be enough security to protect ether forever. And that is the key difference between the these two systems. Yes, and I think you could even take that bare case on Bitcoin to its logical conclusion and say at some point, if the security of Bitcoin diminishes enough, the social consensus of the system will have to decide to increase issuance, increase inflation, or the system will die. That's one possibility. So from that vantage point, you might question whether the 21 million fixed cap is mutable or not. Now, some folks would say, well, if you change 21 million to something else, then it no longer

becomes Bitcoin. And I understand that, but what that also probably means is that Bitcoin diminishes in its importance as a system. And it's no longer the global money system that it needs to be and was originally envisioned to be in the first place. So lots of interesting debate, I think, between these two different issuance policies. Now, I do want to go back to something you said, David, because I want to make sure this is clear for everyone who's listening.

Security budget itself comes from two places. I think we sort of hinted about this a little bit. But security budget comes from issuance, new blocks that are minted. every block, every day, every year. You know, as we said, Bitcoin's is about 3.5%. Ethereum's right now is about 4.5%. Bitcoin's gets cut in half every four years. Ethereum is going to tend towards moving towards the 1% range over time

with minimum necessary issuance. But that is not the only place that security budget comes from, just to be clear for everyone. It also comes from transaction fees. So every time you move Bitcoin on the Bitcoin network from one Bitcoin address to another, you have to pay the miners. You have to pay the military a fee of some sort, and that fee is denominated in Bitcoin. Same with Ethereum.

Every time you do some sort of transaction, interact with a money protocol, a defy protocol, a bank on Ethereum, you have to pay. gas fees. That gas is denominated in ether, and that ether goes to the miners, the validators that are the military operation providing economic security to these systems. So that is another source of revenue. Now, when you combine issuance revenue and transaction fee revenue, that essentially is the cumulative security budget of these systems. And the Bitcoin thesis the bulls on Bitcoin's monetary policy will say, well, as block rewards are decreasing and as those go down over time, it's a fixed monetary policy system, so we know that's going to happen,

but the budget that's going to replace that is going to come from transaction fees. So from use of the underlying network. And obviously, that would have to mean fees would rise if it costs, you know, 10 cents, 20 cents to move Bitcoin from one place to another in the future because there's scarcity of block space. That's a completely separate market from the price of Bitcoin. The price of Bitcoin's block space is different. But there's scarcity of that. And so price would have to increase. It might cost $10 in the future. It might cost $100. It might cost $1,000 into the future. And those transaction fees will go to secure the network and provide.

adequate security budget. The same happens in Ethereum today. Now, the fact of the matter is today, over 95% of Ethereum's budget is paid for by issuance and not by transaction fees. And Bitcoins, I think, is about that amount or even higher. It's something like 98% is paid for by issuance and not transaction fees. So the markets themselves would have to complete flip. The block space market would have to become a lot more revenue generating and expensive. Can you dig into the implications there, in contrast that between Bitcoin and Ethereum? So I view these systems as like organisms. These are children that are growing up. And Bitcoin is five years older than Ethereum. And you can see that in the total value of the fees that are collected by

Bitcoin miners. The last I checked, Bitcoin miners receive $300,000 a month in fees. And Ethereum validators receive $50,000 a month in fees. And these numbers have gone up since the beginning of time. You know, they both started at zero. And the idea is as these organisms age and get more mature and more efficient, the amount of fees that these systems generate on a monthly basis go up. And at the same time, it's both in the vision of both of these change to reduce the issuance to a minimum, you know, Bitcoin down to zero and Ether down to minimum viable issuance. And so at some point, the idea is that the fees are what replaced the issuance. Bitcoin and Ethereum have different ways of managing fees, however.

Bitcoin's block size, the amount of data you can fit into one packet of Bitcoin, of the Bitcoin blockchain, that is sent around the internet is one megabytes. It's effectively actually three megabytes, but that's just from some funny coding magic. Really the point is it's one megabyte. And it's very inflexible. You can't make more block space in the same way you can't make more Bitcoins.

