Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Robert Sams: Bitcoin, Volatility and the Search for a Stable Cryptocurrency

Episode Date: January 5, 2015

That the bitcoin price is highly volatile is no secret. Opinions differ on whether that is just an inevitable roadblock to be passed on the way to world domination or whether it represents a fundamental flaw that will prevent Bitcoin from ever achieving widespread use as a medium-of-exchange. Seasoned hedge fund trader and monetary systems expert Robert Sams, is of the latter view and has been among the leaders in conceptualizing what a stable cryptocurrency should look like. It’s an issue that is at the very heart of how the cryptocurrency ecosystem will develop. Topics covered in this episode: Why volatility is an obstacle to cryptocurrency adoption The two big problems of creating a stable cryptocurrency His proposal for a stable cryptocurrency: Seignorage Shares How finance professionals perceive Bitcoin Episode links: Seignorage Shares Whitepaper Robert Sams Blog Ethereum Blog Search for a Stable Cryptocurrency XeroClear Twitter This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/060

This episode of Epicenter Bitcoin is brought to you by Shapeshift.I.O. With no account of sign up required, it's the easiest way to buy and sell light coin, doge coin, dark coin, and other leading cryptocurrencies. Go to shapeshift.io to instantly convert all coins and to discover the future of cryptocurrency exchanges. Hello, welcome to Episenter Bitcoin, the show which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sibas Sinkwuchua. And my name is Brian Pravindraving, train.

Today we're here with Robert Sams. So it's kind of timely that he's on for us because I think we've been wanting to have him on for a bit. Actually, originally, I think perhaps it did come from reading one of Vitalik's blog posts where we was talking about the idea of a stable cryptocurrency. And then we had Robert's schedule for today for a while. And then when we had Vitalik on two weeks ago, this topic came up again. So it's very timely that he's on. And thanks Robert for joining us today.

Glad to be here. So perhaps let's get started by, you can introduce yourself briefly, talk a bit about your background and how you became interested in cryptocurrencies. Sure. My background is from the world of finance. I've been a short-term interest rate derivative trader in the hedge fund world.

over a decade, the guy basically trading central bank policy. But I've been interested in alternative forms of money and cryptocurrency for a long time, really since the late 90s when I learned about David Choms, Digi Cash. So it's been a labor of love for me for a long time, both the technology and question. of monetary theory. Yeah, so you really are one of those who have been interested in the topic even before Bitcoin. There's not many of them, but it still seems like that cash did have quite a mind share at the time. Yeah, it did, and things fizzled out around the turn of the century.

But, you know, there's always been this rump of people from various backgrounds. who've thought a lot about money, the nature of money, and speculating on ways we can improve upon what we've got. So it's an old theme. It's been around for a long time. So when did you start getting involved specifically with Bitcoin? I mean, since you were working with hedge funds. Yeah, I mean, I found out about it. early 20, 2011, and was pretty blown away by Satoshi's paper and the solution to the double

spending problem, which I thought was brilliant. And I've been following it ever since, more as a labor of love than anything. Only recently, as last year, have I started to get involved. vault in the space commercially. But, yeah, so I guess I've been following Bitcoin for, you know, for quite a while, early adopter. And early critic as well. An early adopter and early critic.

Yeah, I think that's one of the interesting things is I have become grown sort of consistently more critical and skeptical about Bitcoin the longer I've been with it. It's very interesting. I think I recently saw a brief interview with Mike Byrne, and we had him on quite a long time ago where he addressed some of the same criticisms. But he was also, it's like he described Bitcoin as this extremely fragile thing that could be broken so easily. And at the same time, there are a lot of people, of course,

who believe, like, you know, this is the next thing, like, it's going to take over the world, everybody's going to be using Bitcoin 20 years from now. And it's quite interesting how you can sort of progressively become more skeptical, but also be really invested in the idea of decentralized money. I think using the term Bitcoin is also a little bit loaded. People will say Bitcoin is a future, but I think what they mean by that is cryptocurrency is the future. Well, it depends.

I mean, a lot of people think Bitcoin is the future, right? Bitcoin will be the one. but yeah. Yeah, there is a view that I think the Talek has described it as Bitcoin maximalism, you know, that it's Bitcoin or bust, and that the Bitcoin protocol, you know, laying down by Satoshi is, you know, like some form of revealed religion. You know, whereas I think, you know, the Bitcoin protocol was a brilliant synthesis of, you know,

several different ideas that have been kicking around for a while, Adam Backs, hash, cash, use of public key signatures for signing transactions. And it was a brilliant solution to a problem that people have been grappling with for a long time. But it's still very early days. There's no reason to think that the first protocol that solves a double-spending problem

in a totally decentralized way and gets traction is going to be the, you know, the thing that lasts forever. Absolutely. So just a little lead into our main topic, I just want to read out a quote from your paper, which I think really sums up well the idea behind what we're talking about today. So this is, if a cryptocurrency system aims to be a general medium of exchange, deterministic coin supply is a buck rather than a fee trade. So can you explain to people what you mean with the statement?

And I mean, I thought this is the sort of core idea that underlies what you've described there and the work you've done there. Yeah, sure. Okay, so fixed coin supply is a bug rather than a feature. What I mean by that is, you know, if the goal is to create something, it's a general medium of exchange. The goal really needs to be to have a coin whose value

is stable, because that's why a fiat currency is valuable, is that it's a decent store of value for the short period of time in which you hold the balance. And if you have a fixed coin supply,

you will never get stability and the purchasing power of the coin. And it's a problem because, on the one hand, you want the coin to, you know, be adopted. You know, so you, you know, you want the, in the early days of a cryptocurrency, if it's, you know, if it starts to gain traction, you should expect, you know, coin demands to, to increase, you know, dramatically, it's like hyperbolic growth. But the mere expectation of that growth creates a separate type of demand, you know, speculative demand that anticipates, you know, future transactional demand. And that is what generates, that speculative demand is what

generates the volatility. But the volatility itself is the very thing that chases away the demand from people who want to use it as a medium of exchange. So you get this paradox. toxic consequence that the very optimism that in future the coin is going to be adopted by a lot of people is actually what stands in the way from it being adopted in the first place. And I think this has been empirically borne out with Bitcoin. In terms of transaction volume, people actually using Bitcoin for, you know, as a general medium exchange, change. The growth rate is positive, but it's nothing, it's not what you'd expect from something that's going to, you know, going to grow at a rapid pace or, you know, take over Visa PayPal or the US dollar or, you know, or whatever the end game is that we want this thing to be.

Yeah, absolutely. And of course, what you also imply with this and I guess that's a point where views sort of to birch is that Bitcoin will never be stable, right? Because a lot of people do think, and I personally don't share that opinion, that Bitcoin is becoming more stable and less volatile of time

and that sort of as more people adopted and it will empirically it's wrong, you know, Bitcoin volatility hasn't declined. I mean, you get periods, you know, where volatility declines and it spikes again.

which is what you see in really any financial time series. This is high correlation, serial correlation, you know, in volatility. High volatility periods beget more high volatility and low-vaultitude periods tend to beget lower volatility. But the overall trend line is pretty stable. And so we're not seeing a decline in volatility. Now what about the forecast? Okay, you know, will volatility decline?

I don't think there is any reason to think that it will. Because supply is fixed, the only way that you'll get stable, you know, volatility on something like Bitcoin is if demand starts to grow at some predictable rate. And that's not something that you can expect to, you know, to happen, you know, at all until, until the endgame is, you know, is one and, you know, Bitcoin has found its niche, as whatever it is, you know, taking over the U.S. dollar, you know, whatever the endgame is, there will always be uncertainty, you know, about the growth rate of demand, and as long as that uncertainty is there for the volatility will be there.

You know, there's another argument that I hear a lot, you know, which is that the volatility in Bitcoin is due to, you know, liquidity. And once liquidity increases, you know, volatility will decline. And again, it's really a misdiagnosis of the source of volatility. The source of the volatility is this mismatch between an uncertain demand and a fixed supply. And liquidity, you know, yeah, low levels of liquidity do create volatility. But it's like a – there's a point at which any increase in liquidity actually doesn't decrease volatility. As we find in empirical evidence in financial markets,

is that once you get a sufficient level of liquidity, if there's any correlation between further increases in liquidity, it's that greater liquidity actually increases volatility because it increases trading volumes and increases speculative activity in the financial asset. So there's even outside of the cryptocurrency space, that thesis that more and more liquidity lowers, lowest volatility is just not correct.

And I think, I think you're totally correct. Even if you imagine that scenario, right, where Bitcoin takes over the world, et cetera, like, first of all, that's a long way to go. And second of all, even psychologically, right, you have this mechanism that you want to be in there before other people, and it has this sort of, I think it's absolutely prone to,

speculative bubbles because of that, right? Because if you anticipate other people coming in, you want to be in first, and then it creates this rush into it that's really not backed by, let's say with the stock, right? With the stock you have earnings and they sort of are something to tie the prices to stock to. But with Bitcoin, that's not really the case, right? Like it can be anything to Bitcoin price as long as, you know,

there's supply in demand for it. That's fine, right? So, I mean, I think the sort of, you know, view of Bitcoin. as a growth stock, like in one sense it's correct, because, you know, if, you know, if the optimistic thesis did materialize that this became a widely used medium exchange, then demand for the coin is going to increase a lot. And, you know, and that's what drives the speculative man. But where it's not like a growth stock, and this is really important, is that the, you know,

the earnings and sales of a growing company, aren't influenced by its share price. And with something like Bitcoin obviously is, you know, the demand to use the coin as a medium of exchange is influenced by the volatility of it. So you get this, you know, self-defeating prophecy, you know, where by the very optimism that the coin is going to take off actually undermines it and keeps that from happening. At least that, I mean, that's that's my conjecture.

And I think it's it's to date and borne out in, you know, in the evidence. Now, in terms of criticism of, so we'll get to stable coins in a second, but, you know, there is this fundamental idea that in the Bitcoin space that the Bitcoin supply should be deterministic, that it should be fixed. So what do you think fuels that? I mean, is it sort of this sort of libertarian idea that only markets can determine the supply and demand of a currency? Why do you think there is such a resistance to the idea of a stable cryptocurrency that is not deterministic in supply? Yeah, okay. I mean, I think first of all in this space, you do have people with different philosophical motivations or perspectives. And on the one hand, there's the decentralization idea to have a decentralized ledger that doesn't rely on a trusted third party. is a really interesting thing.