And so the demand for Bitcoin block space creates more fees. Ethereum is different. Ethereum has much more flexible block space, and this allows for cheaper fees. The Ethereum block space is something that can go up and down based on demand. And so the miners, when blocks are full and the network is congested and fees are going up, the miners can actually increase the size of the block space

to include more transactions per second. And they do this because of profit. While the fees per transaction go down, the total amount of fees they are able to include goes up. And so miners or validators automatically adjust the size of the block space in order to best suit their revenue. And so as Ethereum gets more and more efficient, we've seen the block space get bigger and bigger and bigger. I think the Ethereum block sizes are roughly 30% larger than what they were at Genesis, which means Ethereum as a economic platform has 30% more bandwidth. It can do on a time-by-time basis. And in Ethereum 2.0, this massive overhaul of the whole entire

Ethereum network, we're actually going to increase this by 64. We're going to have 64 shards, if you will, shards that are like each individual blockchains that all coalesce into one. There's going to be 64 of them, which means that the capacity of Ethereum is going to get 64 times larger, which means we can process 64 times as many transactions per time, which means we can accept 64 times the amount of fees over time as these shards get filled. The secondary security budget of fees for Ethereum has the potential to be 64 times larger, which is, I think, really, really powerful. And that's, it just goes back to reducing the amount of issuance necessary to secure the

Ethereum blockchain. The more fees we get, the less ether we need to issue. Yeah, absolutely. I think that's a fantastic point. You know, another point I would add about the differences between Bitcoin's block space and Ethereum's block space is that Bitcoin's block space isn't really programmable. It is a mono-asset network. So the thing you do on the Bitcoin network is you move Bitcoin, one asset from one place to another.

On Ethereum, of course, it's more programmable. There is an entire mini-computer inside of each ledger transaction on the Ethereum network. And that can lead to much more possibilities. So it's a poly-asset network. There are many different types of assets on Ethereum, not just ether. You can have assets stable coins like die. You can have bank issued stable coins like USDC or USDT. It opens up the door for a lot more activity, and that activity increases, the potential of that activity

increases the potential demand for block space in Ethereum. So it's kind of an interesting dynamic in that it may turn out to be the case that Ethereum's block space is actually in higher demand because you can do much more with it. It's not just about moving Bitcoin from one place to another. And it also has a higher supply because, as you said, in ETH2, there's going to be 64 different replicas of the Ethereum chain, so there can be a lot more supply. Now, all of that, those transaction fees generated by the block space goes into the security budget, and ultimately, it's the security budget that dictates how much issuance there could be, which is, I think,

possibly a bullish case for Ethereum's issuance policy decisions and Ethereum strategy. in general, Ethereum strategy can be, well, what we're going to do is make our block space, the transactions and the things you can do on our network really attractive and in really high demand. And that could come to pass if Ethereum becomes a global financial system. And through that, we can pay for our security and continue to minimize the issuance of our network and make ether, a stronger store of value asset and a stronger reserve asset for the underlying system. So it has this nice feedback loop and this very nice positive property if it all comes to pass. The thing I worry about on the Bitcoin side is, you know, what if people just want to

hold their Bitcoin and don't actually want to transact with it? Or what if it becomes too expensive to move Bitcoin from one place to another on the Bitcoin chain because transaction fees have now risen, doesn't that make the Bitcoin network more dependent on side chains and trusted entities like the crypto banks, the coin bases of the world? And we're starting to maybe see some of that emerge. So I think it's very interesting for bankless listeners to play around with these different dichotomies in their mind and not just fall down the trap of going on Twitter and seeing a meme of fixed supply without thinking through the full ramifications of what fixed supply might mean. Now, one thing that we haven't addressed yet, which is something

that I think Bitcoiners often bring up and deserves to be brought up on the Ethereum issuance policy side is, hey, one great attribute about Bitcoin is no one's ever changed it. We've known exactly what the issuance policy has been since inception, and there's never been any individuals that have updated that issuance policy. It's always been the same. Whereas with Ethereum, it's changed. So it's always changed in the direction down, of course, but it has changed. What do you think about that, David? Is that a knock on Ethereum's credible neutrality and the neutrality of its issuance policy? Some people certainly think so.

And like I said earlier, when you buy one Bitcoin, you are guaranteed to have one Bitcoin for the rest of time without changing the supply of, without a changing percentage of the total supply. The reason why that's guaranteed is because no one can change the Bitcoin protocol. Ethereum is just simply much more ambitious, which means that it needs to be tinkered with and developed and researched on and iterated by a core set of Ethereum developers.