And to put an alternative form of money on such a ledger, well, you know, it now seems quite plausible that we can make, you know, alternative money, something that can exist even in a hostile political environment. So there's that side. But then there's the other side of, you know, you get the, you know, gold bugs, commodity money, people. and they've been around for a long time.

And they're part of the space as well. And of course, you can have people who believe in both. I'm very much in the first camp and not in the second. So the question is, you know, why do people find this fixed supply thing so compelling? I think one reason is, you know, there are libertarian monetary types who

believe that the only form of money that is any good in the long run is some commodity-based money like a gold standard. And they wrongly think that Bitcoin is like digital gold. I say they wrongly think that

because one, even the commodity money or something like a gold standard isn't based on a fixed supply. I mean, there are gold deposits deep in the ground, If the price of gold, you know, hovers above the marginal cost of pulling it out of the ground, then gold supply will increase. So even something like gold has a somewhat elastic supply function, which, you know, and Bitcoin is quite unique in not having a supply function that doesn't respond to market forces in the outside world at all.

So it's not really like digital gold. It's more like, you know, a digital collectible, you know, like a digital rim branch or something. And the other thing is that commodity money advocates, gold standard advocates often don't pay enough attention to the institutional reality of gold standards that we've had in the past. So people will cite the experience in the 19th century Europe and the United States being on a gold standard. And it was a period of, you know, of substantial economic growth. But, you know, that wasn't a gold standard in the way that a cryptocurrency would be a gold standard because it's still based on fractional reserve banking. So the actual money supply, you know, when we had a gold standard, wasn't fixed. It was based on the extension of credit by the banking system.

And it's just that the base money that, you know, the scripts, you know, paper were convertible into. you know, was gold standard, but the actual stuff that circulated as a medium of exchange, you know, it's not like gold coins, you know, but a cryptocurrency, you know, it is like gold coins because it's not based on, it's not based on credit or fractional reserve. So I think, so it's a long answer to, you know, to the question. No, but I think there is sort of this misquoting history that often happens when, that often happens in this community, but in a lot of different communities as well. And I've also called Bitcoin Digital Gold without really knowing or without really sort of trying to grasp what that meant.

But, yeah, when people cite, you know, the 1900s and how we were on the gold standard then, and we had such economic growth, also forgetting perhaps other external factors like, I don't know, the invention of steam motors and things like that. there are potentially other factors that were part of that growth, not just the fact we're in gold standard. I mean, if I can add something, I think one reason may also be, I think if people actually understood your seniorage idea, and we'll get to this in a second, I think there would probably be a lot more open to it.

But I think in Bitcoin, the idea of being independent of the central bank, having this independent money is essential, right? The essential money, that's the sort of essential idea. And it's sort of very obvious that if you say, okay, the supply is going to be growing at this fixed rate, it's very obvious that like nobody can corrupt this. So I think the very idea of having some sort of adjusting money supply, it like makes people insecure, right? It's like, oh, but then maybe this isn't so incorruptible anymore. Maybe this. I think there's also a fear there that maybe slightly misguided, but that the idea of, that the idea of, of,

central money is very close a link to having fixed money supply that sort of everybody can understand. Yeah, yeah, sure. I mean, it's having a very, you know, having a supply function, cryptocurrency supply function that's variable is based on information that comes from outside the system, you know, introduces other sorts of potential problems. So we can talk about that in a minute, you know, and how, how to solve. those problems. But nonetheless, any cryptocurrency or any type of currency has a monetary policy, whether there's a central bank or not, you know, a gold standard has a monetary policy. You know, it's a monetary policy that's determined by the physics and the cost

of pulling gold out of the ground. And Bitcoin has a monetary policy. I just don't think it's a particularly good one. And, you know, we have, you know, we have choices about how we want that supply function to look. You know, we can stick with a deterministic supply function and cap supply. We can have a deterministic supply function that grows forever. Or we can have a non-deterministic supply function that takes information from the outside world. And those things are all up, up for, you know, debate. But what I would like to see is more people actually. think critically about how the coin supply happens rather than think that there's something intrinsically good about having a cap supply right let's not make

assumptions let's think critically about things yeah let's let's go into the sort of the main challenges like you outline two two problems or two things that need to be accomplished and solved to make a stable cryptocurrency possible can you briefly I find those? Sure. I think there are two there are two hard problems that have to be solved

and the first is if we're going to make a supply function that responds to demand we need to take information about market information about the world outside

the blockchain and put that into the blockchain in a trust minimized way. You know, that doesn't bring back, you know, some trusted third party. And that's one hard problem to solve. You know, there are a couple of different strategies for solving that problem, which I can talk about in a minute.

And the other hard problem is how do we distribute the change in supply? So, you know, if we're going to have periods or sometimes the supply needs to increase by X, and sometimes it needs to decrease by, why, how does that coin supply get distributed? And, you know, there are some obvious answers. Well, you know, let's just distribute them to, you know, wallet balances prerata, you know, for example. But how you distribute that coin supply has ramifications about how it influences coin demand.

And you can reintroduce the same problems that you have with fixed, with fixed money supply if you don't do the distribution right. So that's the second, the distribution problem is the second one. And in the Shane-Rids-Share's paper, I outlined a solution to the second problem and only kind of sketched upon different strategies

for tackling the first problem, which I think is the harder of the two problems to solve. Yeah, I think that the price one is particularly challenging, right? But what's nice is that you seem to find a solution that's really neat, right? That really accomplishes, it seems to me everything that needs to be accomplished for the second one, which is like how do you actually keep your price stable in the face of increasing and decreasing demand. I mean, in beginning it sort of seemed like, oh, if you know the price to me, before I ever properly thought about this,

it was like, oh, if you know the price isn't that simple, right, you just increase it. And I didn't even think of, but what happens if the demand decreases, right? It's not so simple. And of course the problem is then if you decrease the balances, well, it may hold the price stable, but now if you had 100 coins in your wallet

and a week from now you have only 90 coins in your wallet, well, maybe those have the same, same, you know, real value one coin, but of course you've still lost purchasing power. So that's not something that's going to be palatable to anyone. So for example, you know, because the ideal of the stable coin has, you know, been pursued by quite a few different people. And there are, you know, several solutions that have been, been for, proposed. And the, one of the ones that I came across earlier this year was Fernando Amatranos

Hayek money idea. And Hayek money proposes distributing the changes in coin supply pro rata, you know, over coin balances. And it's a quite an elegant solution that was, outlined in the Hayek money paper, but I still think it ultimately fails. And if you look at, and we're talking about now the second problem, how do you distribute the coin supply? Well, if we distribute changes in the coin supply pro after all the coin balances, you know, so basically we set up a system whereby, say, you know, the coin price goes up 10%, then we increase coin supply by 10%.

And everyone's wallet, you know, nominal coin, you know, quantity and everyone's wallet goes up by 10%. we basically just recreated the same volatility dynamic of the purchasing power of a wallet. It's just like the purchasing power of a Bitcoin wallet. It's just that the nominal quantity of coins changes instead of the market price of a coin. But you still have the same problem. So you need to have a solution to how the change in the coin supply is distributed. I mean, of course, nobody's going to complain, right? in that case, it's probably, I mean, I don't know if that could cause problems somewhere as well,

perhaps it could. But the much more, I think the case where it really becomes clear that this is not a good solution is in the other case, right, when the last decreases. Yeah. Yeah, like, you know, yesterday you had 100 coins in your wallet, and today you have, you know, 90. Yeah. It's that change in the purchasing power. That's the thing that you want to stabilize,

not just the market price of the coin. And psychologically, that's even going to be much harder sell than with Bitcoin. You can say, like, okay, it's worthless. But it feels like, oh, people took away some of my money. That's going to be impossible, I think, to sell to people. Yeah, that's an interesting one. And no, I think it's true. You know, why it's true is interesting because, you know, economically, they're the same thing.

But the people tend to view, you know, price change differently from, you know, nominal quantity change. And, you know, the reasons for that are separate question altogether. But yeah, no, I agree with you. I think that's true. Okay, so we'll get to talk about all that in just a minute, but first, we'll just talk about ShiftShift, our sponsor. So if you ever tried to buy altcoins, you know that it is a very cumbersome process. You have to find a reputable exchange. You have to create an account there, probably give them a bunch of personal information, submit an order, wait for the order to be fulfilled, and that can take a lot of time.

And it's just a hassle. We expect that once you're in the cryptocurrency ecosystem, once you've bought Bitcoins and that, you know, you're kind of in the system, that, well, you know, getting one type of coin or another should be easy, right? There shouldn't be these barriers. But that's not always the case until now, because we have ShapeShift. So Shapeshift is the fast and easy way to buy and sell alt coins. They support light coin, peer coin. have to check because they add new coins all the time. So light coin, pure coin, dark coin, doge coin, name coin, feather coin, black coin, Bitcoin dark, quark, red coin. And they have this

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No, you're yours. Oh, to mine. Oh, yeah. Thanks for the light coin, Brian. So this should just take a second. Yeah, so if you want to check out ShapeShift, you can do so at ShapeShift. I.O. It's super convenient

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and your privacy is protected. So head over the Shapeshift.com, give it a try, and tell us what you think, and we'd like to thank them for the support of Epicenter Bitcoin. Okay, so getting back to senior shares, you outline sort of two different type of coins, right? because you don't just have once, you know, the sort of stable cryptocurrency in your model has consists of, you can say, two different components where you call one a coin and the other one share. Can you explain briefly how they work and what role they play?

Sure. So the coins are what have a variable supply. That's the thing that you're trying to stabilize. and you change the supply in coins by auctioning off new coins versus shares or new shares versus coins. So for example, if you need to increase the coin supply by 10% you have a blockchain auction, that auctions 10% new coins against against, share so effectively increasing the coin supply and decreasing the share supply and vice versa if you need to to decrease the coin supply you'll be selling coins versus buying new shares on in the auction and if the long run you know if if the coin is worth anything if it has any any any any

any positive growth rate in its adoption, you expect the coin supply to increase on average over time, which means that the share supply is going to decrease on average over time. And there's an argument that I outline in the paper that this change in coin supply effectively translates into the share coins being, like an income generating asset. You know, it's like a dividend-paying stock. You can replicate your position in shares in such a way that you are effectively receiving or paying a dividend

that's equal to the change in corn supply. So it recreates this logic that we sort of want to encourage early adoption and people who want to speculate on the future prospects of the coin, but we break the speculative demand and transaction demand basically into two-sided objects. If you want to speculate on the future adoption of the stable coin, you buy shares, and if you want to just use the coin, carry balances around to facilitate your transactions, then you buy coin.