There are roughly 10 to 15 different organizations of people that are all working on Ethereum, different people that are producing clients, different research teams that are tinkering with possibilities. But ultimately what this means is that some people are changing what Ethereum is. And that's something that doesn't happen to Bitcoin. And that's the knock some of the Bitcoin community brings upon Ethereum is they think that in the same way that the Federal Reserve can change monetary policy, the Ethereum researchers can change Ethereum monetary policy. And it's definitely something to consider. However, like you said,

the Ethereum monetary policy has changed three times and it's always been down. And so the social contract of minimum viable issuance, the thing that we all agree is what Ethereum's monetary policy is, has not ever changed. And if Bitcoiners concerned, are correct, the minimum viable issuance monetary policy will change at some point in time, I don't think that's going to happen. And if somebody in the Ethereum research team suggests something other than minimum viable issuance, I think the Ethereum community will reject that and ultimately will not accept that as a change to the Ethereum protocol.

Yes, I agree too. And that's why these systems are so different than Fiat is because Bitcoin's $21 million. and Ethereum's minimum viable or minimum necessary issuance, they're all preserved by the social contract of the system. It's enforced by people running the actual and choosing to run the actual Bitcoin or Ethereum code. And they can choose to run other code. So if someone, a core developer in the Bitcoin community, were to propose, you know what, we're worried about this fixed issuance.

We have security concerns, you know, years into the future. We're going to get ahead of this. We're going to add a 1% issuance to Bitcoin moving forward. That would absolutely cause a fork in the Bitcoin community. And what a fork means is you'd have two different versions of Bitcoin. You'd have one group pursuing the 1% issuance and the other group with the original, you know, Bitcoin 21 million tribe. And folks could opt into one system or the other. Well, the exact same thing would happen on the Ethereum side.

So if a core developer were to propose, even if it was Vitalic, if he were to propose, you know what, we're going to add issuance above security, and we're going to add issuance to go fund this governance project that we have. That would absolutely, in my mind, cause a fork in the community. Because the community, the social contract for Ethereum, the folks that are actually running the nodes is minimum necessary issuance and that issuance goes to pay for security and we're going to move to proof of stake and eth two. The community has bought in on that entire package and that entire vision. I don't think they've bought in on increasing issuance and using that issuance

for other purposes. So both of these systems are enforced by the same sorts of things. It's people running code, people running the actual nodes. And there was a post this week that somebody you pushed forward and said Ethereum, Ether, Ether, is the same as Fiat. And that's why I vehemently disagree with that perspective. It's not the same as Fiat. It's the same as Bitcoin. It's algorithmically set. Its issuance policies algorithmically set. And it's maintained by social consensus. These systems are the exact same. And breaking that consensus would cause a fork of the system. The ability to fork both Bitcoin and Ethereum is how these systems retain being bottom up.

If some institution comes in and exhibits control and they want to change the system, well, the community, the people, the bottom of the world pyramid can say, well, you can do that, but we're going to stick with our chain. We're going to run our own code. We're going to opt into the code that we want. And that's why these systems will always be bottom-up revolutions. And that's why we're here. I'm here for the bottom-up revolution, the many versus the few.

And that's why we're all here to go bankless. Absolutely. That's why we're doing it. These crypto money systems, they are vitally important. It was worth the time to go through how money exists and why it became money. And then to talk about the crypto issuance policies because Bitcoin and Ether, that's the base layer. That is the bottom of this entire new money stack that we're building, and it's vitally important. So it's really important to understand the differences

between issuance and monetary policy between those two systems. So as we close things out, maybe we should just talk really quick about risks. Of course, none of this is financial advice. It's not tax advice. We are entering into the frontier. If you choose to buy something like Bitcoin or Ether, know that you're taking risk of these systems and go in with eyes wide open. We always like to close these things with some actions. So things that you can do to get started, subscribe to the podcast, obviously, the newsletter at bankless.substack.com will keep you updated on this. But what we really want you to do in today's episode is give some more thought to the Bitcoin and Ethereum monetary policies, their strengths and weaknesses, how you might see them

developing over time. Get a more, develop a more nuanced view on these things rather than kind of the yelling that happens in these various social communities and the religious wars that happened. We really want our bankless listeners to have an informed view. and informed perspective on this. Those are the actions. This has been bankless. Thanks for joining us.