So also, one should mention, right, if you, let's say the demand increases and there's an auction of coins, then the shares, used to purchase those coins are destroyed. That's right. And of course, the consequence of this is if it works out, you'd expect that if you hold a certain amount of shares, the number of coins you're able to purchase with those shares will increase over time, right, if the currency is successful. There will be few and fewer shares being able to buy more and more new coins.

But can you explain that last part again? You know, let's say there are a million shares in the beginning, and now the coin supply increases because more people want to use the currency, and then let's say 300,000 of those coins are used and destroyed to issue those new coins. Now there's only 700,000 left, right? And so if continually the demand increases, more and more shares will be burned to issue new coins. coins and the number of shares would continue to decrease. Of course, that would also mean in a supply and demand way if there's an auction, it would become cheaper to buy coins in an auction. I think one way to think about it is think about stocks.

And when a company earns money in a quarter, it can pay out a dividend to the shareholders, leaving the quantity of shares outstanding the same, or it can engage in a share buyback. So instead of paying out a dividend, it uses those earnings to go on the open market and buy back shares, thus decreasing the quantity of shares and increasing the percentage of the remaining shareholders,

the percentage of future earnings that the remaining shareholders have. And the saniorage shares are, it's kind of like a stock that never pays a dividend, but always, you know, uses share buybacks. The economic logic is the same, you know, ignoring, you know, tax implications and things like that. The economic implications are exactly the same, whether you buy back shares or whether you pay a dividend. So it makes sense to think of the same as a share as like a dividend-paying crypto equity, even though it doesn't really pay a dividend per se, but it acts as if it does pay a dividend because of this auction logic.

It's like a share buyback. And it's important to think about it that way because once we think about it that way, then we have a way of valuing what this. those same-nared shares should be. There'd be, you know, the net present value of all expected future cash flows. Whereas if we think about it in terms of, well, there's senior shares over time, you know, the supply decreases, so they become more scarce.

You know, it's just sort of modeled economic logic. You can't really figure out how we value something that becomes increasingly scarce. But we don't have to. It's actually just like valuing a dividend-paying security. I think one of the really brilliant things about this is, and that was also a brilliant thing about Bitcoin, perhaps sort of that, was that it incentivized working on this and it really rewarded early adopters, right? So if you were there in 2009, 2010, you know, working on this extremely speculative project that, you know, nobody knew if it was going to get to anything, would then have any real value. but if you believed in it, you could work on it, and it was easy to mine some bitcoins or just purchase some bitcoins.

And you sort of knew if this works out, I'll become rich, right? So it made a lot of, I don't think Bitcoin would have worked out otherwise. You know, I don't think we would ever ever gotten to the point where we are today without that. And so there is a sort of idea of, I guess, if you have a stable currency, then that would fall away, right? You wouldn't have this incentivization of people anymore to work on it. But if you have this share coin model, I think it sort of gets the best of both worlds because you still have that incentivization on the share side, but you don't model this up with a volatile currency in the price. So I think it's absolutely brilliant.

So you get to the two different motivations, you know, have their own their own outlet. So if your motivation is to have a stable, you know, coin, you buy the coin, the motivation is to speculate on the future adoption, you buy the shares. And they work together kind of like this, you know, monetary, you know, yin and yang, you know, where they support each other.

You know, speculators buying the shares effectively create a, like, loss-absorbing capital. You know, they create a buffer for those periods when the coin supply needs to decrease in order to be stable. You know, they're the ones that are, you know, bearing the brunt, you know,

of those periods where coin supply needs to decrease to prop up the coin. And, you know, they're willing to do that because they, instead of coins holders, are, will participate in the upside. You know, if the coin turns out to be a success, then they'll make a lot of money by having the share. So it's kind of like,

like transferring risk, you know, to the party that, you know, most wants to bear it. And everybody gets paid in it. You know, it's a Pareto, you know, superior state of affairs than the Unicoin model. I'm curious about sort of the practical use of this. Like so in order to auction your shares for coins and vice versa, how wouldn't go about doing that? Is that done in a wallet or is that some sort of centralized platform? that work? Yeah, I mean, you need to make it part of the protocol on the blockchain itself. So it'd be like an on-chain auction. And, you know, there are different ways that that can be constructed.

It's a, that's a problem in and of itself, you know, in order to solve. But roughly, I'd see it working, following way. You know, you get the information from the outside world, according to whatever mechanism that you use. The protocol calculates how much the change in coin should be. And if it's an increase in coin, then you have an auction whereby anyone can trade shares for coin at whatever price the opportunity. So everyone would submit their bids, you know, their bids, you know, so many coins, you know, for, you know, per share,

that's the price, basically. They would, you know, encrypt those bids. They get recorded on a block. And then in a subsequent block, you know, everyone decrypts their, you know, their bids and the protocol goes and calculates who gets filled and who doesn't. And destroys the, you know, the shares that are sold for coin.

And then vice versa, the supply needs to decrease. So it would actually be a part of the protocol. The auction would have to be part of the protocol itself. Okay. And with regards to adoption, so we touched on this a bit earlier on how the principles behind Bitcoin are slightly more, I guess, simple to understand. You have a fixed money supply.

And you can think about it. you know, one way to look at it is sort of like digital gold, even though that might not be empirically the case, but it's one close analogy. Now with this, you're dealing with a mechanism that is somewhat more, I guess you could say, complex for just regular people to comprehend. How do you anticipate that a coin like this could be adopted and potentially become mainstream? Yeah, good question. I don't know. I mean, it's, I think all of these things take time for people to, you know, absorb how they work. And you need experiments.

You know, people need to throw these, you know, stable coin ideas out there and, you know, see what works and what doesn't. You know, there are different ways of achieving the same end as well. There are a number of different types of stable coin, schemes. You know, the one that I like most separate from the same nearest shares is probably the TALIC's

shelling coin idea, which is a very different mechanism from San Nearest shares. It's more of like a CFD model, you know, where you have some underlying collateral, which is like the, you know, the volatile coin, so it's the analog to my shares. And you have a long and short CFD, and the guy who's on the long side of that is, you know, buying, effectively buying the stable coin,

and you use like an interest rate mechanism to clear the market, to get supply and demand on both sides of the CFD to clear. And that's an interesting scheme as well. It works in a different way. They each have their own problems and benefits, but again, it remains to be seen how these things work when they're put into practice. I personally think the Scher's idea is actually easier to comprehend. So talking about understandability, which is an important part of adoption.

I think it's easier to comprehend than the other schemes I've seen out there, but it remains to be seen. So touching on the topic of price information, right? So in this model and the senior shares model, you'd need the price information to determine how many coins are going to be auctioned off. Is that correct? Yeah. So it's interesting that you mentioned shelling coin as a different idea, right?

because as sort of a shelling betting game is also one way of finding out the price in the model that you're describing, correct? Yeah, so both, you know, shelling coin and senior shares need some kind of mechanism for getting the market information into the protocol. And one such mechanism is using some type of shelling game, you know, where you incentivize people to, to submit their estimate of what the random variable is. So let's say whatever you're indexing the coin to. Maybe it's the price of gold and the price of oil and some other things like an index. And you incentivize people to take their estimate of what that market information is and you submit it to the blockchain.

and the winners of that game are the people who bet with the majority. So you might say, you know, collect all of the estimates, and everyone whose estimate lies within the inter-two quartiles wins, and everyone who's outside the attitude quartiles, they lose and pay the winners. And then you take the median of those inter-two quartiles as the value, you know, that the protocol uses, or something like that. the different mechanisms that we come up with. But the underlying assumption behind these shelling games is that

that the obvious bet to make is that is the truth, you know, so that the shelling point is truth. And whether that's a reasonable assumption or not is something that has to be tested in some. can't be proven by economic logic. Because the incentive of the game is to bet the consensus. It's to bet what everybody else is going to bet. And whether the truth is what you think everyone else will bet

or something else is, you know, it's an empirical question, I think. And especially would be very dangerous, right? If you build a currency on that and then maybe it holds for a long time, and then once billions of dollars are at stake, it breaks down, that would be. that would be quite disastrous now. Yeah, I agree.

And I'm kind of skeptical of these shelling point schemes, but I'd love to see them implemented and see how they actually work in the wild. And they're not just, you know, there are a number of people working on prediction market ideas that use shelling schemes as well. So it's not just the stable currency motivation, you know, where these things come to play.

and I'd love to see how they actually work I think it's great that people are putting research into the space but I just kind of feel it in my gut there's something quite flaky and unstable about these ideas but it would be really cool if I'm wrong because it's a great solution if it actually works but I'm not so sure it can

Now, you mentioned research. Like you said, there is a lot of research that is going into this space. We've seen multiple ideas be submitted. So you mentioned also Vitalik. Had an idea for an Italian gentleman. Yeah, Fernando Amitano. Right. So, I mean, we're certainly coming a long way from the simple ideas of Bitcoin

and stable and deterministic supply. where do you think this is going? Where do you think this will go if stable coins do gain traction in five years for instance? Well, I think it's a prerequisite for a cryptocurrency to ever become

a general medium of exchange. You know, the thing that you, you buy your coffee for in Starbucks. You know, I think we'll need to have some kind of stable coin. I think we'll see a lot of different experiments. probably most of them will fail, but I'm pretty bullish that some will actually take off and get a lot of traction and more traction than Bitcoin has achieved.

And in a way, Bitcoin is sort of laying the groundwork because, you know, if you think of like merchant adoption, you know, for a currency, well, it's not, you know, if you're already accepting one cryptocurrency, it's not hard to, you know, for a payment provider to support others. So having the, you know, things like merchant adoption for, you know, for Bitcoin actually makes it easier for a rival currency to plug into that network effect. And I think a stable coin, you know, will be the thing that people will actually start. So do you think eventually this should be its own currency, its own blockchain, maybe its own proof of work or proof of stake, or do you think this could be implemented as an Ethereum sub-currency?

Or do you perhaps even think it could be possible that Bitcoin could be changed in such a way? Yeah, I'm pretty skeptical of Bitcoin, being the Bitcoin protocol being changed. I don't think there's really any impetus for that. at all. But yeah, I'm agnostic about it being, you know, implemented on top of another protocol or its own, you know, blockchain. You know, I'd like to see, see both. And I think what we find most likely to happen is that, you know, people are experimenting with different types of, you know, consensus algorithms, you know, different types of proof of work, different types of proof of stake. And so, you know, you know, different types of proof of work. And, you know, you know, you know, you know, even entirely different consensus algorithms, you know, coming from the Byzantine fault tolerance, you know, line of research. And I think some of these, you know, these different consensus algorithms

will also experiment with different coin supply algorithms and stable coin. You know, there's a project called Pebble by, start by Dominic Williams, which, which is a stable coin cryptocurrency based on a consensus algorithm that's neither proof of work nor proof of stake. And it's a pretty serious project. And that's an example of how I see the stable coin thing taking off. It's not just experimenting with different types of crypto monetary policy, but also different types of consensus about stable coins being run on something like Ethereum or running on their own blockchains.

I'd like to see both. Now, are you agnostic to the success of Bitcoin? I mean, you mentioned your skepticism of Bitcoin. I mean, it does come up a lot in this discussion that which cryptocurrency will prevail, will be Bitcoin, will be others. We've got this idea of Bitcoin maximalism. I think, I mean, is it necessary for Bitcoin to succeed, or are we just biased because we hold it? I mean, we're so interested, invested in it.

I don't think it's necessary for Bitcoin to succeed. I think if another cryptocurrency it takes off or multiple cryptocurrencies take off and really get, you know, find powerful use cases and get adoption, I think that's probably good for Bitcoin rather than detrimental. What's missing is an ecosystem of cryptocurrencies that have, you know, widespread, powerful use cases. And I think the volatility of Bitcoin makes it harder to find these use cases. And if some other cryptocurrencies do, you know, Bitcoin will still plug into that ecosystem, serving some function.

I don't know exactly what, you know, it would be maybe some kind of crypto collateral or whatever. But I think Bitcoin will thrive if other cryptocurrencies thrive. The biggest risk to the space, I think, is the reliance too much on the success of one particular cryptocurrency. And, you know, I think that's a mistake on so many different levels. Now, we mentioned monetary policy quite a bit just before we wrap up here. Now, the idea of monetary policy can be seen by some as undesirable because it is so associated

to the idea of a central bank and central government policy. Now, you wrote in your paper, this kind of struck me as interesting. In a sense, this dual model of coins and shares embodies the functionality of the Fiat Central bank without decentralization. Can you just, you know, in simple terms, explain like what are the different components of a monetary policy? And what I'm interested in is how can we take those components that are run by man and, you know, decentralize them or turn them into an algorithm?

Yeah, I mean, sure. I mean, I think, you know, what I mean by monetary policy is really just changing the money supply to achieve some objective. And in this case, it's some price stability defined in some way. And that is pretty much what central banks do. The mechanism by which that's achieved has changed over time. It used to be that money supply was targeted directly over the last couple of decades, the mechanism has been targeting the short-term interest rate, but they're all

geared to the same end, just changing the money supply in order to, you know, to achieve priceability. And that's not a bad thing. The bad thing about it is, you know, is the, is the discretionary nature of it. And there is a debate, you know, a long-running debate within monetary economics of, you know, rules versus discretion, you know, and, you know, and The central banks are run on a very discretionary basis today, but there is a powerful minority of economists to argue that it should be entirely rule-driven. You know, you get rid of the, you know, the FOMC, get rid of the central bankers, and that's the monetary policy with the computer.

And I think that's obviously of the latter opinion. And I think that what we have with cryptocurrency is not only can we replace monetary policy with a computer, but we can replace it with a distributed computer. So, you know, there's no trusted third party to actually implement the needed to implement the monetary policy itself. And I think that's a really evocative and interesting idea. Well, right, why do we just also replace politicians with a decentralized computer? So I know, I think in the U.S., right, I mean, prices. price stability is one objective that central banks have, but I think another one is unemployment, at least in US. Do you also see other cryptocurrencies, do you think that could be in the future

a role as well, that something like that is taking account, or maybe completely different things? It's something like a full employment mandate for, no, I don't think so. I think really the only thing that makes sense is price stability. Yeah, I think that's the only thing that makes sense to me. So kind of as a last topic, and it's interesting to have you on, especially with your background, can you give us some insights into how do central bankers think about Bitcoin? Is this a topic they care about? I mean, there have been some sort of official publications.

I've read some of them, where we've read some of them. There are, you know, I mean, one definitely gets some impression, but I don't know, do you have any insights or impression what the sort of view is there? And can we expect any actions to come in the next years? Yeah, I mean, okay, I think there's, first of all, you know, cryptocurrency, you know, to most people in the financial industry just means Bitcoin, because, you know, they read about it in the paper, but not look into it any further. And, yeah, the opinion is one of, I'd say, almost universal skepticism.

And there are some exception to that and some people who follow to actually look into it, you know, in some detail. and I think you get people who fall basically into the two camps. You get one camp, it's okay, this cryptocurrency idea is really interesting, but Bitcoin won't work for largely a lot of the reasons we've been talking about today. And those are people who are actually quite susceptible to this idea of decentralized monetary policy and stable coin. And then the other group of people who are like, well, the cryptocurrency thing, that's a bit stupid

but the underlying blockchain technology is interesting because it can solve some really big problems around payments and security settlements and I think that's that's where

if you talk to most people in finance who won't laugh when you talk about blockchain and cryptocurrency, that's what they want to talk about that want to talk about using the distributed technology for settlements, but not interested in the currency. It's interesting that there wasn't a group there that they were like, yes, we understand Bitcoin, cryptocurrency is interesting,

and Bitcoin is great, right? I've never met anyone like that. I'm not saying they don't exist, but no, I don't think it's... They're rare species. Yeah, I don't think it's taken very seriously. rightly or wrongly. I mean, I think wrongly, obviously, that cryptocurrency should be taken seriously.

And it's probably taken more seriously today than it was even six months ago. But again, it's the real interest, and it's quite serious interest, is in using the technology to solve problems and settlements rather than the currency. And if I were to make a bet, I would say that this, that's where we're actually going to find the first, you know, big, powerful use case will be using the underlying technology, you know, rather than the cryptocurrency.

And I think the cryptocurrency, you know, I think it's still really early days. And, you know, I think that will flourish probably after we've seen a widespread use case of the technology for something else is my personal speculation. last week we talked or Sebastian mentioned one thing that sort of has been an idea I wanted to what extent

you agree with that it's the idea that macroeconomic events like let's say financial crisis could play a significant role in facilitating the adoption of cryptocurrencies do you think that's a likely scenario

yeah I mean maybe I think it'll actually probably accelerate the adoption of, again, the technology for things like security settlements. You know, I think the financial crisis did help, you know, with the adoption of Bitcoin, but just skepticism about banks and, you know, it was like a vote of, you know, a vote against the legacy financial system. but also interest rates are an important part of that story.

I mean, basically any asset that seems cool and popular at the time but doesn't earn any income is more attractive in an environment where interest rates are at zero, whereas if interest rates are at 5%, you know, the opportunity cost of holding Bitcoin or gold or whatever is, you know, is a lot higher. So you always see, you know, these types of, commodity-like assets

are more popular after financial crisis or depossession and interest rates get slashed. And it's quite possible that we could go into a scenario where most people in Bitcoin world won't believe this because I always think that we're on the brink of

Vine Mar Republic. But we could go into a scenario where deflation becomes a real issue again and central banks have to move to a regime of negative interest rates, you know, which has a lot of implications, you know, actually, you know, being charged money to, being charged a fee to hold your money in a bank, you know,

would certainly encourage the adoption of cryptocurrencies and, and, and, and other weird stuff. So I do think that, like, the macro backdrop does, does, does influence it. But probably for different reasons from what most people think. So can you talk about some of the projects you've been personally involved in? There are several companies that you've been working with. Yeah, the priority at the moment is a startup called Zero Clear. And it's a solution in the clearing and settlement space. The initial use case that we're targeting is using a

a touring blockchain to implement the clearing of OTC derivatives contracts and a certain subset of the OTC derivative contract market that were going after. And the technology is ideally suited to solve some really hard problems in the infrastructure side of of derivative settlements. And there are problems that are more acute now than they've been, ever been in the past because of the financial crisis and lots of regulatory, you know, changes that have taken place afterwards.

And it's an area that's already, you know, within the financial industry. And no one has come up with, you know, with a solution and the space that we're looking at. So it's a problem to be solved and we have a solution toward it, you know, for the problem that's very unconventional because it's based on blockchain technology, which I think is pretty cool. And so is this interest rate derivatives or some, I mean, I take it you're talking about derivatives in the traditional financial sector. Yeah, so it won't be exclusive to interest rate derivatives and it still remains, you know, which contracts we will focus on initially.

But the space is bilateral OTC derivatives contracts. So there are, you know, the regulatory changes that have happened since 2008 have been trying to push this market to something called centrally cleared contracts where a clearinghouse stands between buyer and seller. of the derivative contract. And the market that we're focused on is the subset of derivatives conflicts that won't be eligible for central clearing

that will remain bilaterally cleared. And these are the more complicated contracts, the less liquid ones. A lot of them are in the interest rate space, but not exclusively. And so where is that at right now? You're launching soon? Yeah, it's very early stage.

we're in the middle of seed funding round at the moment. So after that, we close that, then we'll go public with more detail on how it all works. Okay. Well, I definitely recommend that people read the white paper that you wrote. Can you tell us where we can find that? Oh, yeah. We'll put it in the show notes.

We'll put the link in the show notes. I think it's GitHub, R&SAM. backslash stable coins. Okay. And there's also your blog, right? So you have written quite a few blog posts, and that's Cryptonomics with C in the beginning. And we will also put that, it's Cryptonomics.com, right? But we will put that link in the show notes as well.

Okay. Yeah, no thanks. I think it's dot org. Economics. Yeah, you're right. Okay, well, Robert, thanks so much for joining us today. It was really interesting to talk to you about this topic. I think it's such an important topic.

And you've really found a nice, elegant solution to this, I think. Let's hope someone, some people will find a nice, elegant solution to the other problem that are finding a price, and then hopefully we'll see some nice, elegant implementations of this to see whether this will actually work out and whether this can actually sort of realize the vision and the goal that we all see in the future of a decentralized currency and cryptocurrency. Yeah, no, I think it's very early days in solutions out there. And, you know, one of them will take off. But it's just encouraging that, you know, more people are looking at the space and thinking hard about it. Absolutely.

Well, thanks so much again. And so we will be back next week. We have another interesting episode coming up with Preston Byrne and Sean Jones. So we will be talking about Preston's new project called Erie Industries. And so Preston's been, Sean has done interview with Preston before in our podcast, which was super interesting. And I remember talking with him in Amsterdam too. So I really look forward to that one too.

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